We’re in a Recession, but Don’t Worry — You Can Recession-Proof Your Retirement
It’s official. According to the National Bureau of Economic Research (NBER), the U.S. economy officially entered a recession in February of 2020.
First, the Bad News
The bad news is, the most optimistic economic scenarios of a V-shaped recovery probably won’t come to pass. Experts like Harvard’s Kenneth Rogoff have recently cast doubt on the V-shaped recovery, saying “There’s too much lasting damage to small businesses—to airlines, hotels, the financial sector.” Jobs service-sector workers might not return for years or a decade if those industries can’t resume full operations due to COVID, and those employees formerly drove economic growth with their purchasing power.
Worse News, Retirees and Higher Earners to Be Hit by Pandemic Recession
While past recessions have been hard on younger people because they reduce lifetime earnings, they generally aren’t as bad for older workers. According to a new report from the New School’s Schwartz Center for Economic Policy Analysis (SCEPA). However, the current COVID-19 induced recession may have a bigger effect on those closer to retirement and in retirement than on the younger generation.
According to the SCEPA report, households earning above $48,000 but below the Social Security earnings cap of $137,700 will be hit hardest “because they are susceptible to both job loss and market loss.” These households are also vulnerable because their greater expenses may require them to tap into retirement savings to supplement their lost income.
Even high earners and high net worth individuals will feel the pain. The way Social Security is set up, high-income earners get a lower replacement wage than middle- and low-income workers. High-income workers also usually have greater expenses than low-and middle-income workers, and Social Security will cover proportionally less of those expenses than it does for lower-income households. Consequently, these retirees are more reliant on their retirement savings to support their lifestyles and are also more exposed to market downturns.
Shockingly, the researchers at SCEPA found that among workers earning more than the Social Security cap of $137,700 per year, 27% do not have any retirement savings. The 73% who do have retirement savings will suffer an average decline in those assets by 31 percent by the time they reach 65, leaving many of these households without funds to last them for 20 years. Though they are a small group of all retirees, high earners who “experience downward mobility into poverty in retirement” are expected to double.
Now the Good News — Your Retirement Plan Is a Life Preserver
The COVID-19 recession is a one-two punch for older workers: a right jab to earnings if you are furloughed or lose your job, and a left hook to your investments. The good news is now is a perfect opportunity to re-run your retirement plan accounting for changes in how much debt you have, child-related expenses and varying income sources.
Your income needs in retirement may have changed due to the recession. The biggest impact will be on your savings, either because the value of your investments dropped or because you dipped into your nest egg to cover lost income due to unemployment. But don’t forget big changes will come to your tax burden as well as you go from paying more income tax to paying more capital gains tax.
You can calculate your expenses in retirement with the New Retirement retirement planner to protect your retirement savings from further market turbulence, guarantee income in retirement and create back up plans to hedge against uncertainty as the current situation unfolds.
The NewRetirement Planner allows you to think through details that can make an immense difference in your financial situation — now and into the future.
Create a Defensive Playbook for This and Future Recessions
First and foremost, if you are looking at an immediate cash shortfall, resist the urge to tap your retirement savings. Our article on the best — and worst — sources of emergency money and income gives a comprehensive list of the relative risk you run tapping into these funds earmarked for a later date.
Similarly, avoid the temptation to take a loan from Social Security or apply for benefits early without having run the numbers on how that will affect your benefits. For more perspective, listen to our podcast with Mary Beth Franklin, author of Maximizing Social Security Retirement Benefits.
Diversify Your Income With a Side Hustle
Whether you’re already retired, on the glide path to retirement, or still more than a decade away, you can add extra income in retirement by cultivating a side hustle. Since the appearance of COVID-19, in-person part-time jobs may not be a good choice, especially if you’re in a high-risk group, as many retirees are. But there are other ways of earning money in retirement besides driving an Uber.
- Become an e-commerce entrepreneur. Selling goods and services online has never been easier. Whether that is selling things you craft on eBay or selling your expertise on Upwork or Fiverr, it is possible to make a nice sum of extra money without leaving your home.
- Get paid for your opinion. This is actually quite easy, and lucrative. Many sites, like Swagbucks, Survey Junkie and InboxDollars pay in cash to a PayPal account or in gift cards.
- Become a consultant. If you have the connections, consulting in your area of expertise is a greater return on investment than doing freelance work through a job platform. It’s also giving your opinion, but for much more money. Unfortunately, becoming a consultant is as much work or more than you put into your pre-retirement day job, which might defeat the purpose. On the other hand, if you’re not yet retired and you’re worried about income, now is the time to build your Rolodex of future clients. Make it a part of the glide path from your current job to your post-job life.
- Rent out a spare room. If you built a nest big enough for four or five, and now there are only two, rather than downsizing and taking capital gains, you can rent out your extra space. Even in a post-COVID world, if you can create a separate entrance for tenants, you don’t have to worry about shared space.
- Become a B&B. Same idea as above, but rather than a steady stream of income from one person, you may be able to earn more — with more risk — by offering your space for short-term rentals.
For more ideas on side hustles, check out these 14 real and really easy ways to boost retirement income. Side hustles may feel like they defeat the purpose of retirement because you’re still working. What else can you do?
Create Income With Annuities
Hank Brock, a CFP at Brock and Associates, in St. George, Utah, told us, “We have found that a large segment of retirees is seeking certainty. … If you are concerned about unpredictability, then a lifetime annuity with inflation protection and spousal support is the way to go.”
His advice is backed up with research from the Social Security Administration. In a longitudinal study that was published four years after the Great Recession, the SSA found that “the replacement ratio effect of using financial assets and home equity to purchase annuities at the time of retirement” was considerable.
Panels A and B show the retirement income ratios for singles and married couples over the course of ten years. Notably, the ratio decreases over time.
Panels C and D show the effect on the retirement income ratios of moving all assets to annuities. As a method of guaranteeing income in retirement, annuitizing assets including housing assets, has a significant effect.
This approach isn’t for everyone, but for the most risk-averse it offers a hedge against catastrophic future scenarios.
Run Worst-Case Scenarios With Your Current Retirement Plan (It’ll Make You Feel Better!)
The only constant is change. If the 21st century has taught us anything, it’s that the world will be a different place by the time you retire. There is no one “silver bullet” strategy that will work for everyone, and it’s incumbent on all of us to be vigilant about updating and revising our plans for the future.
Your savings and retirement plans will have to adapt to changes in the world and in your circumstances. The New Retirement planning tool allows you to run hypothetical scenarios including worst-cases.
The benefit of running worst-case scenarios isn’t just seeing how bad things could get — it can also prepare you mentally for tough situations. Psychologists from the University of Michigan and Wellesley College describe the benefits of “defensive pessimism” in the paper “The Positive Psychology of Negative Thinking.” By running through worst-case scenarios, defensive pessimists inoculate themselves emotionally from the anxiety of present planning, which allows them to get better results than if they simply focused on the best case.
Run scenarios now with the NewRetirement Planner.
2020 will be a watershed year for many Americans (and many people around the world). Knowing that, now is the best time to reevaluate where you stand and how to get to where you want to be.