Living through an economic downturn is difficult enough without your retirement planning being tested as you watch the balance of your nest egg precariously rise and fall every business day. What exactly to do (or not do) in a recession all depends on where you are in your timeline toward retirement, as well as your aversion to risk.
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Four Retirement Planning Options for a Slow Economy
It can be a bitter pill to swallow to put more money away in your 401(K), 403(b)(7) or IRA only to see those accounts continue to lose value on the screen daily or on paper when the quarterly statements arrive. Let’s take a look at four retirement planning options for when the economy has fallen on hard times, or when you’ve been furloughed from your job.
1. Stop Saving
What this means today: You stop contributing to your retirement savings plan.
What this means going forward: Your retirement savings plan does not grow with new money and no new shares of the investments are purchased. The balance continues to fluctuate with the market.
If you are close to retiring and don’t have time to wait for the economy to recover, or if you could just use some more money in your paycheck every two weeks, reducing your 401(k) contribution percentage — yet still maximizing any available employer match — is one choice during uncertain economic times.
Your gut reaction to a recession or a period of economic uncertainty may be to stop contributing to your company’s retirement plan. That’s totally understandable. The urge to stop saving, when the prices of stocks and stock mutual fund investments may be depressed, however, is not generally considered sound retirement planning if you are still many years away from reaching retirement age. This is because, while an economic downturn can be a struggle week to week at home and in your bank account, you may end up missing an opportunity to invest in stocks and mutual funds at lower prices in your retirement savings account.
2. Reallocating Your Current Investments
What this means today: You exchange the ‘riskier’ stock-based investments currently held in your retirement savings plan for more traditionally conservative options.
What this means going forward: Historically, the stock market in general has provided the greatest return on investment over the long term. By reallocating some/all of your retirement saving plan balance out of stock-based investments your account may underperform in relation to the overall economy in the future.
You may have heard the expression, ‘buy low, sell high’. That’s the easy, four word template for most retirement planning and general investment strategies. Reallocating your retirement plan investments by selling or exchanging out of stocks or stock mutual funds after they have fallen, or while they are still tumbling downward in value, however, could end up doing the exact opposite. Having potentially bought high in the past before selling lower in the present, a reallocation to bonds or ‘cash’ investments could turn paper losses into real ones. Unless you need the money immediately (or in the near future) or if your original retirement planning timetable has shifted since you started saving, selling during a downturn could have a negative impact on your retirement plan.
3. Keep Saving
What this means today: You make no changes to your retirement planning strategy or goals.
What this means going forward: While the state of the overall economy will change, continuing to ebb and flow during these uncertain times, your plan for how and when to retire remains consistent.
The simplest reaction to an uncertain economy is to change nothing about your retirement planning outlook. If you understand the risks, have decades until your actual retirement arrives, and can avoid logging in to look at your 401(k) balance too often, the Keep Saving method could pay dividends by the time you’re ready to enjoy your well-earned retirement.
4. Save More
What this means today: You increase your 401(k) contribution percentage to put more money toward your long term retirement planning goals.
What this means going forward: Your retirement savings plan balance will still fluctuate with the market but you will be buying more shares of the investments in your plan, increasing the potential for long term growth if and when the economy rebounds.
Saving more in the middle of a recession or during periods of economic uncertainty is not for everyone. Maybe you simply can’t afford to stash more money away for 20 or 30 years from now, or maybe you just can’t stomach the roller coaster of investing during challenging times. There’s no shame in either. But, if you can, increasing your savings during a downturn in the economy may present the opportunity to buy investments at lower prices which, should they recover and continue to grow over time, could provide more long term gains in your retirement account.
As difficult as it may be to look at your retirement savings account during an economic recession, it is even more difficult to predict what the future will look like. When it comes to retirement planning and investing during periods of uncertainty, it may be beneficial to maintain a long term approach and vision while employing a strict ‘living within your means’ strategy in the short term.