Planning for Retirement in a Slowing Economy
Being alert to economic slowdowns -- and shifting gears if needed -- can keep you on the path to meeting your retirement goals.
When the pace of economic growth appears to slow, even if other indicators are not signaling trouble ahead, those in and approaching retirement may want to revise their plans in order to reduce their amplified risk.
A market downturn early in retirement is much more damaging than one a decade or so in. Markets don’t move in a consistent pattern; they are more like a roller coaster, falling and rising unpredictably, sometimes continuing in one direction for a few years in a row. If it happens that the market falls early in your retirement, just as you are beginning to use your savings, you may confront Sequence of Returns Risk The math can be counterintuitive, because if your portfolio drops by 15%, you will need an increase of 18% just to get back to where you started. And that doesn’t make up for any additional money you may have withdrawn in order to fund your living expenses.1
Our current economy is unusual. Analysis by Michael Fiske and David Blanchette in Advisor Perspectives shows that historically, when dividend yields were low, bond yields were high, but in 2021 both were well below long-term averages. In this situation, Fiske and Blanchette calculate that a tripling of principle is needed to achieve equivalent yields from just a few years ago.Lower yields may require retirees to withdraw from their principal rather than living solely off interest, in order to maintain their lifestyle. Rather than chasing risky yields, Fiske and Blanchette recommend maximizing after-tax return from the portfolio.2
Economic growth may remain slow for the next 10 to 20 years. The U.S. entered a bear market in January 2022, only two years after the most recent bear market began. On average, bear markets have lasted just over 18 months, with an 38% decline in stock values.3 We may not experience a “lost decade,” as we did in the 2000s, but subpar returns appear highly likely.4
Americans who stay ahead of the slowing economy are likely to see better results than those who wait it out without adjusting their strategies. Here are some ideas and actions to consider.
• If you are within a year or two of retirement, increase your available cash to protect yourself from a potential market downturn. Instead of an emergency fund with a few months or a year of living expenses, consider keeping three years’ worth of available cash. To make it easier, you might set up a special savings account or a 401(k) retirement plan and have payroll deductions taken automatically. Having cash to fund your first few years of retirement will help you to avoid selling stocks in a falling market and allow you to live the lifestyle you’ve budgeted for without compromising your future. 5
• Low-risk investments may be a good choice in a slowing economy. Certificates of Deposit and money market mutual funds have failed to wow consumers with interest rates over the last few years, but yields have recently risen. Rather than holding cash, which can lose you money during periods of high inflation, you might consider low-risk short-term investments that can keep you fairly liquid while also netting a return. 6
• It may be best to buy stocks when the economy is slow because you can buy at a lower price, but during a downturn experts recommend that investors re-think their investment mix. Only invest in the stock market what you can afford to lose, use dollar-cost averaging rather than trying to time the market, and choose quality stocks that you intend to hold for five or ten years.7
• A recession can cause losses in high-yield bonds and even some investment-grade bonds, so fixed annuities and fixed indexed annuities offer the advantages of guaranteeing the value of your principal and earning interest, while maintaining the diversification benefits. Those nearing or in retirement may want to look for guarantees of principal and interest in vehicles like the Multi-Year Guaranteed Annuity (MYGA), which locks in a fixed rate for the term you select, usually five to 10 years. The principle is guaranteed and the interest you earn grows and compounds tax-deferred within the annuity, providing a stated predictable return.8
• Minimize debt. For example, if you’re investing in real estate, buy in cash rather than carrying a mortgage that you may not be able to afford should the economy slow down.
• If the market is volatile, consider putting off your retirement in order to work a little longer. Just one more month of work can increase your retirement savings as much as if you had put one percent more away for the previous ten years.9 If you’re not yet 70 years old, every additional month that you work can increase your lifetime Social Security benefit as well.
Citations.
1 - thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
2 -advisorperspectives.com/articles/2021/01/25/what-to-do-about-the-high-cost-of-investment-income
3 - cnbc.com/2022/06/13/sp-500-is-in-official-bear-market-according-to-sp-dow-jones-indices.html
4 - fidelity.com/viewpoints/market-and-economic-insights/investing-for-the-next-20-years
5 - barrons.com/articles/retirement-in-a-bear-market-51559342111
6 - money.usnews.com/investing/investing-101/articles/managing-your-liquid-assets-during-the-market-downturn
7 - fool.com/investing/how-to-invest/what-to-invest-in-recession/
8 - forbes.com/sites/bobcarlson/2018/09/25/when-to-replace-bonds-with-annuities/
9 - nber.org/digest/may18/working-longer-can-sharply-raise-retirement-income
