When uncertain financial times loom, questions about your retirement are sure to come up. Have I saved enough? Do I need to keep working? How can I safeguard my savings?
As people who lost significant savings in the economic recession of 2008 can attest, it’s possible to survive a recession. That year, an economic crash erased about $2.4 trillion from Americans’ 401(k) and IRAs. This was an especially hard hit for people approaching retirement, who didn’t have much time to rebuild their savings or wait for the stock market to rebound.
Here are some questions to consider when thinking through how your retirement will weather a recession.
Should I Begin Taking Social Security Payments?
While Americans are eligible to begin drawing Social Security benefits at age 62, often it can be beneficial to wait. The earlier you begin collecting Social Security, the smaller the payments will be—although one benefit is that you will receive more payments overall.
For every year that you wait to collect, your Social Security benefits typically will increase about 8 percent. You could claim the benefits early and invest them, but that option requires the discipline to invest the checks and a market that’s going to generate at least an 8 percent annual return (unlikely during a recession). Financial planners find that many people end up spending at least some of those early benefit checks. A better choice could be to hold off on withdrawing Social Security as long as possible.
When Should I Retire?
A recession may cause you to rethink your retirement plans. If you can no longer afford to stop working completely, you may find that a part-time job will generate enough income to match or exceed your portfolio’s annual distribution. For example, if your part-time job pays $13 an hour for a 20-hour workweek, you’ll earn $13,520 annually—the equivalent of a 13.5 percent annual return on a $100,000 portfolio value.
In today’s job market, you may find several types of part-time jobs that match your interests or skills. You could pet sit, plan weddings, repair cars, or turn almost anything you enjoy doing into a small business. You’ll also find plenty of work-from-home jobs that could draw on your professional skills or areas of interest. Working a part-time job would allow you to postpone withdrawing Social Security benefits and buy your portfolio some time to recover.
Should I Keep Contributing to My Retirement Account?
If you are still working full-time and have an IRA or 401(k) when a recession hits, you may have to consider whether you want to continue contributing. If you feel secure in your job, this can be a great time to buy into the market at low prices, and the market most likely will rally back.
However, recessions can be scary and emotional times for investors. Instead of getting caught up in the market, you may want to continue investing on your regular schedule. If you already have automatic paycheck deductions into your 401(k), this will be easy.
If a recession leaves you cash poor, however, and you haven’t been able to save up an emergency fund, you may need to temporarily stop contributions to free up cash for monthly expenses.
Should I Invest?
The days following a financial crash can be an excellent time to invest if you are willing to take the risk. For example, people who bought into the S&P 500 the day after Black Monday in 1987 saw 50 percent increase in only two years. If you have cash or savings on hand, consider investing through an index fund. You could recoup your losses from a recession quickly.
Which Accounts Should I Withdraw From?
Sometimes, people must draw on their investment portfolios during a recession to meet monthly expenses. While the best plan is to not touch your retirement accounts prematurely, if you’re in this situation, consider the tax implications of withdrawing from different types of accounts before you decide where to withdraw.
If you are already collecting Social Security and withdraw from a 401(k) or traditional IRA, the combined income could move some of your Social Security into a category where they are taxable. In this case, a better choice would be withdrawing from a Roth IRA, where withdrawals are not taxed and will not impact your Social Security payments.
If you do not collect Social Security, you won’t be affected by these rules. However, if you do prematurely withdraw money from your 401(k) and don’t pay it back, the withdrawal will set off a 10 percent penalty if you are younger than 59 1/2. However, the IRA does have 18 exceptions to this rule, so it may be worth reading the fine print if you need to make this kind of withdrawal.
Of paramount importance during a recession is staying calm and making good decisions about your retirement, even as the financial markets are in turmoil. If you are in doubt, a financial planner can help you navigate your finances during difficult times, as the decisions you make could significantly impact your retirement long after the recession ends.