Recessions may not occur frequently, but they can instill fear in investors, especially as retirement approaches. The last thing anyone wants is to see their portfolio plummet just when they need the funds the most.
By implementing strategies to recession-proof your portfolio, you can safeguard your retirement savings from the negative impacts of economic downturns. This may involve diversifying your investments across various asset classes, establishing a robust emergency fund, and exploring options such as annuities.
5 ways to protect your retirement savings from a recession
Whether you are already retired or planning for retirement in the near future, here are some tactics to shield your lifelong savings against potential recessions.
1. Opt for diversified investments
Diversification is a key principle in investing, especially crucial during economic downturns. By spreading your investments across different asset classes like stocks, bonds, ETFs, and real estate, you can minimize the impact of a decline in any single asset.
There are various methods for diversifying your investments. One approach is to allocate a portion of your portfolio to stocks for growth potential, bonds for income and stability, and alternative investments like real estate or commodities for diversification.
It’s also important to diversify within asset classes. Defensive stocks, for example, tend to perform well or remain steady during market downturns. Defensive sectors include utilities, health care, and consumer staples. If individual stocks aren’t your preference, defensive ETFs can be a suitable alternative.
While stocks and stock funds are susceptible to market fluctuations, government securities such as Treasury bonds can provide an added layer of protection to your portfolio.
2. Strengthen your emergency fund
An emergency fund is a cornerstone of a recession-resistant retirement plan. It serves as a financial safety net for unexpected expenses like medical bills or job loss, preventing you from accumulating debt or selling investments at a loss to cover essential expenses.
A general guideline is to save three to six months’ worth of living expenses in your emergency fund. However, you may consider a higher amount if multiple individuals depend on your income or if your income fluctuates.
Your emergency fund should be easily accessible. High-yield savings accounts or money market accounts are viable options, offering higher interest rates than traditional savings accounts while allowing easy access to your funds.
3. Utilize annuities effectively
Although annuities have received criticism over the years, when used correctly, they can provide stability and reliability during uncertain retirement periods.
An annuity is a contract with an insurance company that provides payments over a specified period. Annuities can be market-linked with a fluctuating interest rate or fixed with a guaranteed interest rate. Most annuities also offer a death benefit for beneficiaries.
While annuities often come with high fees that can impact returns, certain types can safeguard against recessions by offering a reliable, fixed payout. Fixed annuities, for instance, provide a guaranteed income regardless of market performance and typically have lower fees compared to other annuity types.
Another option is a multi-year guaranteed annuity (MYGA), functioning similarly to a certificate of deposit but with slightly higher rates. When considering annuities, weigh the benefits of immediate versus deferred payouts and the associated fees.
4. Postpone Social Security benefits
Delaying Social Security benefits, if feasible, can offer significant advantages. Benefits increase for each month you postpone beyond full retirement age until age 70, maximizing your benefit amount.
While the total benefits received over a lifetime may remain similar regardless of when you start, delaying allows for a larger monthly payment when you do begin. Delaying can prevent premature spending of funds, although alternative resources may be needed for expenses.
5. Generate additional income
A reliable way to mitigate financial losses is by increasing income. Retirees can explore various avenues to generate additional income beyond retirement benefits. Whether leveraging existing skills or exploring new opportunities, supplemental income can help offset potential losses during a recession.
Creating a second income stream can also provide financial security, especially in volatile market conditions.
Conclusion
Recessions pose significant financial challenges, particularly for individuals nearing retirement. Through diversification, emergency fund preparation, and strategic decisions like delaying Social Security benefits, you can position your savings to withstand market downturns.
— This article includes contributions from former Bankrate writer Georgina Tzanetos.
Editorial Disclaimer: Investors are encouraged to conduct independent research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.