Complementary Booklet: Protect Your Retirement Savings During a Recession 2020

 In Retirement, Financial Planning, IRA

The COVID-19 pandemic is having far-reaching economic consequences for people from all walks of life.

From stock market volatility to rising unemployment1 to declining GDP2, economists are warning of a recession coming on the horizon in 2020.

An economic downturn can be a significant source of anxiety for retirees living on the fixed incomes of their retirement savings. It can also be challenging for those getting close to retirement. While it’s hard to predict exactly when a recession will hit, how long it will last or its long-term effects, there are ways to prepare. 

Let’s go over four main areas you’ll want to address to help weather tough times and stay on the right track for retirement. 

#1: Estimate Your Expenses in Retirement

How much do you think you’ll need in retirement? What is the best way to save for retirement?

To answer that question, one way to start is to calculate a list of monthly expenses you’re likely to have. Examples include your mortgage or rent, home or rental insurance, food, utilities and automotive expenses like car payments, insurance and fuel.

Don’t forget health care costs in your retirement budget, which tend to go up as we age. Include some of the “want-to” expenses you’re likely to have, such as travel aspirations, hobbies and special occasions like birthdays and holidays. 

In addition to figuring out how much you should be saving for retirement, look for simple ways to keep your current spending in check. Put off major purchases whenever possible and save up for those that can’t be avoided in the future. Have a plan for paying down debts, including your mortgage, auto loans, student loans and credit card debt.3  

#2: Tally Up Your Assets

Would you have enough to cover all of your monthly expenses if you lived to age 80? What if you live several years beyond that?

Many assets are tied to the market and may decrease in value during a recession. Consider diversifying your savings between high- and low-risk investment products like potentially recession-proof stocks, bonds or bank CDs. These could make it easier, both financially and psychologically, to ride out a down market.4  

Review any employer benefit plans you have, such as a 401(k) or 403(b), as well as a traditional or Roth IRA. Keep track of the value of stock options, mutual funds, bonds or other investments you may have.

Remember the principle of buy low and sell high. Withdrawing from your investments during an economic slowdown or downturn could mean you’re locking in your losses. For additional financial security, consider adding more low-risk investments like treasury bonds as you near retirement. 

One way to avoid the temptation to dip into retirement savings is to build an emergency fund to cover unexpected expenses or economic hardship.5  

#3: Assess Your Risk Tolerance

Risk tolerance represents the degree of variability in the value of your investment assets that you’re willing and able to withstand. Many factors contribute to risk tolerance, so talk with a financial advisor to analyze your current situation. 

  • Go beyond just your age or the average retirement age. Instead, think about how much longer you’re likely to work. If retirement is many years away, you would have more time to recover from a downturn in aggressive or high-risk investments like equities. If you’re getting close to retirement, you may allocate more funds into bonds and other conservative, low-risk investments.5 
  • How comfortable would you be if your investment portfolio had a bad year? For example, how much would it keep you up at night if the market goes down by 15% or more?4  

Your risk tolerance will change over time. Speak with your financial advisor regularly and rebalance your portfolio as needed. 

#4: Calculate Your Income Gap

If your current assets fall short of your income needs in retirement, you have an income gap. There are a few different options for addressing this.

One approach to saving your funds is what some call a “bucket strategy.” The first bucket would contain 1-2 years’ worth of cash that you can access for immediate needs. The second bucket would cover the following 2-3 years and might include fixed-income sources or assets that will pay dividends. The third bucket would be for longer-term investments such as equities.6  

Consider whether you are able to delay retirement. The Social Security Administration considers age 67 to be Full Retirement Age. If you retire early or at the average retirement age, at age 62 for example, your monthly benefit would be reduced by about 30%. But if you delay retirement until age 70, you could receive as much as 24% more per month.6  

Annuities could provide another opportunity for creating more income with less risk. You purchase annuities from an insurance company and pay a monthly premium. From there, your money grows tax-deferred until you withdraw it. Annuitization is the process of converting your funds into guaranteed payments when you are ready. 

Fixed-index annuities let you earn interest on your premiums and are tied to a benchmark such as the S&P 500 or Nasdaq. If the index increases in value, your assets go up with it. But if the index falls, your assets stay where they are.

 

At The Resource Center in Springfield, MO, our local advisors offer customized financial solutions for navigating your retirement plans through uncertain economic times. 

To help you get started, we are offering a complementary booklet, Will a Recession Rob Your Retirement: Four Things to Check Now. Fill out the short form below to receive your copy today. For any additional questions you might have or for more information on this topic, please feel free to contact our office directly.

Complementary Booklet: Will a Recession Rob Your Retirement: Four Things to Check Now

 

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM).  AEWM and The Resource Center are not affiliated companies.  Individuals should consult with a qualified professional for guidance before making any purchasing decisions.  Investing involves risk, including the potential loss of principal.  Annuities are intended for retirement or other long-term needs.  Guarantees are backed by the financial strength of the issuing company.  Annuities are not bank or FDIC insured.  This content is provided for informational purposes only and is not intended to serve as the basis for financial decisions.  00640602

 

Sources: 

1: https://www.bls.gov/news.release/pdf/empsit.pdf

2: https://www.marketwatch.com/story/gdp-sinks-48-in-the-first-quarter—biggest-drop-since-2008-and-worst-is-yet-to-come-2020-04-29

3: https://knowledge.wharton.upenn.edu/article/how-to-recession-proof-your-retirement/

4: https://www.investopedia.com/articles/pf/08/recession-proof-your-life.asp

5: https://www.fool.com/retirement/2020/04/07/3-ways-to-recession-proof-your-retirement-savings.aspx

6: https://www.forbes.com/sites/impactpartners/2019/07/10/how-to-bridge-your-retirement-income-gap/#1c5c659b4d68

 

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