6 Ways to Recession-Proof Your Retirement

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Is it possible to predict a recession? The short answer is: not really. The Great Recession of 2008, for example, famously blindsided many economists worldwide. 

So why are recessions so hard to forecast? According to a recent article in Bloomberg Businessweek, “The main reason is that it’s simply a hard job. Information about the economy is incomplete and arrives with a lag. And turns in the economy tend to be abrupt. Some are caused by financial shocks, such as stock market panics, which are themselves unpredictable.”

So instead of worrying about when the next recession may strike or trying to predict it based on conflicting information, the wisest course of action is to simply prepare for it. “While you can’t really recession-proof your life, there are some things you can do to make sure you’re not blindsided,” explains Erica Gellerman, creator of the personal finance newsletter, blog, and podcast The Worth Project

Here are six steps you can take to make sure you’re well-prepared for retirement when the next recession hits. 

Have an Emergency Fund

An emergency fund is perhaps the most valuable weapon in your retirement-planning arsenal. Most experts recommend having at least three months of savings to live off in the event of an unexpected financial blow, but really, every little bit counts. 

It’s also perfectly ok to start small and build your emergency fund as you go. You can set a savings goal, then figure out how much of your paycheck you need to set aside each month to reach your goal in three months (or six, or nine—it’s up to you and your particular financial situation). 

Once you’ve decided how much you want to sock away each month, make sure to set up a direct deposit from your paycheck or banking account directly into your emergency fund so you won’t be tempted to cheat yourself out of your savings. The idea is to contribute something to your emergency fund every month, without fail, until you reach your goal. 

Diversify Your Investments

If you’re on the cusp of retirement—say you’re planning to retire sometime in the next five years—you may want to consider adjusting your retirement portfolio allocations so you’re less exposed to risk. “A recession doesn’t have to spell doom and gloom for your investments,” says personal finance writer Rebecca Lake, in an article for SmartAsset. “Reviewing your asset allocation strategy, rebalancing, and finding recession-proof investments can make your portfolio less susceptible to major market swings and economic crises.”

One thing to watch out for: many experts now say the traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification for soon-to-be retirees. Why? One important reason has to do with longevity. Retirees are now living longer, which means portfolios need more room for growth in order to pay for living expenses and outpace inflation. 

Other factors working against the 60/40 rule include the increasing turbulence of the markets over the last few decades and the evolving needs of investors. In order to maximize your investments, many experts now recommend maintaining an even broader allocation of assets to succeed at long-term growth while maintaining a reasonable level of risk. 

Manage Your 401(k) Wisely

It’s tempting to want to sell or make significant alterations to your 401(k) during down periods in the market, but it’s best to leave it alone. For most people, 401(k)s are long-term investments, which means that market fluctuations are simply part of the deal. 

“Fast-moving markets, either rising or falling, are not times to make major changes to saving and investment plans, advises retirement plan investment adviser and Forbes contributor Robert C. Lawton. “Emotions tend to color perceptions to a high degree during these times, leading to bad decision-making.” 

“Wait a minute,” you may be thinking, “Didn’t you just say that soon-to-be retirees should alter their portfolios to be exposed to less risk?” Yes, but the majority experts will advise you to rebalance once a year, preferably when the market is fairly stable—not “panic-sell” the moment you see a downturn. 

And finally, if you’re not already doing so, make sure to maximize your 401(k) contributions and take advantage of any matching contributions that your employer may offer. If you’re 50 or older, many retirement plans offer a “catch-up contribution,” which means you now qualify to save a bit extra. (In 2019, 401(k) participants 50+ years of age can contribute up to $25k for the year—an increase of $6,000.) 

Pay Down Your Debt

Ideally, paying down any debt you have as you approach your retirement shouldn’t impact your 401(k) contributions. Your best bet is to try to pay off all your debt before you retire, while still contributing the maximum amount you’re able to your retirement plan. CFP Lynn Ballou recommends building debt payments directly into your budget rather than viewing it as an additional cost. 

One caveat: Experts strongly advise against dipping into your 401(k) to pay down debt, especially when you’re nearing retirement. A late-career loan will be due as soon as you leave your job, potentially leaving you with both reduced retirement savings and the tax burden of an early 401(k) distribution. Unless you qualify for a penalty-free “hardship withdrawal”—which is fairly rare—it’s in your best interest to leave your 401(k) untouched. 

Bring in Some Extra Income

Once you’ve retired, the last thing you probably want to do is rejoin the rat race. Fortunately, you don’t have to return to full-time employment to make some extra money in your retirement. There are plenty of ways to boost your retirement income without infringing on your hard-earned leisure time. 

Think about your skill set, your interests, and the resources available to you. Do you have stockpiles of collectible items you no longer want cluttering your house? Consider selling these items on Ebay. Love animals? Perhaps you can walk dogs or pet sit a couple of days a week. Own a nice home in a desirable location? Maybe you can rent out a room, mother-in-law unit, or even your entire home (if you’re going on vacation or summering elsewhere) via AirBnB. 

These suggestions are really just the tip of the iceberg. If you’re not sure where to start or what you might want to do, check out websites like Workforce50.com, Retired Brains, and RetireeWorkforce for more options and ideas. 

Don’t Go it Alone

One of the best ways to ensure you’re making good choices when it comes to planning for your retirement is to seek advice from a trusted financial advisor. Though it’s easy to dismiss this as an unnecessary expense, the right advisor can provide far more than sound financial advice. 

According to Samantha Lamas, a behavioral researcher at Morningstar, “One solution to help investors avoid common behavioral biases and the financial mistakes that can come with them—such as panic selling in a market downturn—is for advisors to be behavioral coaches. Advisors can corral these tendencies and help build a solid, trusting relationship with their clients to help drive investor success.”

It’s also a good idea to seek out advice from your peers. Thanks to the internet, there’s a wealth of retirement-specific blogs, websites, and social media groups where recent and soon-to-be retirees can get advice on virtually any aspect of retirement planning. 

More of a do-it-yourselfer? There are several retirement planning apps that can help guide you through the thornier aspects of recession-proofing your retirement. 

Most importantly, keep in mind that although recessions will come and go, you can always stay one step ahead of the game by having a solid, well-thought-out plan in place. If you maintain an emergency fund, manage your investments and retirement plan wisely, keep debts low, and have a go-to source for extra income, you’ll be well-positioned to make the most of your golden years—even when the next big one hits.