Choosing whether to retire during a recession comes down to several factors. The first thing to consider is whether you want to partially or completely retire. You must also consider how you plan to generate income during retirement.
Choosing between real estate or a fixed index annuity as side income comes down to what you think would be more manageable and the risks involved in investing with your retirement income.
Rental property income can be an excellent choice if you’re prepared to take on more responsibility and risk while an annuity features more stability and reduces your responsibilities.
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What Is A Recession?
Recessions are periods of time when the economy reduces. These periods are measured by gross domestic product and they typically last for at least six months. These periods are typically accompanied by unemployment and falling stock prices.
Recessions typically occur when an economic shock occurs and the demand for goods and services experiences a steep decline. These periods are often difficult on businesses but they can also allow businesses to innovate. Recessions are a necessary part of the economic cycle and they can provide an opportunity for economic resets.
How Does a Recession Work?
Recessions occur when an economy experiences a decrease in its gross domestic product (GDP) for two consecutive quarters. This indicates the economy is in a period of stagnation. The presence of a recession can cause economic activity to slow and a reduction in production. This reduced production can lead to layoffs.
How Long Does a Recession Last?
How long a recession lasts depends on the location and the economic factors that influence the recession. The longest recession in the United States lasted from December 2007 to June 2009. Recessions vary in length depending on the country and its economic status. While Greece’s recession lasted six years from 2009-2015, Iceland’s lasted at least half that duration.
The length of a recession is largely determined by the policy of the country where it occurs, the severity of the economic downturn, and the number of countries involved in the recession.
Bear Markets Vs. Recessions
Few things strike more fear into the heart than a bear market. Bear markets can make you feel like you’re on unstable investing ground. It can be difficult to determine what to do following a bear market.
But bear markets aren’t the same as recessions. While bear markets can occur within a recession, they do not last as long as recessions. Bear markets occur with a sudden drop in consumer confidence.
Tips to Consider During a Recession
Unexpected Retirement
Because unemployment increases during a recession, you might find yourself in a forced retirement situation. Reduced consumer spending and business activity can increase your chances of being laid off during tough times with your company. That’s why you should always be prepared to retire early.
Losing your job is extremely stressful and having financial contingency plans is the most advisable strategy to combat some of the stress it causes. If you don’t have a financial advisor already, you should consider hiring one.
A financial advisor will be able to provide a clear picture of your financial stability and how you can prepare for the unexpected. Are you in a position where you could retire if necessary? Would you need to find a new job and continue working for a few years to hit your retirement goal?
Market Losses and Early Retirement
Recessions also spell trouble for numerous markets, regardless of where you place your retirement money. Near-retirees don’t have the time to ride the ups and downs of the market, which can make it more difficult.
Regardless, retirees should consider investing during a recession if they can afford to wait five years before retirement. This is the reason why most people choose to postpone retirement during a recession. There is strong support for this strategy because investing more during down times could result in an increased retirement income when the economy recovers.
Before you commit to this strategy, you should discuss matters with your financial advisor. They will be able to gain a clear picture of the different benefits of each.
The Sequence of Return Risk
Putting retirement off has potential return benefits but it might not be an option. Sometimes companies force older workers to retire during times of recession. This means you might be required to retire before you’re financially ready to do so. In this case, delaying your retirement won’t be an option so you should be prepared for a situation such as this.
If you’re forced to retire before you plan, you will have to start making withdrawals from your account sooner than expected. You will also be making withdrawals during a recession, which means it will have more of an impact on your retirement funds.
This type of retirement risk is known as a sequence of returns risk. You should discuss this with your financial advisor and they will be able to help you plan your retirement accordingly.
Final Thought
The short answer to the question “Can You Retire During a Recession?” is yes. However, the answer to whether it is wise to retire during a recession depends on whether you time it correctly.
If you retire right before a recession hits, you might not have to worry about the various effects. If you’re forced to retire during a recession, the answer becomes slightly more complicated.
When a recession hits during your retirement plans, you might have to rethink your retirement time frame. This is because your investment portfolio can be drastically affected by the reduction in the GDP. You also might lose access to income by being forced to retire early during a recession.
This is why it’s wise to create multiple streams of income throughout your career, mainly passive income. Annuities can also be incredibly useful during these times because they provide principal protection.
Choosing to retire during a recession depends on your factors and whether or not your retirement investment and income streams will suffice throughout your golden years. Whether this is true varies from person to person.
