Retiring during an economic recession? Here’s 6 things to consider.

With increasingly common talk of a possible global recession, it may have you considering how your retirement plans might be affected. Whether you are looking to retire in the next 6 months or further into the future, here are 6 things to keep in mind that will serve you well in the future.

There are many myths surrounding the best way to act when it comes to your finances during a recession. It can cause us to make rash decisions, like pulling all of our money out of the stock market, switching your super investments into cash or downsizing your home. This is why a retirement plan is important. So you can have a clear idea of what strategy you need in place to achieve your retirement goals and make sure that all your financial decisions help with this strategy. 

1 – You shouldn’t have to delay your retirement

In most circumstances, delaying your retirement is not necessary. If you have a solid retirement plan in place, you should be able to weather the storm and continue living comfortably through this volatile economic period. The key is not to let a recession derail your plans and lead to you making big changes to your strategy – stay the course!

2 – It is highly likely your superannuation balance will return to where it once was.

An economic recession is historically linked with a downturn in equities (shares) and the housing market. These are assets that most superannuation funds have a lot of money invested in. However, it’s worth remembering that investment markets are cyclical. Over time, they will go through extremely volatile periods, but they have always rebounded and in most cases gone on to exceed their previous highs over time. 

A good retirement plan will transition your investments to more conservative options as you approach your retirement date, so your nest egg will be less exposed to any potential market volatility. This will help protect your super balance and give you greater peace of mind leading up to retirement.

If you are unsure of how exposed you are to a recession – get in touch with Catalyst Wealth Group for a portfolio review and retirement planning conversation. 

3 – Sticking to the plan, is almost always the right idea

While your adviser may adapt your retirement plan based on current market conditions, in most circumstances, the underlying strategy and advice will remain unchanged. This is because your retirement plan is based on your personal goals and objectives, which are unlikely to have changed just because of a short term change to the economy.

Try to avoid checking your portfolio balance too frequently during a recession. This can tempt you to make knee-jerk decisions in an attempt to improve short-term performance, which is usually counterproductive. The best way to ride out a downturn is to stick to your investment plan, your bigger picture retirement strategy and let time work in your favour. There are many things you can’t control in retirement, but following a well-structured plan will give you the best chance of success.

4 – A recession may create investment opportunities

A recession can actually present some great investment opportunities, if you have the funds to take advantage of them.

For example, a downturn in the property market may create an opportunity to invest in a property at a lower price. This could provide you with extra income in retirement or act as a hedge against any potential future share market volatility. Your adviser can help you determine if this is a good option for you and how to go about it.

You may also be able to take advantage of lower share prices and invest in quality companies that have been affected by the market downturn at discounted prices. These companies are likely to be well positioned when the economy recovers, so you could see some great long-term returns from these investments. 

5 – Part time work can help you come out ahead.

While not meaning to contradict our very first point in this article. It should be known that earning some extra income during a recession can help you in a number of ways.

If your investments have lost value, working part-time can help provide you with some additional income. This may mean you don’t have to sell your investments at a lower price to help with your retirement living expenses, allowing your investment balance time to recover from a market correction. It can also give you the opportunity to top up your superannuation, at a  lower entry point. (See point 4)

If you are recently retired, or thinking about retiring, perhaps a gradual phasing out from the workforce, rather than a complete retirement could be beneficial for you.

While staying in, or re-joining the workforce isn’t necessary, sometimes it may help to give you that little bit of extra security and peace of mind during times of economic uncertainty. 

6 – Cutting costs can help your long-term retirement goals

While we are certainly not suggesting you cut out all your fun activities and lifestyle choices. It may be beneficial to check where you can cut costs, during a recessionary period.

Especially in the current high inflation environment we find ourselves in during 2022. If you can find ways to cut costs from areas in your budget that don’t provide a great return on your investment or provide enjoyment. It may allow you to build your savings which is good in times of economic volatility. Or potentially consider investing some of your money to take advantage of the current market conditions.

It’s important not to make any drastic changes to your lifestyle, as this can lead to feelings of deprivation, which can impact your mental health and wellbeing. However, small changes here and there could make a big difference to your long-term retirement goals.

Overall a recession can be an incredibly daunting and stressful time. But if you are prepared and have a solid plan in place, you can weather the storm and come out the other side unscathed. If we haven’t already made it clear in the above article, the best way to come out of a recession unscathed, is by having an adequate and thorough retirement plan in place. This plan will make clear the strategy you need to achieve your retirement goals and help keep you on track and avoid unnecessary risks or changes to your plan when the economy changes (which it always does). 

If you don’t have a retirement plan, or if you are unsure of how equipped your current retirement plan is to weather a recession – get in touch with Catalyst Wealth Group today. One of our expert advisers will be more than happy to help get you on track for a comfortable and prosperous retirement.

Frequently Asked Questions

What age should I start planning for my retirement?

While there is no hard and fast rule, it is always a good idea to start the conversation with a professional about retirement as soon as possible. 

The sooner you start, the longer your money will have to grow and compound. This is especially important if you want to retire sooner rather than later.

Is a recessionary period a good time to add more to my super?

As mentioned in point 4, the prices of assets will usually be lower during a recession because investment values have fallen, providing you with the opportunity to buy more investments at a lower cost. So if you have extra cash available, and are still working, it may be worth considering adding more funds to your superannuation to help build your balance for retirement. It’s important to take note of your contribution caps, as there are limits on the amount of money that you can put into superannuation each year. 

What does a retirement plan consist of?

A retirement plan takes into account all your current financial circumstances and goals and maps out a clear path to achieve a comfortable retirement. It will consider factors such as your age, how much money you have and the kind of lifestyle you want in retirement. The plan will map out what you need to do between now and retirement with your finances to achieve your retirement goals. 

I was made redundant during a recession, should I just retire early?

The answer to this question lies heavily in your personal circumstances. You need to consider your age, your current financial position, your income needs in retirement and whether or not you have enough assets to support this retirement income goal. It is almost always a good idea to speak to a professional about your options before making any big decisions.

Trying to stay in the workforce during an economic downturn can be very beneficial to your retirement, especially if you didn’t originally plan to retire this early.

Will my superannuation balance recover?

This year, equities in almost all global markets (including Australia) have seen a decline in value. So your superannuation balance has probably taken a bit of a hit. However, as mentioned in point number four, contributions being made into your superannuation account this year provides you with an opportunity to buy more assets at a lower price and improve the long-term outlook for your superannuation retirement balance.

Historically, assets have almost always recovered from sharp declines and gone on to reach new highs in time. So, while it may be tempting to cash in your superannuation and invest elsewhere, this is usually not a good idea in the long run.