Retiring in a Recession: Why Market Downturns Can Be Your Friend
If you receive most of your financial advice from cable news and social media, you might feel like we're perpetually on the brink of a recession. The prospect of a major downturn can feel especially unsettling for those whose short-term financial goals include retirement. Even aspiring retirees who do understand the inevitable ups and downs of investing might worry that now isn't "the right time" to retire.
One of the benefits of the Keen Wealth Advantage is that we don't just react to external economic events, we proactively plan for a wide variety of contingencies -- including recessions. And while retiring during a downturn might sound like bad timing, with proper planning it's possible to retire on your terms, and on your timeline, no matter what's happening on Wall Street. In some cases, following your retirement plan right through market volatility can even be advantageous.
Avoid Costly Mistakes
The worst money decisions we make are often the most emotional. And during market downturns, emotions can run very high, especially for retirees.
That's understandable. It's one thing to watch the markets move up and down when you're still working and you have decades of building your nest egg ahead of you. It's another when you're getting ready to open that nest egg and it's suddenly shrinking.
However, making emotional decisions, such as panic selling or trying to isolate your holdings against risk, can be far more damaging to your retirement security than temporary declines experienced during a recession. Instead of "cutting your losses," what you're really doing is cementing those losses, forever, and limiting your opportunities to participate in the next recovery.
Zoom Out
And, according to market history, if a downturn or recession does happen, a recovery is very likely to follow in relatively short order.
Since 1929, on average, the markets have dipped into bear market territory every five years or so. And, on average, those bear markets have lasted less than 10 months.
Now, 10 months is a significant amount of time, especially if you're retired! But if you've been working with an advisor and following a financial plan, zoom out and you'll probably see multiple blips of similar sizes that you have made it through. In fact, many folks who stuck to their plans and retired around the 2008 Great Recession or the pandemic managed to build their wealth. If you don't panic, and if you work with an advisor, it's possible to make strategic investments that will pay off significantly on the other side of the downturn.
Don't Survive, Thrive
Here are just a few of the contingency plans that Keen Wealth helps folks consider in recessionary environments:
Strategy 1: Roth Conversions
When your assets are down in value, it might be a good time to convert funds from a traditional IRA to a Roth IRA. You’ll pay lower taxes now, and your future withdrawals from the Roth IRA will be tax-free, potentially lowering your lifetime tax liability and providing you with additional financial flexibility later in retirement.
Strategy 2: Portfolio Rebalancing
During downturns, try to think about stocks as being "on sale." Investors who let their fear get the better of them often try to pull their money out of the markets instead of taking advantage of lower prices.
However, that doesn't mean selling during a downturn is always the wrong move. You might be able to strategically rebalance your portfolio by selling a portion of your fixed income securities and then reinvesting in “on sale" assets, within the parameters of your risk tolerance, that are likely to appreciate when the market recovers. In taxable accounts selling down stocks to lock in losses for the year could also offset some of your gains, lowering your overall capital gains tax liability.
Strategy 3: Cash Reserves
Emergency savings accounts can help retirees maintain their lifestyles during a downturn without feeling pressure to make panic investment sales. You might even look for opportunities to build your wealth and invest more while the market is down.
Strategy 4: Reviewing Your Budget
At any stage of your life, the single most impactful adjustment you can make to your financial plan is to adjust how much you’re spending. If you do retire during a recession, it might be a good idea to review non-essential spending (streaming subscriptions, carry-out dinners, etc.) so that you aren’t stretching your resources too thin – especially if inflation ticks up.
Make Market Downturns Work for You
Whether we fall into a recession this year or not, it’s a guarantee that seniors will have to face more than one downturn over the course of retirement. Talking to a Keen Wealth advisor can help you maintain the perspective you need to keep calm during the inevitable ups and downs of market investing. And Keen Wealth’s comprehensive planning process can help you stay prepared for whatever comes next in the markets, in the world, and in your life.
Make an appointment and let’s discuss how you’re feeling about recession chatter and your financial plan.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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