3 Steps to Recession-Proof Your Retirement

Have you heard the joke about the economist who correctly predicted nine out of the last five recessions?  The point being, it is hard to predict a recession. And, even the best economists are only making an educated guess.

Given that no one can definitively predict the next recession, when should you act to recession proof your retirement?  The answer is now!

Start with a plan based on your individual situation.  Your retirement plan should assume multiple recessions over the course of your working and investing life.  A good plan keeps you from making emotional or forced decisions that may derail your retirement.  A recession-proof retirement plan doesn’t mean a recession won’t affect you.  It means you know what to do when a recession does come along.

It’s essential you pay down any outstanding debt, especially high-cost debt such as credit card debt, to create breathing room in your retirement budget.  This means less of your retirement income is tied up in fixed expenses.  It is much easier to adjust your variable spending as needed, such as dining out, recreation and travel expenses.  It is difficult to adjust fixed expenses such as a mortgage, personal loan, or credit card debt.  If you must enter retirement with debt, it needs to be built directly into your retirement budget rather than viewing it as an additional expense outside of your cost of living.

Commit to an emergency fund.  It protects your retirement plan.  It doesn’t matter how solid your retirement plan is if you wreck it by taking your money out of the market prematurely.  If you are planning to retire in the next few years, it might be a good idea to have your first few years of withdrawals already in cash.  You do not want to be forced to make withdrawals from your retirement account when the market is down 30 to 40 percent. Retirement is going to last 25-plus years.  A recession is going to last about a year.

Remember, you planned for this!  Whether you are a do-it-yourself investor or work with a professional, you should allocate your retirement portfolio based on your goals and not how the market is doing right now.  It may be tempting to sell or make changes with your 401(k) or other retirement accounts during down periods in the market, but it’s best to leave them alone.  Retirement accounts are long-term investments, which means that market fluctuations are expected.  Stick to your plan—keep making your planned retirement contributions even in a down market.  Don’t even look at your retirement account balances.  This will just cause unnecessary worry.

Regardless of whether a recession is on the horizon, it’s always a good time to make sure you are financially prepared.  Now is the right time to evaluate your finances and check in with yourself.  If you feel nervous that you are not on sound financial ground, it’s time to ask, “What can I do to put myself in a stronger financial position so I can feel more at ease.”