Authored By Kenneth Reeves, Apex Financial

How does one retire during a recession or market downturn? In retirement, timing is everything, as it is in much of life. While attempting to retire during a financial downturn may seem unwise, many people may not have another choice.

 

By Ken Reeves

Those who want or need to work past the average retirement age often discover that chronic illnesses, injuries, or a tightening job market may not give them the luxury of deciding when they’ll leave the workforce. Another issue seniors may encounter is having to retire earlier than anticipated to care for an elderly parent or ailing spouse.

So, what happens if you want or need to retire when the economy falters? Are there measures you can take to make the transition as smooth and worry-free as possible? If your portfolio has lost a chunk of its value, how will you make up the difference?

While ending your career during a period of economic uncertainty isn’t ideal, there are a few things you can do to blunt some of the potentially negative impacts. The best advice I give all my clients is to include a contingency plan early in the retirement blueprint design process.

When things are going well, and you feel you are on track to achieving your money goals is the worst time to become complacent. Sit down with your advisor and craft a Plan B that anticipates you retiring earlier than you wanted during a bear market or asset bubble. Such worst-case scenario planning will help you avoid panic and indecision if you choose or circumstances force you to leave your job early.

Do the math!
Take a deep Dive Into Your Portfolio.

Like many people, you probably have retirement savings in various accounts, such as 401ks, IRAs, and other assets and investments. While losing your “accumulation” mindset can be challenging, particularly when inflation is rampant, you must objectively evaluate your current portfolio.

Is too much of your money exposed to risk? Can you afford to lose even one cent when you retire? Have you done a thorough enough job of preserving your assets? Do you know how much money you can safely withdraw without putting yourself in a bind?


Evaluate Your Original Projections

Retirement and income planners like myself typically have various software and other tools to help our clients create realistic financial projections. For example, software programs may help investors discover how much their assets’ returns must average to provide the desired income. These tools consider many factors, such as the sequence of returns risk, inflation, taxation, and Social Security.

While it’s impossible to anticipate everything life throws at us, having your advisor model multiple scenarios can help you spot weaknesses or gaps in your planning that could blindside you at retirement. You wouldn’t attempt to fix a leaky roof during a hurricane, and you don’t want to try and fix financial problems when you’re clocking out for the last time.

Consider work options, side hustles, and “gig” work.
If you are healthy but have to retire because your company is downsizing or closing, you have a few options. An obvious one is to find another career, perhaps in a different field, where you can work for 2-5 more years. If you are over 50, you’ll be able to make catch-up contributions to your 401k or IRA. In 2022, you can add an additional $6,500 to your 401k after meeting the initial $20.500 limit. For an IRA, you may make contributions of up to $7,000.

There is always the “gig work” option. You may find work as a rideshare driver, delivery person, babysitter, or similar gig. Or, you could start your own work-from-home business. But what if you don’t want to or cannot work full-time when you retire?

The thing to remember here is that, in retirement, income is king. If you don’t have income from an outside source, such as a full or part-time job, you will have to use your savings earlier and more often, potentially causing you to run out of money early in your retirement.

Plan For Health Care Expenses

If you’re 65 or older when you leave the workforce, you’re eligible for Medicare. However, if you are under 65, you’ll want private “gap” health insurance when you retire. Such coverage can be expensive, especially if you quit working before achieving your savings goals. However, even though many pre-Medicare retirees do, going without coverage is not a great option.

Without medical insurance, your savings could be crushed by something relatively minor, like a broken arm, which can cost upwards of $2,500 to set and cast. If that arm needed surgical repair, you’d likely get a bill of $15,000 or more! Imagine how much you’d pay if you suffered a heart attack or stroke.

If you’re over 65 and qualify for Medicare, you must know that Medicare won’t cover many things. For example, Medicare won’t cover long-term care beyond a certain threshold. You’ll need to carefully choose a Medigap or Medicare Advantage plan to help you offset out-of-pocket costs. And you might also talk to your income planner about long-term care annuities that can provide some long-term care coverage.

Review your budget
Review Your Budget and Lower Your Living Expenses
I hope you took your planner’s best advice and created at least one emergency fund that can get you through rough patches during your retirement. This emergency fund can keep you afloat if you must leave the workplace early, especially if you have to do so during recessionary times.

If you don’t have emergency savings or feel your current emergency fund isn’t large enough, you may want to re-think your budget. Reducing your living expenses may seem impossible, and you may believe you are already living on a thin shoestring. However, when my clients are honest with themselves and me, we often discover places where cash leaks out, sometimes without them realizing it.

It’s painful but necessary to sit down with your significant other and your income planner and find out where the financial termites are, eliminating as many as possible. For instance, some of my clients are enrolled in multiple “subscriber” services, such as streaming services, premium cable, or newspaper subscriptions that they never use or don’t need. Sometimes, they discover they eat out more than they realize or pay too much for consumable items simply out of habit or convenience. Perhaps they buy top-shelf items when generics or store brands would work well. Even necessities such as auto insurance or dental care can vary significantly in cost.

Do the math!

Social Security Truth and Consequences
If you must retire earlier than you wanted, you’ll probably think of Social Security first. If you’re at least 62, you can start getting Social Security benefits that will be reduced if you have not yet attained full retirement age. In 2022, the normal retirement age, or NRA, reached 67 for people who turned 62 in 2022. Retiring before age 67 greatly impacts your benefits.

So, before you begin Social Security early, I highly recommend you meet with an experienced advisor. Your advisor will discuss the ramifications of taking your Social Security before the full retirement age, potential tax issues, and other nuances of this benefit.

The decision of when to begin taking Social Security is one of the most crucial choices you will make. It might be a wise idea to spend some time modeling possible outcomes. For example, you can draw Social Security benefits and work simultaneously. But your benefits are reduced if you are younger than full retirement age and earn more than the yearly limit. The good news is that beginning with the first month; you reach full retirement age; Social Security doesn’t reduce your benefits, no matter how much you make. Your check might even increase when you work because you’ll be paying Social Security taxes on your earnings.


Ken’s Caveats: If you took nothing else away from this article, I hope you realized that planning could make all the difference if you must retire sooner than expected or in unfavorable economic conditions. If you’re reading this, you know this; you know that having Plan B in place is a wise course of action at any age, even if you never have to use it.

If you are still working and healthy, you should meet with your trusted advisor and create multiple “what if” scenarios in case you need to leave the workforce early. You might also want to look into alternative strategies that can give you steady, risk-averse growth while creating guaranteed income streams, such as annuities.

If you want to learn more about retirement planning and how to navigate through this maze, visit retirement Max Radio’s website and stream all of the weekly content. You can also go to Spotify and listen to all of the latest episodes.