Many professionals have sounded the alarm about a possible recession in 2023 for quite some time. A recession is scary for retirees because nobody can predict if or when it will occur.
Inflation makes it difficult for retirees to make ends meet, especially in light of Social Security’s massive cost-of-living adjustment for 2023. Your savings may have already taken a hit from the market downturn last year.
What impact would a recession have on your retirement if it materialized later this year? And if you haven’t already, consider whether or not this is the ideal time to retire. Here’s what you need to know.
Recessions and market downturns are never pleasant, but retirees can be especially trying. It can be stressful when you have to rely on your savings to pay the bills, but those savings take a hit. The stock market might continue to fall if a recession is on the horizon.
When stock prices drop, it’s best to keep as much of your money as it is rather than withdrawing it all at once. This is especially true during a recession or market downturn.
Your savings and investments will decrease in value when prices fall. That’s to be expected, but it also means that cashing out during a downturn could mean locking in losses if your investments are worth less than you paid.
After retirement, you may need to start taking withdrawals from your savings to pay for day-to-day living costs. However, it might be prudent to postpone large purchases until the market improves.
One option would be to supplement your savings with additional income (like Social Security) to preserve as much of your nest egg as possible. To avoid locking in losses, you can wait for the stock market to recover before withdrawing your funds.
Your approach may vary slightly for those who have yet to be retired (or are thinking about returning to work).
It depends on your financial situation if now is a good time to retire. There may be less concern about a recession affecting your investments if you have a sizable retirement fund. It is also simpler to withdraw as little as possible from your retirement account if you receive other income forms, such as Social Security or a pension.
However, a recession could make it even more challenging to keep your retirement savings intact if you already have a shortfall. Until the market recovers, it may be prudent to postpone retirement by a few years.
Reviewing your asset allocation or the distribution of your investments within your portfolio is an excellent way to ensure your retirement savings are safe, whether you’re already retired or planning to retire soon.
Stocks make up a more significant portion of a person’s portfolio when they are younger and have more time to save for retirement. You don’t need the money from your investments immediately, so you can afford to let them take a short-term hit.
However, as you get older, your portfolio’s allocation should gradually become more conservative, with a greater emphasis on bonds and a smaller portion of stocks. Bonds may provide more protection for your savings during market downturns and recessions, but their lower potential returns offset the risk.
Due to the recent decline in stock prices, it may not be the best time to switch to a more conservative asset allocation, such as bonds. However, when the market eventually recovers, it may be time to consider making changes to your portfolio in anticipation of the next downturn.
Even though nobody knows for sure if a recession will occur in 2023, it’s not a bad idea to start preparing now in case it does. Learn the potential effects of a downturn on your retirement to better prepare for it.