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Learn How to Prepare for a Recession if You Are Retired

You can help keep your golden years free from financial worries by preparing for a recession before it happens.

August 18, 2022

This article is provided for informational purposes only and should not be construed as legal or investment advice. Consult with a professional financial or investment advisor before making investment decisions.

Economists have differing theories on the causes of a recession. The National Bureau of Economic Research characterizes a recession as a time of national economic decline when the Gross Domestic Product (GDP) has declined for two consecutive quarters and there is an increase in the unemployment rate.

During a recession, the U.S. economy declines. Characteristics of a recession include:

  • Job losses 

  • High inflation 

  • A decline in the value of investments

Planning for a recession is essential for safeguarding your family’s financial security. We’ll provide tips on how to prepare for a recession if you are retired so you can make a plan in advance. 

How to prepare for a recession if you are retired

When planning for your future, you may not have considered how to prepare for a recession during retirement. As a retiree, if you think a recession might be coming, you'll want to protect your retirement income so you can keep paying for your living expenses in the short term and long term.

While you won’t have to worry about unexpected job loss like a pre-retiree does, you still have the potential to disrupt your income streams from a bear market or declining interest rates.

Here are four proactive steps to prepare for a recession as a retiree.

Diversify your investments

When facing a prospective economic recession and market volatility, financial advisors recommend diversifying your investments and asset allocation to minimize your risk of losing money from your retirement portfolio. 

When you want to spread risk, exposure over various asset classes, a balanced portfolio of stocks and bonds may be the way to go. In addition, diversifying your investments in the stock market may reduce the danger of losing money on stocks that perform poorly and allow you to take advantage of gains from investments that perform well.

If you’re already retired or nearing it, diversification may look different from that of people who are still working. For instance, you might put your money into “safer” investments like cash-value life insurance, laddered bonds or money market funds.

Consult a financial advisor if you’re considering making changes to your investment mix. They can help you determine what’s best for your unique situation during a market downturn.

Lower monthly expenses

If you're worried your retirement accounts may lose value or won't grow as much during a recession, you might want to lower your monthly expenses to help your nest egg go further. Here are a few suggestions for cutting costs.

Pay down debt

Paying down debt can help reduce the number of bills you must pay each month — saving money and freeing it up for other expenses.

A common source of debt is credit cards. The interest charges can add up quickly if you only pay the minimum due on your statement. Try to pay more than the minimum to get your credit card balances to a manageable level. 

Also, if your credit score has improved since you first applied for credit, you may be able to negotiate a lower interest rate. That will help you pay down your credit card debt even faster. If that’s not an option, it may be possible to transfer the debt to a line of credit or a balance transfer card with a more affordable interest rate.

Another area where you may be able to find savings is your home mortgage. You may be able to refinance your mortgage for a lower interest rate. Some lenders also offer forbearance programs if you need financial assistance.

Reduce entertainment expenses

Another way to lower your monthly expenses is to avoid recreational spending. Just as people did during the Great Recession, retirees and pre-retirees have to devise creative ways to conserve money during an economic downturn.

One example is reducing the number of times you dine at restaurants. You might consider canceling some of your streaming services or finding more affordable alternatives to your regular activities, like watching a movie at home rather than at the cinema. 

Families trying to reduce spending don’t have to forego all forms of entertainment and relaxation. But they should be strategic about how they spend their funds to maximize savings.

Establish an emergency fund

Establishing an emergency fund is essential for a recession because you never know when the unexpected will happen. According to the Federal Reserve Board, about 12% of Americans can’t afford a $400 emergency and still, others would have to borrow money. Many Americans live without a savings account to help them during financial emergencies.

When you have an emergency fund, you have a reserve of money that can be used for unexpected costs, like:

  • Medical bills

  • A disruption in income 

  • A necessary home or car repair 

Without an emergency fund, you may need to take on debt to pay for unplanned expenses.

You should generally have at least three to six months’ worth of expenses in your emergency fund. If you keep your emergency fund in an interest-bearing bank account, such as a high-yield savings account, you can let your savings grow while it sits unused.

Create a retirement budget

The fear of outliving one's savings is a common concern for retirees. Creating a budget for retirement can help you avoid this. One of the most important aspects of retirement planning is creating a budget that accounts for both anticipated and unanticipated expenses. 

In addition to creating your budget, you’ll want to develop a system to help you stay on top of planned expenses, pay bills on time and keep your spending in check. Here are a few methods that may help those in retirement and those still in the workforce.

Use a desktop calendar

A desktop or digital calendar helps keep track of planned expenses and their due dates. Budgeting for these expenses is a great first step, but paying them on time or knowing when money will leave your account is important too, and this will help you avoid late fees or an overdraw on your account. 

Keep the calendar where it’s easy to see. You can physically cross out each monthly expense as it is paid.


Try the envelope method

Use a strategy, like the envelope method, to help keep your budget on track and your spending in check. 

Here’s how the envelope method works. After you decide how much you will spend on different expense categories in a month, you put cash in an envelope for each category. 

For example, if your monthly grocery budget is $400, put $400 in an envelope. When you go to the grocery store, take the envelope. This helps you stay within your target because you can't simply spend as much cash in the envelope as you could with a credit card.

This is just one possible strategy, and it may not be right for everyone. Perhaps you prefer a budgeting app or a financial spreadsheet. The most important thing is finding the budgeting method that works for you.

Plan for a recession before it happens

Economic downturns are inevitable, so it’s important to know how to prepare for a recession if you are retired. Consider these steps to safeguard your retirement income during a recession:

  • Diversifying investments

  • Lowering monthly expenses

  • Establishing an emergency fund

  • Creating a retirement budget

For professional investment advice, meet with a financial advisor or Certified Financial Planner to review your investment options and tailor your plan to your specific situation.

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