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What Does A Recession Mean For Your Retirement Plan Right Now?

The most nerve-wracking word in finance may be recession. Navigating a recession is challenging for many people, but especially retirees. With the value of your portfolio declining, it's harder to withdraw the exact amount and set yourself up for future growth. 

How can you navigate a financial recession in retirement? Here are some ideas. 

What Is A Recession and How Long Does It Last? 

A recession is defined as a significant, widespread, and prolonged downturn in economic activity. This is measured by various metrics, including trends in the gross domestic product (more specifically, two consecutive negative quarters), industrial production, and retail sales, among other factors. There is not necessarily one set way for the National Economic Bureau of Research to conclude an evident recession.

It may surprise you that a typical recession lasts only several months to just over a year, but the imagined implications of a downturn make us more fearful that it will become a dragged-out ordeal. However, the average U.S. recession since 1857 lasted 17 months, and the six recessions since 1980 averaged less than ten months.

You have already lived through one of the longest recessions of your time. The '08 recession started in December 2007 and ended in June 2009. 


That could be because it's difficult to adequately express the nuances of a recession, and their effects can still be felt after the NEBR deems them "over." 

As you know, that recession was caused by the ripple effects of the U.S. housing bubble. The housing bubble burst due to banks loaning money for homes to those who typically would not qualify for them. 

If your finances or employment status took a hit during this time, take heart in knowing that you've made it through financial difficulties before and are better prepared for any that may come in the future.

We are facing another unique set of circumstances, navigating new life and financial territory after a global pandemic that slowed the world down. It may surprise you again to learn that the NEBR classified the events of 2020 as only a two-month recession. Though the length of time (two-quarters of GDP) made it impossible to use some of the usual metrics used to calculate one, the effects were drastic enough to be deemed a recession.

What about right now? There is a lot of talk about the world's economic state, including the word recession. It has been an argument among economists. If we're looking at the metric of two consecutive quarters of harmful gross domestic product (GDP)—the U.S. entered a recession in the summer of 2022. However, the NEBR stated that they do not count summer 2022 as the beginning of a recession.

Though these issues can be confusing, economists agree that we may see a recession soon. It can be helpful to use trackers like this one from Forbes Advisor that breaks predictions down into many different factors, everything from GDP to the housing market to the job market.

The fact is that markets go up and down; it's part of the natural cycle. What we do to prepare for them and during them makes all the difference. So, what should you do if you experience a recession while in retirement? 

Avoid Spontaneous Financial Decisions

It's tough not to let emotions drive actions when the markets are down. However, selling your position in the market can lead to more harm than good in the long term. That's why sticking with your financial plan and vision for your future retirement lifestyle is essential.

A good rule of thumb is this: if your goals or plans have stayed the same, it likely doesn't make sense to take drastic action. Instead, keep your "eyes on the prize," so to speak, and keep doing what you're doing. 

If You Need To Make Changes, Be Intentional 

If you feel some re-adjusting is necessary, be as strategic and balanced as you can. You can do things that can offset funds and capitalize on the state the market is in, even in a recession.

One such strategy is taking advantage of tax loss harvesting. Tax-loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax due on other securities at a profit. This can help maintain your portfolio and reduce your overall taxes. A great way of looking at it is this: while tax-loss harvesting cannot restore an investor to their previous position, it can lessen the severity of the loss. 

One upside to a recession is that stocks are on sale, which can be an excellent time to buy them. Other reasons to buy stocks on sale during a recession include the fact that you'll be taking advantage in a market while others may have fear, dividend yields go up, and at the end of the day, the market is cyclical, and you could find a winner. 

Not everything about a recession means doom and gloom, and there are certainly more ways to take advantage of market turbulence if you're willing to pause and seek them out! 

Build Up Your Short-Term Bucket 

Have you heard of retirement "buckets"? This financial strategy involves having metaphorical buckets of money that all serve different purposes throughout your retirement. Here's what it looks like in practice:

Bucket 1: Contains funds for the next couple of years of living expenses, 

Bucket 2: Medium-risk investments (think high-quality bonds and dividend-paying stocks), and 

Bucket 3: High-risk investments, which you ideally will leave alone for a more extended time than buckets 1 and 2, will provide the most long-term growth. 

This method can provide an intentional and organized way of dividing your finances and keeping you on track for long-term goals. However, if the bucket strategy doesn't work for you, that's fine, do what works best for you. Consider how other financial elements, such as cash reserves, bonds, and annuities, can improve your finances during a recession. 

Keep Out of Debt 

One of the critical things that should be reasonably easy to do to avoid financial stress during a recession is to stay out of debt. Now is likely not the time to purchase a new home, car, or any large purchase of that nature. Going into debt is never a wise choice, especially during financial turbulence. 

It would be wise, in general, to be conscious of any significant spending. Maintain a stable level of expenditure and avoid splurging when times are a bit steady, and you can feel more secure that they won't make you take an unnecessary hit.  

You may also find it stabilizing and even fulfilling to find creative ways to make extra money. This doesn't have to be something you dread- you could even get into something you've always wanted to do, such as something artistic or a hobby you love, that you can cash in on as a natural source of income. 

Have No Fear

The bottom line is if you're experiencing a recession during your retirement, have no fear; it doesn't have to mean the end of the world for your finances. By keeping an eye on the future, avoiding spontaneous spending, making intentional changes, and keeping out of debt, you'll have a great plan to withstand the inevitable financial storms and the changes life throws at us.

Our team is here to help you navigate the economy, regardless of whether we're experiencing a recession. Schedule an appointment to see how you can recession-proof your financial plan.