Talk of a US recession has been on the rise as Wall Street investors continue to speculate on the potential risk factors of a struggling economy. Here’s how you can prepare for a recession if you are retired.


How Does a Recession Affect a Retired Person?

After decades of hard work, you may be ready to finally hang up your hat and embrace your new retiree lifestyle. However, a recession could threaten your chance at a comfortable retirement. This doesn’t necessarily mean you shouldn’t retire during a recession, though, as that largely depends on your individual circumstances.

Just like any other investment or savings account, 401(k) and IRA plans are still subject to the stock market’s volatility. And how much your retirement savings will be affected depends on where your money is invested.

Take stocks, for example. If your retirement savings plan is only invested in corporate and technology stocks, then you’ll be at significantly more risk since all your eggs are in the same basket. If the value of corporate and tech stocks falls, then so does your entire portfolio.

Luckily, as you age, your portfolio is often increasingly diversified across a mix of fixed-income investments like bonds and CDs. As you near retirement age, portfolio managers generally invest more in these less volatile investment options to prevent massive financial setbacks.

Younger investors who are much further from retirement age are the ones who will be most affected by a possible recession since their portfolios typically hold riskier investments. But it won’t be a big deal in the long run as recessions are a normal part of the economy’s lifecycle, and younger investors will have the time to recover from potential losses.

4 Ways to Protect Your Retirement Savings in a Recession

You can take preventive measures to protect your 401(k) or IRA savings from a recession.

1. Continue Contributing to Your Retirement Plan

As the value of your investments starts to drop, you’ll likely be tempted to stop contributing to your 401(k) or IRA. But you should probably take the opposite route, especially if you’re a young investor, since you have time to boost your retirement portfolio in the long run.

Teresa Bailey, CFP and senior wealth strategist at Waddell & Associates, states that investing in the market during a low period may be a good idea. This is true “… if your financial plan calls for a time horizon greater than a few years for the funds and you aren’t carrying debt with a high interest rate,” she says. “Especially since stocks are on sale during this period.”

Eventually, the economy will pick up again, and the value of those stocks will likely rise.

On the other hand, current retirees actively withdrawing from their retirement savings should consider getting a part-time job for a while. Although your 401(k) or IRA may be offering you a steady stream of income, you’ll be depleting those funds at a much faster rate. A part-time job could provide a secondary source of income for you to pull from. That way, the investments in your account have more time to recover and accumulate value.

2. Diversify Your Investment Portfolio

Exposure across different sectors of the market is one of the best ways to combat a recession. You can diversify your portfolio by:

  • Investing in non-traditional asset classes like real estate, private equity, cash, and commodities
  • Owning shares of stock from multiple companies rather than investing all in one
  • Investing across multiple industries like energy, technology, healthcare, and consumer goods
  • Owning shares of companies with different sizes and market caps, such as small-caps, mid-cap, and large-cap companies
  • Investing in both international and domestic markets

“The more diverse your portfolio, the less risky your investments will be,” says Samantha Gorelick, CFP and managing financial planner at Brunch & Budget. “Your stock holdings should include many different types of companies from all different sectors, of all different sizes, and preferably a mix of domestic and international stocks.”

The closer you are to retirement, the more your investment portfolio should be invested in fixed-income investments like treasuries and bonds, as they tend to fare better during recessions. Moreover, long-term bonds can provide routine interest payments.

But keep in mind that bonds aren’t risk-free. High interest rates on bond investments can pose a threat to current bondholders as the value of already-issued bonds can fall. And although bonds often outperform stocks during recessions, these assets won’t yield as high returns.

“If you won’t be touching a portfolio for decades, though—as is often the case with retirement accounts—you can keep the percentage of bonds low in order to benefit from more growth over the years,” says Gorelick.

3. Consider Annuities

Another source of income to consider pulling from during a recession is annuities. Annuities are tax-deferred investment products that offer guaranteed income for a predetermined number of years and are generally low-risk.

Annuities are best when paired with other streams of income, like money from a part-time job or Social Security payments. In a struggling economy, the additional income from an annuity investment can prevent you from preemptively depleting your retirement savings.

Keep in mind that there are multiple types of annuities (such as fixed, variable, or indexed) that come with their own limitations, risks, and fees. Buying an annuity contract can be costly and isn’t recommended for long-term growth. These contracts are also fairly illiquid, often taking anywhere from six to eight years before rolling out payments.

If a recession does occur in the US economy within the next year or so, it will be too late for you to benefit from a new annuity contract. But folks with existing contracts may be able to start collecting funds at just the right time.

4. Don’t try to time the market

One of the biggest mistakes investors can make is trying to time the market. Although there’s been a lot of speculation about a possible recession in late 2023 or early 2024, there’s no guarantee it will happen. Recessions are normal, so there’s no reason to take drastic measures yet.

Attempting to time the market so you can buy low and sell high can be more trouble than it’s worth. Although you may be tempted to sell all of the stocks in your retirement portfolio and replace them with bonds, you may be better off leaving your assets as they are.

Before doing anything drastic, talk with a financial advisor or CFP who specializes in retirement planning. The best financial advisors can offer you professional guidance and insight into the market to help you reach your financial goals without jeopardizing your retirement savings.

Will Your 401(k) Recover After a Recession? 

Will Your 401(k) Recover After a Recession? 

Your 401(k) can recover after a recession, but how much it may recover varies based on your individual circumstances. The closer you are to retiring, the less time your 401(k) plan or IRA will have to recover. Regardless, if you plan accordingly, the assets in your account shouldn’t sway too much.

Younger investors will be the most affected by a downward swing in the economy. Although it’ll feel discouraging in the short term, the long-term effects of a recession on retirement savings for younger folks shouldn’t be catastrophic.

“The risk of loss is possibly the greatest risk when investing your money,” says Gorelick. “Diversification can help mitigate that risk. Learning about risk is important because no matter what you do with your money, there is risk involved.”

Is Now a Bad Time to Retire?

Starting retirement during a recession may not be your first choice, but that doesn’t mean it’s necessarily the wrong one. Depending on your individual situation, retiring in the next year or so may not be a bad idea.

Folks with a diversified investment portfolio and multiple reliable streams of income may find it reasonable to retire in 2023 (or early 2024). However, it’s generally better to leave your retirement savings alone as much as possible while in a recession.

A struggling economy often drives up interest rates, lowers the value of stocks and similar assets, and increases the overall cost of living. Although you may have a reasonable nest egg set up, a recession may cause you to deplete your savings at a much faster rate. And the last thing you want to do is run out of money during retirement.

If you have concerns or questions about whether you’re ready to retire, you should consult an Asset Strategy (our sister company) financial advisor for professional insight and guidance.

By Tessa Campbell, Oct. 31, 2023

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