If you’re getting close to retirement or just retired, the current economic climate may be unsettling. For those who planned and saved for retirement, a recession may seem like the end of their retirement dreams. However, not all is lost. Here’s what to consider so you can have a successful retirement.
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Retiring in a Recession: What to Consider
Don’t let the rough economic conditions derail your retirement dreams. With some planning and flexibility, you can get through an unstable market to enjoy your retirement.
If you’re unsure whether to retire or keep working, here are a few things you should consider before handing in your notice.
Design Your Budget for Flexibility
When designing your retirement budget, focus on two numbers – how much you need to cover the essentials and how much you need to cover extras. This will help you build flexibility into your budget so you can adjust your spending in times of economic instability.
Your basic budget should cover your essentials for a comfortable life such as your mortgage or rent, car payment, gas and maintenance, utilities, groceries and healthcare. Consider this your bare bones budget, what you would spend if you were low on cash.
While a bare bones budget may not sound fun, it’s essential for building financial flexibility. As long as you can cover your basic expenses, you can continue enjoying your retirement without worrying about running out of money.
Now that you have your basic budget, consider adding in some extras. This can include travel, dining out, shopping, golf, entertainment and more. Include the areas of spending that will bring you joy in retirement.
If you face a period of time with low investment returns, you can cut back on some of the fun areas such as dining out or travel.
This flexibility allows you to retire knowing that you can cut back and still cover your basic expenses in case of a prolonged economic downturn.
Consider Your Location
One perk of being retired is that you are no longer bound to a location because of a job. You can choose where you live based on factors other than your commute.
It can also help you retire, even in a down market. This is especially true if you live somewhere with a high cost-of-living. Moving from California or New York to more affordable state can cut thousands off your retirement budget.
This is one reason you see retirees gravitating to lower-cost-of-living states such as Florida, Texas, and Arizona. These states also have milder weather, allowing more time for outdoor activities.
If you’re willing to move, you may retire sooner than later, even in a recession. Review your budget and current cost of living based on your location and compare it with another state.
If you’re not willing to move far, look at places within your preferred geographic area that may cost less. Without a commute or school districts to worry about, you may find a bargain on a home in your area that can reduce your expenses.
Related: 11 Best Cities to Retire Early
Optimize Your Portfolio Mix
Your invested assets are another piece of the retirement puzzle. This includes money in your company’s 401(k), 457(k) or 403(b) account, Solo 401(k), SEP-IRA, Roth IRA, and Traditional IRA as well as any taxable accounts.
The mix of stocks and bonds in your accounts determines your exposure to the volatility of the stock market. If you have a more aggressive portfolio mix with a larger exposure to stocks, you may have to wait for the market to recover before withdrawing any money.
However, if your allocation is more conservative, a volatile market may only be a minor factor in your withdrawal rate. Either way, it’s important to take into account your portfolio mix before using it in your retirement planning.
Those with non-portfolio income sources that cover basic expenses may be able to ride out a market downturn with a portfolio heavily weighted in stocks. As you get closer to retirement, experts advise shifting your portfolio away from stocks and heavier into bonds.
Make Sure to Have Non-Portfolio Income Sources
Not all retirement income is created equal. Non-portfolio income sources such as Social Security and pensions do not depend on market conditions. They will form the foundation of your retirement income and will help you build out your retirement budget.
It’s important to maximize these income sources since they offer a lifetime cushion. Even as your portfolio dwindles or the market plunges, Social Security and pensions should continue to pay out.
If you can hold off on claiming those until you receive the full benefit, it can pad your retirement income. Even better, those who can hold off on filing for an increased benefit (until age 70) can add even more to their bottom line.
Make sure you run the numbers for both the regular benefit and the increased benefit before deciding. If you are married, you may opt to claim one benefit at full retirement age and delay claiming the other. Couples with different retirement dates have even more flexibility in this area.
Check out the free Open Social Security calculator to determine your best filing date. You can experiment with the inputs and factor in any potential cuts to Social Security benefits.
If one or both spouses have a pension benefit, you may be able to take it as a lump sum or receive it as an annuity. Run the numbers on both scenarios but keep in mind that the annuity option will reduce your stock market risk and offer you steady income.
Other non-portfolio income sources to consider include a reverse mortgage, a fixed annuity, or a whole life insurance policy. Talk to a financial advisor if you plan to factor those income streams into your retirement plan.
Adjust Your Drawdown Rate
While the stock market has gone up over time, there are periods with great volatility. Withdrawing the same amount from your portfolio whether the value is up or down can cause you to drain it faster, leaving you high and dry in retirement.
Adjust your withdrawal rate to accommodate market swings. When planning your retirement budget, your non-portfolio income sources should cover most of your basics. Use the portfolio proceeds to cover extras such as travel and dining out.
This gives you extra flexibility when markets are down. You can adjust your budget to reduce your extra spending. Maybe cook a few more meals at home and go on a vacation to a local attraction rather than jet-setting to Europe.
Adjusting your withdrawal rate to accommodate for market swings will increase the chances your portfolio outlasts the market downturn. By putting less emphasis on the income from your portfolio, you will have greater peace of mind when it comes to retiring, no matter the market conditions.
Keep a Cash/Bond Reserve
Going into retirement, it’s important to keep good cash and bond reserves. This will help you ride out a market downturn and give you access to quick cash should the need arise.
Aim to have one to three year’s worth of expenses in a high-yield savings account and two to three year’s in a bond fund you can easily access. This should carry you through even long economic contractions and allow you peace of mind.
If you have good cash and bond reserves, retirement may be closer than you think, even in the current economic climate.
Get a Side Hustle or Part-time Job
While you may retire from having a full-time income, making some money on the side can help keep your retirement budget flexible. Any money that you earn from a side hustle or a part-time job will reduce how much you need to draw down from your investments.
This is important if you are retiring amid an economic downturn. Having extra money coming in means you don’t have to pull funds from your portfolio to pay bills when the market is down.
Not sure where to start? Here are some great side hustle ideas to get you going.
Having the right safeguards in place can make all the difference for retiring in a recession. Build flexibility into your retirement planning to mitigate the strain of an economic downturn on your finances.
However, not everyone retires by choice in an economic downturn. If you end up retired by necessity, consider some of the options above to reduce the strain on your wallet. Getting a side hustle or moving to a cheaper location can help carry you through until the market recovers.
Would you consider retiring in the current economic climate? Why or why not? We’d love to hear your thoughts in the comments.