HomeFinance4 strategies to recession-proof your retirement plan

4 strategies to recession-proof your retirement plan

Protecting your retirement in the face of a potential recession means taking a hard look at your financial plan and making sure you have enough of a safety net if the economy falters later this year or next year.

As many as two-thirds (67%) of U.S. adults expect the economy will enter into recession later this year, according to Northwestern Mutual’s 2023 Planning & Progress Study that looked at Americans’ attitudes and behaviors toward their finances.

“Periods of uncertainty provide opportunities to stress-test financial strategy,” said Christian Mitchell, chief customer officer at Northwestern Mutual. “Consumers want to know if their wealth building plans and their lifestyles will remain on track if the economy pulls back, and many are taking positive steps to prepare for whatever economic season may come.”

For those who see a recession looming, one-third (33%) say it will be short-lived, lasting a year or less, while one-fifth (19%) say it will last more than two years. And among those anticipating a recession, three out of four expect it to have a high or moderate impact on both their near-term (78%) and longer-term (75%) finances, Northwestern Mutual said.

The top three steps people are taking include cutting costs (64%), building up savings (50%), and postponing large expenses until the economy is on more stable footing (41%). Even high-net-worth individuals – those with total household investible assets greater than $1 million – are building up savings (50%) and postponing large expenses (38%), Northwestern Mutual said.

 “As a firm, we do believe the economy will have a recession in the back half of the year,” said Michael Berkhahn, vice president, Graham Capital Management. 

In an average recession, the stock market falls 32.5% and it can take two years to recover from market lows, Berkhahn said. 

However, in retirement, when you’re already drawing down 4% of your assets a year, it can take an additional 14 months to get back to where you were prerecession, Berkhahn said. It can even take longer if the recession is worse, such as the Great Recession in 2008, he said. 

Recessions are cyclical and in a retirement that lasts 25 years, so investors may face a recession every five to seven years, Berkhahn said. 

Do a safety check

“Recessions are normal. They happen. Now, let’s revisit your plan and make sure safety is built into the plan,” Chris Collins, wealth management adviser at Collins Financial, a Northwestern Mutual Private Client Group company. “Try not to let any short-term fears affect your long-term plan.”

“Built into a good retirement plan is the reality that recessions happen. Bake in what it looks like if there’s a recession within two years of retirement,” said Laura McHugh, vice president, client adviser at Spinnaker Trust.

Build up your cash position

“Make sure you build up a cash position in a near-term bucket. If you know you’re going to need $40,000 in the next year, shift that into cash now. You want to build up some cash so you’re not having to sell investments at a low point,” said Derek Pszenny, co-founder of Carolina Wealth Management.

McHugh agreed that money you need for the current year should be in cash. And given the stubborn inflationary environment, having an extra six months of savings at hand is not a bad idea, either, she said.

“Don’t take risks with funds you are going to need,” McHugh said. “Regardless of a recession, the general rule is that money you need for the current year should be in cash.” 

Move to quality equities

Pszenny said pick funds that have low volatility or funds that contain stocks that pay dividends. Those dividends offer a cushion. 

“With 20% less volatility, they will go down a little less than the rest of the market,” Pszenny said. 

Within your equity portfolio, shift 5% to 10% more into such funds to gain some protection, Pszenny said. 

 Across the rest of your portfolio, examine all your equities holdings to weed out any weak spots, said McHugh.

“Look at what you own in equities – there could be a lot of corporate failures in a recession. Slow and steady wins the race. Look for quality assets and names,” McHugh said.

Shift to longer term bonds

Meanwhile, for money you’ll need over the next several years, seek out safer investments in case the recession lingers longer than a year or you need more protection. 

“During recessions, the Fed typically decreases interest rates. So now is the time to shift from short-term bonds to longer term, medium term bonds,” Pszenny said.

Experts said anywhere from two to five years worth of assets should be in more conservative, fixed-income buckets. 

“You should have peace knowing you have several years of income-needs protected,” Collins said. 

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