Will a Recession Rob Your Retirement?

Even before Russia invaded Ukraine, high inflation and economic fallout from the COVID-19 pandemic caused concern that the risk of a recession was growing.¹ When a recession hits, much more is at stake than stock market shares. During The Great Recession, December 2007 through June 2009, not only did Americans lose $19.2 trillion in net worth,² the unemployment rate doubled to 10% ³ and over 8.7 million jobs were lost.⁴ When the COVID-19 recession began in late February 2020, the U.S. economy significantly shrank before it quickly rebounded. But the damage had already been done as businesses reduced their workforce or shut their doors and millions of employees received layoff notices.⁵ 

When economists start pointing to signs of a recession,⁶ it is natural to feel anxious. Retirees on a fixed income or those getting ready to begin retirement can feel especially vulnerable.

Here’s The Good News

While the economy is largely unpredictable, your retirement income doesn’t have to be. By getting a clear picture of where your finances stand and creating a plan that takes worst-case scenarios into account, you can feel confident about retirement — even in a recession. 

Let’s look at two areas to address to help ensure you can weather a drop in the market.

Your Expenses

Whether in a prosperous bull market or declining bear market, the list of things to prepare for in retirement is lengthy: rising health care costs,⁷ end-of-life expenses and a longer life⁸ often top the list. 

You’ll also want to factor inflation into your retirement plan in case the costs of everyday items, travel and other expenses continue to rise. Inflation erodes the value of savings and will continue to do so after you retire. Recently, higher costs for everything from gasoline to agricultural products have trickled down to consumers, helping push inflation to a 40-year high.⁹ The financial repercussions from high inflation, political unrest and the COVID-19 pandemic will continue to evolve, heightening concerns for Americans’ future economic well-being.¹⁰

Estimate What You Need

The challenge in building an effective retirement income plan is to work with someone who, without prejudice, understands how to combine available income tools and tactics in a strategic manner to meet your income goals of retirement, while also managing the risks confronting those goals.  

1. Your Lifestyle Spending Number

So, what’s your number?  How much income do you want/need to have monthly for the rest of your retired life?  Whatever this number is should give you a sense of calm assurance that you’ve “got this”.  You’re fine. 

$8,000 a month?  $12,000 a month?  $5,500 a month?

This number should cover your monthly essential expenses and provide for a little fun along the way.  You shouldn’t be out of money at the end of the month, and you shouldn’t fear running out of income during your lifetime. 

Caution.  This is not a number you want to guess at.  This is a crucial decision in the financial planning process.  This takes bit of soul searching.  You really don’t want to find out one year into retirement that you were off by $2,000 a month!

Exercise:  One approach to uncovering this number is the budgeting approach.  Essentially, you want to price your retirement out.  I recommend using a Spending Planner Worksheet to be sure you don’t miss any essentials.  Next add the discretionary spending that is important to you.  This does not need to be a precision number. It could actually have a little slop in there and be sure to round up.  This number is your Lifestyle Spending Number.  

Remember, you are planning your retirement.  A portion of your nest egg should cover essential expenses.  Additionally, we’ll allocate funds for other expenses such as travel, home remodel, vehicle purchases, weddings, etc.

However you decide to settle on your retirement spending goals, it is really important that you go through this process. 

2.  Your Assets

Where does your nest egg live? If you’re like many, your assets are spread out in things like 401(k)s, mutual funds and company stock options. All of those assets are tied to the market, so, during a recession, they could significantly decrease in value. On average, the stock market loses 13.7% ¹¹ in a correction and 32.5% in a bear market.¹²

While investing in the market is a risk, it is an effective way to grow assets — particularly for pre-retirees who got a late start to their savings. But how much of your savings should be invested in the market? 

Calculating your risk tolerance, the degree of variability in investment returns you are willing to withstand, can help you decide. Many factors go into determining your risk tolerance, and a financial professional has access to tools that can pinpoint the exact amount of risk that’s appropriate for you. 

3. Seek growth potential to meet your long-term needs

As you build your retirement income plan, it’s important to include some investments with growth potential that may help keep up with inflation and pay for those fun things like vacations, hobbies, and other nice-to-haves. It’s a smart strategy to pay for these kinds of expenses from your investments. That’s because if we were to go into a recession and the market were to perform poorly, you could always delay some of these expenses.

You can get a rough idea of how much risk should be in your portfolio by asking yourself a few questions. 

• How much would you feel comfortable losing if your investments had a bad year (or series of years)? 
• How soon do you want to retire? (The closer you are, the less risk you want to take on.)

No matter what your risk tolerance is today, it likely will change in the future, and you’ll need to adjust the amount of investments at risk compared to reliable income sources. 

By taking action sooner rather than later, it is certainly possible to build up your nest egg to where you need it to be before you retire. But if you’re anticipating a recession, especially in the time leading up to your retirement or during the early years of your retirement, you may be hesitant to rely too heavily on the stock market. 

If you’re racing to build up your retirement savings but wary of investing a large chunk of your assets in the stock market, there are other options for a portion of your retirement assets. 

Don’t Let The Market Dictate Your Lifestyle

You don’t need a bull market to guarantee a great retirement. One of the keys to a comfortable lifestyle in any economy is planning ahead. If the thought of building a plan on your own is overwhelming, there’s help available. We can help you assess where you are and help guide you to get where you want to be — and stay there. 

You worked hard for retirement. Don’t let a recession rob you of a comfortable lifestyle.

 

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¹ Jeff Sommer. New York Times. March 17, 2022. “Inflation vs. Recession: The Fed Is Walking A Tightrope.” https://www.nytimes.com/2022/03/17/business/federal-reserve-inflation-recession. html. Accessed May 3, 2022. 

² Anne Field. Business Insider. July 8, 2021. “What caused the Great Recession? Understanding the key factors that led to one of the worst economic downturns in US history.” https://www. businessinsider.com/what-caused-the-great-recession. Accessed May 3, 2022. 

³ U.S. Bureau of Labor Statistics. February 2012. “BLS Spotlight on Statistics: The Recession of 2007-2009.” https://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf. Accessed May 3, 2022. 

⁴ Center on Budget and Policy Priorities. June 6, 2019. “Chart Book: The Legacy of the Great Recession.” https://www.cbpp.org/research/economy/the-legacy-of-the-great-recession. Accessed May 3, 2022. 

⁵ Taylor Borden, Allana Akhtar, Joey Hadden and Debanjali Bose. Business Insider. Oct. 8, 2020. “The coronavirus outbreak has triggered unprecedented mass layoffs and furloughs. Here are the major companies that have announced they are downsizing their workforces.” https://www.businessinsider.com/coronavirus-layoffs-furloughs-hospitality-service-travelunemployment-2020. Accessed May 3, 2022. 

⁶ Investopedia. Oct. 12, 2021. “What Causes a Recession?” https://www.investopedia.com/ask/answers/08/cause-of-recession.asp. Accessed May 3, 2022.

⁷ Fidelity. Aug. 31, 2021. “How to plan for rising health care costs.” https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs. Accessed May 3, 2022. 

⁸ Cory Stieg. CNBC. July 17, 2021. “Researchers say the probability of living past 110 is on the rise – here’s what you can do to get there.” https://www.cnbc.com/2021/07/17/ study-living-past-110-is-becoming-more-likely-longevity-tips.html. Accessed May 3, 2022. 

⁹ Scott Horsley. NPR. March 10, 2022. “Inflation hits another 40-year high. The war in Ukraine could make it worse.” https://www.npr.org/2022/03/10/1085448058/inflation-40- year-high-gas-prices-energy-russia-ukraine. Accessed May 3, 2022. 

¹⁰ Holly Ellyatt. CNBC.com. April 21, 2022. “From soaring food prices to social unrest, the fallout from the Russia-Ukraine

¹¹ Miranda Marquit and Benjamin Curry. Forbes Advisor. March 7, 2022. “Market Correction: What Is A Correction?” https://www.forbes.com/ advisor/investing/what-is-market-correction/. Accessed May 3, 2022. 

¹² Kat Tretina and Benjamin Curry. Forbes Advisor. Feb. 24, 2022. “Bear Market and Bull Market: What’s the Difference?” https://www.forbes. com/advisor/investing/bear-market-vs-bull-market/. Accessed May 3, 2022.