Retiring During The Recession – Timing Is Everything!
Originally published in Journal Inquirer
Should I Retire During a Recession?
A recession is defined as a general decline in economic activity over two consecutive quarters. The mere definition doesn’t begin to describe the magnitude of what people experience during this decline. The U.S. economy has dealt with recession 14 times since 1907. The most recent was the financial/banking crisis of 2008 when the government created an economic stimulus package to energize the economy. Age, timing and long-term financial goals play a pivotal role in how people are impacted by a recession. The current recession is a little different than the others because on top of a crippling financial crisis, we have a world-wide health pandemic wreaking havoc on individuals across the nation and globe.
Strategically, retiring during a recession may not be the ideal scenario for many. During these times, often those with the most assets stand to lose the most, therefore it is important to create a comprehensive financial plan that looks at your entire portfolio.
Phase I – Early Planning
As part of the financial planning process, complete an income analysis that will shed light on a couple of key points: 1) Do you have enough money to retire right now? And, 2) if you will be okay, what rate of return do you need on your money?
Health insurance and medical expenses, which can become a very costly expense during retirement, need to be part of your financial planning process. Are you eligible for Medicare? Can you go on a Medicare supplement? Or, what can you do to bridge the gap until you are eligible for Medicare at age 65? Your Health Savings Account (HSA) is portable so if you lose your job, the funds belong to you and can be used to pay for out-of-pocket medical expenses or insurance premiums (through COBRA).
Stress testing your portfolio is another valuable component of the financial planning process. What this means is running your portfolio through various scenarios to gauge investment risk and analyze performance against market volatility. Many individuals nearing retirement are taking too much risk with their investments. By performing a stress test, you would be able to see if that risk is too high and potentially sabotaging your retirement dreams.
Phase 2 – Riding the recession ripple
By building a strong savings account and protecting your current income, it’s less likely you will need to dip into your retirement investments. If your planned retirement occurs during this recession, seriously consider extending your employment a little bit longer. Continuing to work for an additional year or two can increase your level of income from Social Security benefits.
If possible, delay starting Social Security benefits. According to the Social Security website, if you were born in 1955 your full retirement age is 66 and 2 months which means you would receive 100 percent of your monthly benefit. However, if you wait until age 67, you would get 106.7 percent of the monthly benefit because you delayed receiving benefits for 10 months.
If you have a variable rate mortgage, now may be a smart time to refinance at a low fixed mortgage rate so your monthly payments don’t increase. Also, consider downsizing and cutting expenses. Most likely, a quick analysis of your expenses would highlight areas where costs could be cut and savings could be increased.
Phase 3 – Recovery and moving forward
During recovery, meet with your financial advisor to review your portfolio and see if modifications are necessary to mitigate any losses that might have occurred. If your savings weathered the storm relatively unscathed, consider the best options for gaining momentum to secure your ideal retirement plan.
Thinking ahead and focusing on the long-term, re-balance your portfolio to maintain your desired level of risk. Your risk level may have fluctuated during this time and therefore your asset allocation must reflect those changes. If you had previously stopped, resume investment contributions to take advantage of post-recession growth. And lastly, review your estate plan to ensure it still aligns with your final wishes.
Timing plays a central role in most of life’s decisions and retirement is no different. Although retiring during a recession may not be the ideal time, there are strategies you can follow to help secure the retirement you always dreamed of.
Joel Johnson, CFP®