With the Federal Reserve poised to start cutting interest rates, experts are divided on what’s ahead for the U.S. economy.
While some worry the economy could be in for a broad decline, or recession, others hope the central bank can effectively avoid a downturn and execute a “soft landing.”
For people who are in or near retirement, the stakes are particularly high when it comes to what happens next.
A recession or sudden market decline could upend the size of their retirement nest egg, planned retirement date or both.
Everyone approaching retirement should be asking themselves, “What’s my Plan B?” said Anne Lester, author of “Your Best Financial Life” and former head of retirement solutions at JPMorgan.
“Now is a great time to build some scenarios and start asking yourself that question, ‘What would I do?'” Lester said. “If you have a plan, you’re much less likely to panic and do something unwise.”
Research shows people who are approaching retirement are much more likely to panic when a downturn sets in, according to David Blanchett, managing director and head of retirement research at PGIM DC Solutions.
“Being proactive now is especially viable for older Americans for whom retirement is all of a sudden becoming very real,” Blanchett said.
To test your current retirement plan, asking some questions can help.
Is my portfolio allocated where it should be?
For retirees and near-retirees, a market decline can prompt what’s known as sequence of returns risk — where poor investment returns negatively impact how long retirement savings may last.
“If you are near the end of your career or just starting retirement and a recession hits, then you have much less time than you’d like for your portfolio to recover,” said Emerson Sprick, associate director of the Bipartisan Policy Center’s economic policy program.
A market selloff can happen without the economy going into a recession, Lester said. And the economy can go into a recession without meaningful stock market declines.
Consequently, it helps to always be prepared for the markets — and your retirement nest egg — to take an unexpected big hit.
The good news is that it’s rare for the markets to have a big correction — defined as a decline of 10% or more — and keep sinking, Lester said.
“It is very unlikely that we rerun 1929 again, where you have five or seven years of very bad returns in a row,” Lester said.
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Certain rules of thumb aim to help gauge how much you should have allocated to equities, such as subtracting your age from 120. (For example, if you’re 50 years old, you should have 70% of your portfolio in equities. If you’re 70, equities should comprise only 50% of investments.)
Yet it’s important to keep in mind that everyone’s financial situation — and ability to take risk — is different, based on their mix of assets, Blanchett said.
Now can be a great time to get ahead of certain risks.
“If you know, for example, if the portfolio goes down by 10% you’re going to move to cash, move to cash now before it’s going to do that,” Blanchett said.
Government bonds also provide opportunities to earn returns that weren’t available two or three years ago, he noted.
To avoid having to sell investments and lock in losses when the market declines, it helps to have a cash buffer you can turn to. For retirees and near retirees, having two to three years of spending in cash can be a solid approach, Lester said.
What are my sources of income?
Having income that’s guaranteed can help reduce the impact market fluctuations have on your portfolio.
For most retirees, Social Security provides steady monthly checks.
But if you claim at the earliest possible age — 62 — your retirement benefits will be permanently reduced. By waiting until full retirement age — typically 66 to 67, depending on date of birth — you will receive 100% of the benefits you’ve earned. And if you wait even longer — up to age 70 — you stand to increase your benefits by about 8% per year.
“Now more than ever, delaying claiming Social Security is just a spectacular thing to start with,” Blanchett said.
Individuals may also want to consider investing in an annuity, insurance products that also provide monthly income streams in exchange for an upfront lump sum payment paid to an insurance company.
“The higher interest rates are, the better the payment stream is off an annuity,” said Lester, who also serves as an education fellow for the Alliance for Lifetime Income, a nonprofit formed to educate consumers on annuities.
“Rates are likely to drop in the future, and lower interest rates are going to likely result in lower payouts for annuity,” Blanchett said. “So addressing this now vs. later will likely lead to more income, a higher return.”
Certain products like multi-year guaranteed annuities and other fixed annuities can provide guaranteed returns in a tax-advantaged way for older Americans, he said.
Before purchasing an annuity, consumers should do their due diligence as to whether a product fits their financial circumstances. Consulting a reputable licensed financial professional can help.