Diary of a CFP® Pro: April — Recession-Proof Your Retirement Income Plan

This month’s insight from Marguerita Cheng, CFP® Pro: You have been diligently saving for your retirement and are on track for a comfortable life in your post-working years. However, the news headlines warn of the likelihood of an economic recession in the next two or three years. If they’re right, do you have a plan for how to recession-proof your retirement plan?

Reality check: While no one knows when a recession will hit, it’s safe to assume the economy will face a downturn. While you can’t control a recession, you can plan for one. And the earlier you plan, the better off you’ll be.

The following strategies will help you protect your financial plan in a recession:

  • Bulk Up Your Savings: Building savings should be your priority if you don’t already have adequate cash reserves. Financial emergencies can happen at any time. Out-of-pocket healthcare costs alone average $7,674 a year, according to a 2018 report from the Milliman Medical Index. Other often unpredictable events, such as sudden unemployment, can strain your finances. When disaster strikes before you’ve built a cushion of cash, you’re more likely to dip into your retirement savings, to the detriment of your long-term retirement goals. During a recession, you could be forced to take a pay cut or be unemployed for an extended period. The rule of thumb is to save three to six months of expenses in your emergency fund. To protect your retirement income plan, plan to invest in a high-yield savings account.
  • Pay Off Debt: Money can get tight during a recession. Take the time now to pay off debt, and you’ll be in a much better position if the economy takes a downturn. You’ll avoid sacrificing the income that could be used toward essential living expenses like housing, utilities, and groceries to pay off debt. Otherwise, you might struggle to pay your bills and ruin your credit score from missing payments. Maintaining your credit score is crucial if you want to get approved for new credit when the economy recovers. Contact a financial planner if you’re having trouble paying back your lenders. Together, you can develop a plan to pay down debt without sacrificing your retirement income goals.
  • Keep Investments in the Market: Financial markets move in cycles, and your best bet is to ride the wave. An impending recession might cause you to consider moving your money to safer options like a savings account or CD (certificate of deposit). Investing comes with some risk but taking your retirement savings out of the market can put you at a more significant disadvantage in the long term. You might protect your portfolio from taking a hit in the short term if the market dips. But you’ll miss out on the long-term benefits of staying in the market.
  • Rebalance your portfolio: Do this at least once a year to adjust for risk tolerance. If appropriate, consider automatic rebalancing for your employer-sponsored retirement plan. Your investments should include a variety of stocks, bonds, and cash. A mix of riskier investments can help with growth, but you also want some safer assets for stability.
  • Have a plan: The best strategy to protect against a recession will depend on your age and financial situation, and your project will likely look different from someone else’s. Remember that less flexibility or freedom in spending can go a long way toward sustaining your retirement income plan.
  • Work with a CFP® professional: Working with a financial planner can deliver exponential benefits no matter how much you know about managing your money. Financial planners are experts at helping people achieve their financial goals and can guide you toward a financial plan that suits your needs. You may think paying a financial planner is a waste of money, but a trained professional can help you navigate the uncertainty of a volatile market.

The bottom line: The last thing you want to do is make a rash decision. Working with someone who understands the market’s difficulties can help you make decisions that protect your retirement income plan. Even if you feel unprepared to face a recession, know that it’s never too late to prepare.

Photo by Stuart Tracte, flickr.com creative commons

Stay tuned for next month’s installment of Diary of a CFP® Pro!

About Marguerita M. Cheng: Rita is the founder and Chief Executive Officer of Blue Ocean Global Wealth.  She has also been a spokesperson for the AARP Financial Freedom Campaign and a regular columnist for Investopedia & Kiplinger. Previously, she was a Financial Advisor at Ameriprise Financial and an analyst and editor at Towa Securities in Tokyo, Japan.

Certifications: CFP® professional, Chartered Retirement Planning CounselorSM, Retirement Income Certified Professional®, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policymakers, and media about the benefits of competent, ethical financial planning. She serves as a Women’s Initiative (WIN) Advocate and subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination.

Awards: Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship. In 2017, she was named the #3 Most Influential Financial Advisor in the Investopedia Top 100, a Woman to Watch by InvestmentNews, and a Top 100 Minority Business Enterprise (MBE®) by the Capital Region Minority Supplier Development Council (CRMSDC).

Rita volunteers for several organizations: CFP Board Disciplinary and Ethics Commission (DEC) hearings, she has also served on the Financial Planning Association (FPA) National Board of Directors from 2013-2015 and is a past president of the Financial Planning Association of the National Capital Area (FPA NCA).

Click here to learn more about Blue Ocean Global Wealth and here to email Marguerita.

Blue Ocean Global Wealth headquarters:

9841 Washingtonian Blvd., #200
Gaithersburg, MD 20878
301.502.5306 / 888.731.3117 (fax)