Here's how to recession-proof your retirement plan
Jill Hitchcock is the senior executive vice president responsible for the U.S. private client group at Fisher Investments, a fee-only investment adviser.
A lot of people worry a recession or bear market might derail their retirement, but that doesn’t have to be the case! A well-designed, comprehensive retirement plan can help you navigate good and bad times.
In previous articles, I wrote about the importance of long-term planning. This process involves regular communication and planning with your significant other (e.g., arranging a quarterly financial date night) when you map out a timeline of big-ticket financial goals and figure out how to achieve them.
For most people, planning for retirement is the biggest, scariest, and most difficult task to tackle. Luckily, there are things you can do now to help. It’s never too early to start thinking about retirement. Your plan needs to be flexible to adapt to life’s twists and turns, but the beauty of having a plan is that it gives you a roadmap and makes those abstract goals seem more actionable.
Here’s how you can make a flexible retirement plan.
Plan for a longer retirement
One of the biggest retirement-planning mistakes people make is underestimating how long their retirement savings will need to provide for them and/or loved ones. Even if you plan to retire at the traditional age 65, it’s easy to forget that people nearing retirement age are living longer and healthier than previous generations. That’s good news because you’ll have more time to do all of those fun things you mapped out. But it also means you’re going to need to save more money for retirement.
To estimate how long you’ll need your money to last, you can start by referencing average life expectancies, but don’t rely on them alone. For example, the most recent CDC life tables show the average 65-year-old can expect to live to be 84. So you might think it’s okay to plan for a 19-year retirement starting at age 65, but that’s asking for trouble!
Those life expectancy estimates are a starting place, but they are also just averages. If you and your partner are healthy and have family histories of longevity or you need your money to work beyond your life expectancy (say, for grandkids’ educational expenses or for charitable purposes), you may need to plan for a substantially longer period.
One of the best decisions you can make in your retirement plan is to overshoot how long you may need your money to provide for you and your family.
Set savings goals
Having an idea of how much you can save each year, quarter or month will help you gauge your progress and plan how much money to allocate toward future expenses. I set annual goals, but do whatever works for you! For me, a year-long timeframe gives me time to adjust for wiggles in my spending or income and get back on track to achieve my annual goal.
When you set your goal, strike a balance between achievable and realistic. Don’t be so rigid that you don’t have any fun along the way, but remember the old adage to “pay yourself first.” Cliché but true! I set my auto-deposit to contribute to my 401(k) and put money into my brokerage account before it ever hits my checking account, so I’m not tempted to spend it.
It can also be helpful to categorize your savings toward your different goals. If you have a surplus of $500 a month, you might automatically deposit $200 into your 401(k), direct $100 toward a child’s college fund, save $100 in a rainy day fund, and spend the remaining $100 on yourself and your family.
If you get an unexpected windfall, maybe a bonus at work or an inheritance, consider putting a little more in your rainy-day fund in case you fall short of your savings goals in the future.
Understand your need for investment growth
Saving money is only the first step. To achieve those goals you mapped out, you also need that money to grow along the way. And importantly, you may need more growth than you realize!
Many people believe they should invest in “safer” assets as they get closer to retirement, which often means holding more bonds and fewer stocks. An old adviser adage used to be: “Take 120, subtract your age and that’s how much of your portfolio to invest in stocks.” Wrong!
Ditching stocks for bonds come with a tradeoff — bonds’ typically lower short-term volatility also means potentially missing out on stocks’ higher long-term returns. Since 1925, U.S. bonds’ averaged annual returns of only 5% compared to stocks’ 10%. If you need long-term portfolio growth to avoid running out of money in retirement, investing in stocks can actually be the more prudent choice.
Don’t get me wrong: there are very valid reasons to have bonds in your portfolio. They can reduce portfolio volatility and help make sure you’re able to take money out when you need it—especially over a shorter period of time.
When choosing your investment allocation — a fancy way of saying the percentage of your portfolio to invest in bonds, stocks, and other assets — make sure you understand the pros and cons to make an educated decision. And hint: if you don’t feel equipped to make that type of a decision, consider enlisting the help of a qualified money manager.
You should review your plan regularly, but don’t stress over it every day. Looking at your investments daily can hurt more than help, because you may be tempted to respond to the normal bounces in the stock market. Markets naturally go up and down, and that volatility is the price you pay for stocks’ higher long-term average return, which includes some nasty downturns in the past.
Planning for more years, saving more in good times, and investing for long-term growth are some easy ways to recession-proof your retirement plan today.
Read more information and tips in our Retirement section