Retirement planning

Four methods to make your retirement savings recession-proof

One of the main concerns when markets begin to decline is what will happen to your laboriously saved retirement funds. Decades of retirement savings could be lost if your investments are not correctly positioned, especially during periods of market volatility. Markets might go through cycles, but you shouldn’t put off getting protection until you are already retired.

Here are some tips to protect your lifelong savings against a potential recession, whether you are already retired or getting ready to retire in a few years.

Reassign and diversify your investment portfolio

Reallocate your investments and increase your portfolio’s diversification as much as you can while deciding what to do in the event of a potential recession. There are several strategies available to investors for doing this, but the most crucial thing to keep in mind is to diversify your holdings among a variety of assets.

To distribute risk exposure across various asset classes, you want to have a good mix of equities and bonds. Defensive equities, for instance, frequently perform well during tumultuous times such as market downturns or continue to hold their value. You can put money into defensive ETFs, which invest in stocks that often do well during recessions, if specific stocks aren’t your thing.

Utilities, which are necessary regardless of market conditions, healthcare, and consumer staples are some of these defensive sectors. Historically, customers have continued to buy these latter two throughout recessions since they are necessities.

However, as all stocks are still susceptible to market fluctuations, investing in government securities like Treasury bonds can increase a portfolio’s security and diversification.

Utilize an annuity properly.

Although annuities have a negative reputation, if used properly, they can offer security and returns during uncertain retirement periods. A contract with an insurance provider known as an annuity delivers payments over a certain time period. Annuities can be fixed and pay you a (typically low) guaranteed interest rate, or they can be related to the market and have an interest rate that fluctuates. In addition, the majority of annuities provide a death benefit that can be distributed to your beneficiaries in the case of your passing.

The cost of the life insurance (for the death benefit) and administration fees for the invested component of the account are paid by the investor, hence annuities sometimes have high fees. But for investors with the funds to fund them and longer investment time horizons, certain annuities can provide protection against recessions.

Fixed annuities offer market downturn protection, but at the expense of limiting prospective returns. The optimal annuity for you will depend on how much and how frequently you can contribute to the contract.

Fixed-rate single-premium annuity

A single lump-sum premium is used to fund single-premium annuities, and the payouts might occasionally begin right away or within a year. A fixed-rate annuity, which ensures a constant rate of return and offers a guaranteed income regardless of market conditions, can protect against a recession.

Let’s say you decide on the instant annuity with a single premium and a guaranteed rate of 4%. No matter what the market does, you’ll get this rate.

It can be a wise decision to move your money from more market-sensitive accounts into an investment vehicle that offers a fixed rate of return while still remaining invested. Many people fund these accounts by rolling over an old 401(k) or IRA.

Fixed deferred annuity

Deferred fixed annuities, which are frequently compared to CDs, are a secure alternative. Deferred fixed annuities are comparable to single premium fixed annuities in that they allow the investor to contribute to the account over a longer time horizon while guaranteeing a certain (albeit typically low) rate of return.

For those who don’t have a lot of money to put into an annuity but wish to start at a younger age to protect their assets for the future, the lengthier time frame of a delayed annuity, known as the accumulation phase, may be a better choice.

Wait to take Social Security

There are several benefits to delaying Social Security if at all possible. Every month you wait to take Social Security benefits after reaching full retirement age, which for most individuals is age 67, until age 70, when distributions must start, increases your payments by a specific percentage.

Delaying the distribution phase enables a larger monthly check when you do begin, even if the amount of money you will receive over your lifetime will be roughly the same whether you accept benefits early or later. Additionally, if you wait and live a longer life, your Social Security payout will eventually be maximized.

Although you will need to use other funds or retirement accounts for expenses, deferring your benefit will prevent you from spending the money sooner. You can help yourself get through a recession by taking withdrawals from non-taxable funds like a Roth IRA while preserving your Social Security until you absolutely need it.

Continue earning money

Making more money is one proven strategy to protect against losing it. There are several ways for retirees to continue making money long after they stop working. Retirement side businesses can help retirees earn extra money to supplement their income and offset the potential losses brought on by a recession, whether it is by making use of the skills they have spent years honing or by charging to watch young children.

Even if you are not yet retired, starting a second source of income today can help you achieve long-term financial success. Having a backup plan in place for your primary source of income or retirement benefits will help you protect yourself against market turbulence and cyclical downturns.

To sum up

The majority of us will probably experience numerous recessions in our lifetimes, so it’s critical that your portfolio is ready—especially after you’re retired. You may prepare your hard-earned assets to withstand any type of market downturn by diversifying your holdings and placing a higher priority on investments or activities that generate income.

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