The Long-Term Effects Of Recession On Retirement Security

Planning for retirement is a complicated process even in a good economy. If you live through a recession, it can potentially throw your retirement plan off and force you to redesign your entire savings plan. Therefore, you should be familiar with the potential consequences and know how to protect yourself in case of a potential downturn. 

Given this possibility, you might wonder: Are there realistic ways that you can effectively ward off potential long-term problems as the result of a recession? Actually, yes. The first step is to understand the consequences of recessions on retirement plans. Then you can figure out preemptive steps to take in order to protect yourself. 

Employment And Income Effects 

During recessions, employment rates tend to go down. People who have a percentage of their income going towards Social Security or other retirement funds will see these contributions decline or even stop if they lose their jobs. 

In addition, stocks and other types of investments tend to drop in value during recessions. Investors become skittish and start to sell their assets in order to protect against potential losses. The resultant market volatility can have a serious impact on retirement savings accounts.

Recessions can affect people in different kinds of ways. During the 2008 recession, for example, many people who lost assets decided to work longer than they had originally planned. It also proved difficult in that the labor market was weak and unemployment was higher. 

Government Policy And Social Safety Nets

The government has a number of different ways of dealing with recessions. If people have unemployment insurance, they will automatically receive some relief when the economy turns down. The government also takes actions such as cutting interest rates in order to stimulate investment.

The more important question for retirees, however, is what security measures are in place for people who are either no longer working, or soon to be retired. 

The following sections will look at the potential long-term consequences of recessions on retirement plans, and what you can do to ameliorate them.

Long-term Consequences

The long-term consequences of a recession for any given individual can vary widely. If your savings are primarily in particularly risky stocks that plunge during a recession and do not bounce back, you might have to rethink your retirement plans. Worse yet, you might have to extend the number of years that you work in order to build new savings back up.

However, if you take the time to invest wisely and diversify your portfolio, you should be in a relatively safe position. A lot of stocks tend to drop during recessions but then come back up once the economy recovers. In many cases, your best bet might be to wait it out and see what happens after several months. The average recession lasts for 1.5 years, so it usually isn’t long before the stock market as a whole starts to recover. 

Nonetheless, there are certain steps that you can take to protect yourself and ways that you can ward off long-term problems.

Mitigating Strategies

There are a number of ways that you can diversify your retirement savings in order to ward off potential losses during a recession. These should not be a replacement for Social Security, but rather supplementary to it. 

Saving More And Paying Off Debt

One of the more basic ways to prevent losses is to ensure that you have the right amount of money saved. Financial experts recommend that you should put away 10-15% of your gross income during your working years in order to guarantee security in your retirement. People invest these savings in different ways, as we will discuss below.

Another preventative measure that you should take is paying off your debts. Debts can be paid off in different ways, so you should familiarize yourself with the costs involved in doing so gradually as interest fees can add up.

Diversifying Your Investment Portfolio 

One of the most effective ways to ensure your financial security during recessions is diversifying your investment portfolio. Certain types of investments are more reliable than others, so it would be to your advantage to include some investments with a history of stability in your portfolio. 

IRAs

One of the ways that people are choosing to diversify their portfolios is through purchasing IRAs. There are different types of IRAs that you can invest in, and the right professional can help you formulate one that includes a good mix of assets to provide both growth potential, as well as stability in times of crisis. 

One of the IRA types that you might consider is a Gold IRA. Precious metals have a long history as hedges against inflation, and gold in particular has proven to be a solid asset when other stocks become unstable.

ETFs And Mutual Funds

You can also make steps towards protecting your retirement savings during potential recessions by investing in ETFs or mutual funds.

As these funds tend to contain more component stocks than standard stocks, you can hedge your potential losses more easily by including a variety of different kinds of stocks in them. Some will hold up better in a recession than others, and therefore you will be less subject to overall losses than you would with individual stocks. The primary difference between them is that ETFs can be traded at any time of day, while mutual funds can only be traded at a specific time.

Annuities

Annuities can be a reliable way to invest in an insurance plan and know that you will receive payments back when you retire. While you are working, you pay into an annuity account either on a regular basis or in single, lump-sum payments. The holding institution will later provide you with regular payments potentially throughout the entire period of your retirement. 

Single-payment annuities in particular are considered reliable because they guarantee a fixed rate of return. In other words, however severe a recession might be, the holder will receive the same payments regardless of what is happening in the stock market. 

Final Thoughts 

Recessions can be worrying periods fraught with uncertainty. While you are still working, it is best to take precautionary steps early so that you do not run into problems in the future. This includes diversifying your retirement portfolio and keeping abreast of investment options that are proven to be stable in times of economic downturn. 

If you take these kinds of measures, you should find that you are in a good position to enjoy your retirement regardless of what is happening in the economy.