Will a Recession Wipe-Out your Retirement?

Whenever I talk to clients and potential clients regarding their retirement, there’s one thing that’s on everybody’s mind: Will I be okay?  

This is probably on your mind, too. Will you have enough money to enjoy your retirement? Will you outlive your money? Financially speaking, will you be okay?

With so many economists predicting that a pretty severe recession will hit in the next 12 months, here’s another question you should be asking: What can you do to ensure a recession won’t wipe out your retirement?

It takes a lot to recover from a huge downturn

In the 2008-2009 downturn, the stock market plummeted 56%. Some people were able to wait things out until the market eventually rebounded. Others didn’t have that kind of time on their hands, either because they had already retired or because they lost their job. Many had to pull money out of their portfolios while things were down, just to cover everyday living expenses. Their savings were wiped out and they never really recovered.

Do the math. For the sake of even numbers, say you start with a $100,000 nest egg. A 56% downturn will cut that down to $44,000. If you need to spend $10,000 to make ends meet, this further reduces your portfolio to just $34,000. At this point the market would need to almost triple just to get you back to where you started.

You Need to Diversify

One of the most important things you can do to keep a recession from wiping out your savings is to ensure your portfolio is properly diversified. If all you own is stocks and bonds (or mutual funds or exchange traded funds full of stocks and bonds), your portfolio is not truly diversified. There are other types of assets that you should have in your portfolio, too.

You Need Guaranteed Income

One of the most important things to have in your portfolio is a source (or multiple sources!) of guaranteed income that will last for the rest of your life. You need protected money that will not be affected by market downturns.

If you don’t happen to have a generous pension and/or if your anticipated Social Security checks won’t be enough to live on, annuities can be excellent sources of guaranteed income.

In fact, Dr. Wade Pfau, a well-known retirement researcher, has found that if you include both stocks and annuities in your portfolio you are less likely to run out of money in retirement than if you just rely on one or the other. Studies by Morningstar and the Society of Actuaries also found that annuities can help improve your retirement income security.

You need to be working with a professional

If you want peace of mind that you will indeed be okay in retirement, do yourself a favor and don’t take a do-it-yourself approach to financial planning. And certainly don’t rely on one of those “one size fits all” online tools. Working with a certified, experienced, continuously educated and well-trained financial planning expert like me can mean the difference between being okay. . . and not being okay.