If you find yourself retiring during a recession, you must fortify your retirement against future market volatility. These pointers will help you prepare for a recession and protect your savings.
Keep chipping away at debt payments
The most important thing you can do while retiring in a recession is to keep chipping away at debt payments. Start with debit cards, credit cards, and other variable rate balances. Settling these debts will go a long way toward helping you fortify your savings. Interest rates play a huge role in protecting your retirement savings.
It’s no secret that the U.S.’s sky-high interest rates have made debt consolidation more difficult. You may have to request a lower rate from your credit card provider, get a home equity loan with a lower interest rate or switch to an interest-free credit card with balance transfers. These measures are often necessary when retiring during a recession.
However, you must also ensure that your retirement savings are still benefiting from higher interest rates. Highinterest rates help you gain more from conservative investments and bolster your portfolio despite the market volatility. Higher interest rates are a double-edged sword in this regard.
Leverage tax-loss harvesting
A great loophole you can take advantage of is tax-loss harvesting. You simply have to sell investments that are losing value, then use the losses to reduce your taxable gains and offset thousands of dollars from your ordinary income. All the losses carry forward to future tax years when you’re hopefully in a better financial position.
However, it’s important to note that tax-loss harvesting is only a viable option for certain investors, including people who need to protect their retirement savings. You already have too much money invested, so you must exhaust all strategies to keep your earnings. Harvesting is an effective way to get around market downturns, but it shouldn’t be a habitual practice.
If everyone started tax-loss harvesting at once, a sudden market correction would likely occur. Market corrections happen when investors get cold feet and sell their stocks all at once, which results in price drops of up to 20% that stay low for an extended period of time.
Consider a Roth IRA conversion
The stock market downturn has made Roth IRA conversions more appealing for retirees. If you are comfortable with your savings, converting to a backdoor IRA will enable you to make after-tax contributions to your IRA and 401(k) plan. The limit for these contributions is $43,500 in 2023, so you can add a significant amount to your retirement savings.
The market’s decline isn’t good for the economy, but it allows clever investors to enjoy more tax-free growth. There’s no such thing as a crash-proof retirement, but you can make your retirement more secure with a simple Roth IRA conversion. You just need to submit Form 8606 to the IRS when you file taxes for the year you made the conversion.
Wait for Social Security
One of the hardest things about retirement is deciding when to apply for social security. Delaying your benefits might be temporarily inconvenient, but it might be essential for you to protect your retirement savings from recession. Avoid the impulse for instant gratification and wait a few more years so you can get more returns.
One social security expert estimates that deferring your benefits can generate an 8% return every year you hold off. This estimate is assuming that you’re a healthy retiree with an average projected lifespan. Only one-quarter of eligible 62-year-olds claimed their benefits in 2019 — and that was before the market downturn.
Stay flexible with withdrawal rates
Market volatility naturally takes a toll on your portfolio’s health, especially for longtime retirees who are no longer adding to their savings. However, even these people can recover from a market downturn if they maintain flexibility with their savings withdrawal rates. You can protect your retirement savings by making timely withdrawal adjustments.
Start off with a conservative withdrawal rate that covers your essential living expenses. You can always increase the rate if market conditions improve and your portfolio performs well.
Protect your retirement savings
You’ve worked hard for decades to ensure a comfortable retirement, and now the economy has thrown a wrench in those plans. You can’t fix the stock market, but you can protect your retirement savings in a recession by enacting these investment strategies and staying flexible with your savings withdrawals.
Jack Shaw is a writer and editor for the lifestyle magazine Modded, where he has explored topics of health, wealth and relationships. He’s as a car enthusiast and lover of nature, trying to enjoy life one day at a time.