Key Points
A recession early on in retirement could lead to portfolio losses.
The right asset mix and safety buffers could serve as great protection.
- The $23,760 Social Security bonus most retirees completely overlook ›
Workers tend to fear the idea of a recession, since economic downturns tend to go hand in hand with job loss. As a retiree, you may not have to worry about a recession from a job-related perspective. If you're not working, there's no job to lose.
But a recession could have a negative impact on your portfolio. While recessions and stock market downturns don't always happen simultaneously, they can. So it's important to build some resilience into your retirement plan. Here's how.
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1. Build a cash buffer
You clearly don't want your retirement savings sitting just in cash. You need that money to continue growing to outpace inflation and support a withdrawal rate that allows you to maintain your lifestyle.
At the same time, it's important to have cash on hand in case a recession spurs a stock market crash. If you have enough cash to cover two to three years' worth of living expenses, which is a good benchmark, you'll have a period of time when you don't have to tap your investments for income. That could prevent you from locking in major portfolio losses.
2. Don't overload on stocks
It's a good idea to invest in stocks as a retiree so your portfolio has a good chance of beating inflation. But you don't want to go too heavy on stocks, either. And if you're worried about a recession and ensuing stock market crash, you may want to shift more of your assets into bonds, which can be far more stable.
Another benefit of owning bonds is predictable income. If you have interest payments hitting your account, that's money you can use to cover expenses without having to sell off assets when they might be down.
3. Diversify
It's important to invest in a broad mix of companies within each asset class you own. Within the bond portion of your portfolio, you may want to look at corporate bonds, Treasuries, and municipal bonds. On the stock side, aim to own companies across a range of market sectors. Or, put your money into a broad market ETF (exchange-traded fund).
Diversifying doesn't eliminate risk. Rather, it spreads it out. But if your portfolio is well-diversified, you gain protection if a few specific corners of the market take a beating during a recession.
The more prepared your portfolio is for a recession, the less stressful the idea of one might be. By maintaining a cash cushion and the right mix of investments, you can set yourself up to get through a recession without too much damage.
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