A Retiree’s Financial Checklist To Prepare For A Recession

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Andrew Perri, President & Founder

aperri@pinnaclewealthonline.com
Pinnacle Wealth Management
Andrew : 810-220-6322

The “R” word is in the air and making people nervous. A “recession” is technically when GDP falls for two successive quarters, which happened as of last week. While politicians and economists continue to debate whether or not we’ve actually entered a recession, the reality is that people have already been struggling. Inflation is skyrocketing, which has caused the costs of non-discretionary expenses, like gas and food, to spike. In response, the Federal Reserve and other central banks are raising interest rates in an attempt to get inflation under control. Unfortunately, the inevitable byproduct of this strategy is an economic slowdown and loss of jobs for many.

For someone approaching retirement, there are few things more financially difficult than entering a recessionary environment. That individual, who is no longer receiving a paycheck, must start withdrawing on their funds as the market is going down and the economy is lousy. This may lead to their nest egg lasting for much shorter than initially planned.


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It’s possible to turn lemons into lemonade, making the best of these challenging times, with the right perspective and a proactive approach. The key is analyzing three areas that will impact your retirement: lifestyle adjustments, portfolio modifications, and financial planning opportunities. Below are some specific suggestions to consider in each of those categories that may help retirees navigate this difficult economic environment.

Lifestyle adjustments: Investors are quick to go straight to their portfolios for solutions to mitigate a turbulent market. In reality, many of the best strategies are outside the portfolio. While it’s less sexy than discussing investment opportunities, modifying one’s lifestyle is oftentimes the most effective approach.

Work longer: While this is undoubtedly an unattractive option for folks who want to retire, it may be the best solution to ensure their retirement is on track. Continuing to receive a paycheck allows someone to save more and delay withdrawing their funds during a downturn.

Work part time: Sticking it out in a full-time job may not be necessary. It may be possible to ease into retirement while also working a few days a week, whether in your current industry or something different. A small income from part time work may be enough to minimize the extent you withdraw from your portfolio in a down market.

Lower discretionary expenses: Pre-retirees may have had grand plans for their retirement. One option, if the market is down and they no longer want to continue working, is to change their plans. Small adjustments can have a large impact. Perhaps that means traveling less, picking less expensive hobbies, or not going out to eat as frequently until the economy gets back on track.

Portfolio modifications: While a buy and hold investment strategy is generally advisable, during extreme circumstances taking a more proactive approach towards how your money is managed may help brace you for the challenging environment.

Maintain more cash for emergency: Developing a more substantial cash cushion may help keep investors at ease as the market is falling. There is comfort in knowing that, in case of emergency, an extra safety net exists to allow you to avoid liquidating funds as prices drop. This also mitigates sequence of returns risk, which is experiencing a series of bad returns as you start withdrawing on your portfolio. Retiring into a down market and selling investments at depressed prices can cause someone to run out of money sooner than expected. Freeing up a few years’ worth of cash may help retirees manage this risk.

Utilize a bond tent: A similar strategy would be to utilize a bond tent, which is the concept of keeping a few years’ worth of funds in high quality bonds to pay for living expenses if necessary. It is a slightly more aggressive approach since bonds can fluctuate in value while cash will not. If your risk tolerance allows you to move some of your “safe money” into high quality bonds, this will get you a bit more yield on your investments given the rise in interest rates. It’s important to discuss with your financial advisor what approach is most appropriate for your personal situation.

Consider adding cash that’s been sitting on the sidelines: This may seem to contradict the previous two points. However, some investors have an opposite challenge of having way too much cash sitting on the sidelines. In some cases, they may have been waiting for years for the optimal opportunity to invest in the market. These are funds that they don’t need and tend to represent a meaningful portion of their overall assets.

If you’re a long -term investor, now may be a wonderful opportunity to invest excess cash. As of this writing, the S&P 500 is down approximately 13% this year. Put another way, the market is trading at a 13% discount from just a few months ago. Consider this your reminder to add that cash to your portfolio. This is especially compelling with cash losing buying power due to historically high inflation.

If putting a lump sum into the market all at once seems a bit scary to you, consider setting up an automated process to add funds at regular intervals. This is called “dollar-cost-averaging” and is a wonderful way to seamlessly invest in the market while removing your emotions from the process.

Reevaluate asset allocation: It’s only after their portfolio drops meaningfully in value that many investors realize that they had no real investment game plan in place. For many years, it was possible for novice investors to cover up their poor decisions since the overall market appreciated in value. Now is a great time to reassess your asset allocation and risk tolerance to determine if you need a more disciplined strategy to manage your funds.

Conversely, if you already have a sensible investment plan, you may want to consider rebalancing your portfolio. Since the stock market has dropped more than investment grade bonds, you may want to reallocate more money into stocks at these depressed prices. This is a wonderful opportunity to “buy the dip” without necessarily needing to add additional outside funds.

Financial Planning Opportunities: Some of the most compelling opportunities in a challenging market come in the form of financial or tax planning. If retirees take advantage, it may position their family for a more comfortable financial future.

Tax loss harvesting: In this strategy, an investor sells some investments at a loss to offset portfolio gains that were realized by selling stocks at a profit. This allows investors to mitigate the current tax implications caused by selling appreciated investments. It can also help offset future taxes on up to $3,000 a year in ordinary income.

One way to implement this strategy is to swap out current holdings for other positions that are materially different but offer similar exposure. For example, one can sell their Total US Market Index Fund at mutual fund company A and move to an S&P 500 Index Fund at mutual fund company B. The investor can get the future tax benefit from selling fund A at a loss and maintain similar market exposure while avoiding violating the 30 day "wash sale rule" by buying fund B.

Roth IRA conversions: A Roth conversion is the process of repositioning your assets from a Traditional IRA into a Roth IRA. It is a particularly timely strategy with the market down since the investor will need to pay tax on the converted amount. While it’s unpleasant to see your portfolio drop in value, it is also an opportunity to pay less in taxes on a smaller base level of funds.

A Roth IRA conversion can be a very effective tool for retirement. It may save you considerable money in taxes over the long term, especially if marginal tax rates increase. It can also be beneficial if you earn more money in the future since a Traditional IRA has Required Minimum Distributions, which will be taxed at your ordinary income rate.

Gifting for estate planning purposes: For ultra-high net worth families, it’s worth considering making gifts today at depressed prices. It’s an opportunity to "freeze" those assets at lower values, using up less of the federal lifetime gift tax exemption to more tax efficiently shift funds out of their estate. The exemption is currently $12.06 million per person, so a married couple with an estate above $24.12 million may be hit with Federal estate tax. Gifting funds to family members or into properly structured trusts will help minimize the tax you need to pay. It’s also worth noting that the federal lifetime gift tax exemption limit is scheduled to drop dramatically to approximately $6.4 million per person. Just another reason to contact your estate planning attorney now about executing a gift plan.

By Jonathan I. Shenkman, Contributor

© 2022 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

Andrew Perri profile photo

Andrew Perri, President & Founder

aperri@pinnaclewealthonline.com
Pinnacle Wealth Management
Andrew : 810-220-6322