Now What? Advice for Retiring Into a Recession

Inflation rates are the highest since the early 1980s and most economists expect the economy to fall into a recession by 2024.

But it gets worse. Stocks are officially in a bear market, with the benchmark Standard & Poor’s 500 Index declining 20% from its peak in early  January.

Consumer confidence hasn’t been this low since the dark days of November 2008 and the global financial crisis, and as Kenan Fikri, director of research at the Economic Innovation Group, points out, people are feeling more pessimistic about their retirement security than they have since 2017.

Those who are still working and closing in on retirement seem to be the ones facing the most crucial decisions. Younger people have time on their side for financial markets and the economy to improve. Those who have been retired for a while have probably already made many of their big decisions, for better or worse.

What to Do

Soon-to-be retirees are reevaluating things like when to stop working, whether they should move and how to strategize their spending. There are no easy, one-size-fits-all answers, but there are a few ways to prepare, along with some helpful things to keep in mind when making these decisions.

First, if you’re an older worker, remember that in a recession you’ll be more at risk of losing your job than a prime-aged worker. That means you’ll need emergency cash. Make sure you have enough to pay your basic expenses for a couple of months.

If you don’t have this set up yet, but were planning to say, buy a new car or take a vacation, let an emergency fund be your priority. Still, I understand that it can be unrealistic for those who are already financially strapped to come up with a cushion of cash.

It’s also foolhardy to try to time life decisions to what the stock or real estate markets are doing or may do. If you need to move, move.

Downsizing is usually a good idea because it likely means a smaller down payment (with cash left over), and a smaller house or apartment will be cheaper to maintain. That condo might seem “overpriced,” but then again, your suburban house is “overpriced,” too. Even in a recession, the same rule applies: Buy if you will be in your place for more than five years, rent if less.

For those who can afford to make a larger down payment, it’s prudent to do so, especially now with mortgage rates rising. That said, you shouldn’t be tapping your retirement account for extra cash. That’s because retirement accounts get special tax treatment, which is effectively an indirect contribution from state and federal governments.

What’s more, retirement accounts often receive employer contributions. Diverting money from them leaves employer and government money on the table.

And if you feel like you’re stretching your finances, consider buying a cheaper place and taking out a 15-year mortgage, rather than a 30-year one. You’ll pay more monthly, but less in interest overall.

Investing Issues

In terms of investing, think about your time horizon. If you’re planning to retire within the next five years, any money you need in the short-term shouldn’t be heavily invested in stocks. But if you have more time, take heart.

Stocks may be down, but that means they’re cheaper. If past recessions are any guide, it will take about five years for the stock market to recover.

When figuring out how much longer to work, remember the benefits of delaying Social Security. Though job uncertainty and high inflation makes taking payouts at the earliest age possible tempting, almost everyone benefits if they delay collecting.

For a married couple, Social Security and Medicare benefits can total more than $1 million if they’re delayed until full retirement age. If you claim Social Security benefits before age 70, they’ll ultimately be worth as much as 30% less.

Finally, it’s worth leveraging the temporary labor shortage to your advantage while you’re currently working. Ask for a raise or a promotion while employers are scrambling to keep and attract workers.

Stress how you help solve your employer’s problems. No one is going to be persuaded if you say you need more money because a recession hit when you were planning to ride off into the sunset.

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Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She’s the co-author of “Rescuing Retirement” and a member of the board of directors of the Economic Policy Institute.

(Image: Adobe Stock) 

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