The 5 years before and after the decision to retire, sometimes termed ‘the fragile decade,’ have major consequences on a retiree’s quality of life during a recessions. Since recessions are difficult to predict, considering its .
Recessions affect retirees by forcing early retirement due to unplanned job losses, decreasing portfolio value due to declining stock prices, and the potential for unplanned withdrawal of Social Security benefits in order to make ends meet in the present.
Given the latest two consecutive quarters of negative growth, you will surely seek to prepare for recession if you considered or began retirement in the last 5 years.
Read on to learn more.
Examining Your Recession Exposure
‘Retirement’ is a catch-all that describes many different lifestyles at the end of one’s career.
When considering the impact of recession, determine whether the following factors apply first:
- The degree your retirement plan depends on stock prices – Recessions are known to lessen investor confidence sharply, causing dips in the stock market.
- The amount of Social Security benefits available – Social Security benefits accrue with every year you delay receiving them. You may be drawing fewer benefits if you run out of money during a recession.
- The terms of your separation from employment – If you, like many, were laid off during a recession, you may be beginning your retirement earlier than anticipated.
All of these factors are critical in measuring the impact recession can have on the quality of life of your retirement years.
The nature of your retirement plan is the best way to discern which factors you may have to watch for.
The Impact of ‘Early’ Retirement
In addition to financial consequences, early retirement induced by a recession can have health and lifestyle consequences as well. This is often the case for those laid off between the ages of 45 and 66.
Losing a job during a recession in general for individuals is correlated with a higher risk of death. Older people are also associated with an increase in depressive symptoms if their job loss occurred during a recession.
Cognitive function later in life is also statistically negatively correlated with loss of job during a recession.
If retirees up to the point of meeting a recession were not impacted, their consumption habits and health tend to remain steady.
This suggests the nature of a recession is really about ‘timing’ more than the stability of the retirement plan. However, depending on the scenario, these range in their degree of exposure to recessions.
Check out this video for more information and advice for retiring during a recession.
How Recessions Affect Retirement Plans
Not all retirement plans are made alike. The above factors could impact different retirement stradegy in different manners.
Here, we have done more in depth research in order to expand more on a few common types of retirement plans offered.
401(k) Plans
401(k) plans have high limits on their contributions and are often matched by employers, allowing them to grow quickly.
However, the limits imposed on the investment options can make them vulnerable to recessions.
401(k) plans are often restricted to mutual funds. If your 401(k)’s investment options include mutual funds that invest in the stock market, falling stock prices can be a concern during a recession and beyond.
For more information about these plans, check out this article published by American Express that explains the 6 types of retirement plans.
Traditional IRA’s and Roth IRA’s
IRA plans are more flexible than 401(k)’s, because they aren’t as limited in investment options.
However, the amount of non-taxable contributions are limited for a traditional IRA plan – $6,000 a year or $7,000 a year if you are 50 or older.
Roth IRA plans are taxed differently than traditional IRA’s if the retiree anticipates higher income during retirement than before their retirement. In this case, Roth IRA plans provide more tax benefits.
Roth IRA’s can also be drawn on earlier than traditional IRA plans, which are bound until age 72.
If a retiree is laid off earlier than anticipated during a recession, the years after turning 50 are critical. Contributions that are higher can be shortened for traditional IRA’s.
If retirees begin drawing on their Roth IRA sooner than they planned, that can lead to less money in the future than they planned.
It is better to have a diversified retirement plan than to rely on any singular source of income into one’s twilight years.
Many recessions affect the economy in a variety of ways.
If a retiree’s portfolio is negatively impacted by exposure to a recession, it can cause them to draw on Social Security benefits to avoid running out of money.
Social Security Benefits
Retirees rely on Social Security solely when they have otherwise run out of money. In some cases, it is advantageous to draw on these benefits even if a retiree is financially stable.
However, drawing on benefits earlier than expected is taxing on a retiree’s planning.
Social Security benefits are increasingly larger the longer a retiree waits, becoming eligible as soon as they turn 62.
If they can delay drawing these benefits as long as possible, it ensures they will have enough money to live comfortably and happily late into their future.
If they plan on having any assisted living, they likely cannot afford to do so if they rely on Social Security.
Unless children or other family members support them, retirees need to be able to count on having money for any expenses they incur as a result of age.
For these reasons, recessions can have oblique effects on Social Security benefits even if retirees do not start drawing on them once they retire.
If their money runs out earlier than expected as a result of falling asset or security values, the time they would have waited becomes additional time they need these benefits to live.
If a retiree has sufficient cash flow late into retirement, they will be largely unaffected by recessions all together.
If this is not already the case, then planning on which years they expect to require Social Security benefits to live is essential knowledge that can turn based on the gravity of the latest recession.
Conclusion
Retirees have the potential to be unaffected by a recession if they are fortunate enough to remain prosperous late into their non working years.
Problems only arise if there are disruptions. Fortunately, if they planned well, these can be almost entirely mitigated.