Best Retirement Decisions To Make in a Recession

A recession is a prolonged period of significant economic downturn in which trade and jobs decline. It can be accompanied by high unemployment and falling stock market indexes. Recessions tend to last six months or longer, but there are outliers. The recession during the COVID-19 pandemic lasted just two months in early 2020, but the Great Recession lasted 18 months from 2007 into 2009.

Recessions are not easily defined. A simplistic definition tends to be two consecutive quarters of real declines in the GDP — gross domestic product. But that is not the official definition of a recession, according to the National Bureau of Economic Activity (NBER).

The NBER has the sole say in determining a recession in the United States. The NBER is a private, nonprofit research organization that bases its call on monthly assessments of personal incomes, business and consumer spending, industrial production and changes in the labor market — as well as quarterly GDP performance.

Recessions pose one of the most severe and uncertain retirement risks. Recessions tend to cause sudden, steep drops in the stock market. This can mean that your retirement investments can decline in value. Recessions also see high unemployment rates.

If you lose your job, you may not be able to continue contributing to your retirement savings — or worse, you may have to tap into your savings to pay the bills.

You should prepare ahead of time to ride out a recession by building up your savings, paying down debt and keeping an emergency fund to avoid tapping into retirement savings.

When the stock market crashes in a recession, it’s a good time to buy stocks. Stock prices drop sharply during a recession. But stock prices tend to rise during the recovery, allowing you to make a larger profit than if you wait to invest.

While a recession can throw a wrench into your retirement planning goals, you should continue to contribute to your retirement accounts if you can.

A standard rule of thumb is to not go against your risk tolerance when investing in a recession.

In other words, keep doing what you’re doing. If you typically put 60% of your retirement contributions into stocks and 40% into bonds, stick with it regardless of what the market is doing.

Keep your investments diversified to prepare for a recession — and to ride one out. By spreading out your risk in a lot of different investments, you minimize your risk of loss if a company you invested in fails during the recession.

Some investment advisors recommend diversifying your portfolio with as many as 10 different investment and asset classes. These may include stocks, bonds, cash, mutual funds, real estate and other investments or assets.

The safest assets during market loss include individual bonds, CDs or cash through maturity. However, they are more susceptible to inflation risk.

Stocks in large companies with a long, strong record of profitability do well during recessions, but they are a higher risk in the long run. If you invest in stocks, it’s best to choose companies that have a strong track record of weathering past recessions, so they ride out the next one.

Companies with this kind of performance tend to be in the consumer staples sector — producing goods or services that are not usually affected by changes in the economy one way or another. This includes food, beverage, alcohol and household goods companies.

Ahead of a recession, you may also want to look at investments that are not tied to a performance index and won’t be affected by economic downturns. These include bonds, fixed annuities or other non-indexed investments.

Going back to work during a recession can help your finances in two ways — give you a steady income stream and allow you to put more money into savings and investments.

You may also want to put off your retirement if you are still working during a recession. This will allow you to continue making contributions to your retirement accounts.

People nearing retirement age also have the option of making larger annual “catch-up” contributions to retirement accounts. For example, if you are 50 or older, you can contribute an additional $6,500 into a 401(k) or an additional $7,000 into an IRA in 2022.

Each year you work also increases the amount of monthly benefit you’ll receive from Social Security.

The downside to returning to work during a recession is that companies tend to lay off employees during recessions, making the job market more competitive for anyone wanting to return to work.

You should also consider how working after retirement can affect your Medicare, Social Security, pension and other benefits.