The big question on everyone’s mind is whether the U.S. is headed for a recession. With the Federal Reserve getting ready to lower interest rates, experts are divided. Some believe we might face a recession, while others are hopeful that the economy will manage a soft ‘landing’ without too much trouble.
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What Does This Mean for Your Retirement?
If you’re close to retirement or already there, you might be feeling a bit uneasy. And for a good reason! A recession or sudden market drop could shrink your retirement savings and force you to rethink your retirement date. It’s essential to be prepared and have a solid plan in place.
Time for a ‘Plan B’
So, what can you do to safeguard your retirement? According to Anne Lester, author of “Your Best Financial Life,” it’s time to start thinking about a “Plan B.” She suggests that now is a great time to ask yourself, “What would I do if things go south?” Having a backup plan can prevent you from panicking and making hasty decisions that could hurt your finances in the long run.
Avoiding the Panic Button
David Blanchett, a retirement expert at PGIM DC Solutions, notes that those nearing retirement are more likely to panic during a downturn. To avoid this, it’s crucial to be proactive. Start asking the right questions now to test your current retirement plan.
Is My Investment Portfolio Ready for a Downturn?
One of the first questions you should ask is whether your portfolio is set up to withstand a market downturn. For those close to retirement, a market decline can severely impact how long your savings will last. This is known as the “sequence of returns” risk, and it can be a big problem if you’re not prepared.
What Should You Do?
Lester advises that it’s essential always to be prepared for the unexpected. The good news is that while market corrections (a decline of 10% or more) do happen, they don’t usually keep sinking indefinitely. However, being ready for a market dip means ensuring your portfolio is balanced appropriately.
How Much Should You Have in Stocks?
A common rule of thumb is to subtract your age from 120 to determine the percentage of your portfolio that should be in equities (stocks). For example, if you’re 50 years old, 70% of your portfolio could be in stocks. But remember, everyone’s situation is different, and it’s important to assess your risk tolerance and financial situation.
Should You Move to Cash?
If you know that a market drop of 10% would make you want to move to cash, consider doing so before it happens. Blanchett suggests that government bonds might offer good returns now, which wasn’t the case a few years ago. Additionally, having a cash buffer—two to three years’ worth of spending money—can be a smart move to avoid selling investments at a loss during a downturn.
What Are My Income Sources?
Another key consideration is your sources of income during retirement. Having guaranteed income can help reduce the impact of market fluctuations.
Social Security
Most retirees rely on Social Security for a steady income. However, if you claim benefits at the earliest age of 62, your payments will be permanently reduced. Waiting until full retirement age (typically 66 to 67) allows you to receive 100% of your benefits. If you can wait until 70, you could increase your benefits by about 8% per year.
Annuities
Annuities are another option to consider. These insurance products provide a guaranteed income stream in exchange for an upfront payment. The current higher interest rates make annuities more attractive, but rates may drop in the future, which could result in lower payouts.
Is an Annuity Right for You?
Before purchasing an annuity, it’s essential to determine whether it fits your financial situation. Some products, like multi-year guaranteed annuities and other fixed annuities, offer tax-advantaged returns for older Americans. However, always consult with a reputable licensed financial professional before making a decision.
Conclusion
Preparing for a potential recession is crucial, especially if you’re approaching retirement. By asking the right questions and making informed decisions, you can safeguard your retirement plans and ensure a secure future. Don’t wait until it’s too late—start planning now to protect your nest egg and enjoy a worry-free retirement.
FAQs
What is a recession?
A recession is a significant decline in economic activity lasting for an extended period.
How can a recession affect my retirement?
A recession can shrink your retirement savings and delay your planned retirement date.
What is a “Plan B” for retirement?
A “Plan B” is an alternative strategy to protect your finances if your original retirement plan is disrupted.
What is sequence of returns risk?
This risk occurs when poor investment returns early in retirement reduce how long your savings will last.
How should I adjust my investment portfolio for a downturn?
Consider balancing your portfolio with a mix of stocks, bonds, and cash based on your risk tolerance.
When should I claim Social Security benefits?
To maximize benefits, consider waiting until full retirement age or later, up to age 70.
What is an annuity, and should I consider one?
An annuity is a financial product that provides guaranteed income; it may be suitable depending on your financial goals.
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