Retiring soon? Understand how a recession could affect your retirement savings

You’re getting ready for retirement, and you have big plans for 2023. But you’ve heard there might be a recession soon and you’re not sure what to do. You can’t stop a recession from happening, but there are steps you can take to feel more prepared when there’s market volatility.

What’s a recession? 

From a technical standpoint, a recession is often defined as two consecutive quarters of shrinking GDP. In a recession, unemployment can rise, and it might be harder to take out a loan from the bank.

A lot of different economic and noneconomic factors can cause a recession. For example, Canada’s most recent recession happened in the early days of the COVID-19 crisis (March–April 2020). Recessions can also be induced by central banks; as they try to lower inflation by raising interest rates, they may cause a recession. 

Five steps to help control risk when you’re retired in a recession

In a recession, you can still position your savings and investments to help control the risk you might face in retirement and be better prepared to take advantage in a recovery. Here are five steps to consider.

1. Consider if now’s really the right time to retire

Picking the right time to retire is always challenging, recession or not. Delaying or phasing into retirement may be an option you haven’t fully considered. 

Choosing to push your retirement date means you can earn your full income a little while longer, allowing you to top up your registered retirement savings plan and other investments. Delaying retirement also means you can get up to 42% more from your Canada Pension Plan if you wait until you’re 70 to start collecting.1 If you start after age 65, your benefit is increased by 0.7% for every month after your 65th birthday, or 8.4% more for every year after you turn 65. Postponing retirement can significantly increase your pension, allowing you to have a bit more cash in retirement.

2. Review your investment strategy and retirement portfolio

If staying at or returning to work isn't an option for you, one way to weather a storm, like a recession, may be to incorporate these investment strategies:

  • Asset allocation—This refers to the way you spread your investments across the major asset classes of equity (stock) investments, fixed-income securities (bonds), and cash and cash equivalents. Stocks are the growth engine in any investment portfolio—and given that retirees may need their assets to last 30 years or longer, growth is still an important factor for any retiree to consider. When times turn challenging, it can become tempting to move most of your savings to cash. You may want to think twice before you do. It’s hard to find an appropriate time to move cash back into stock investments. If you sell when the market is down, you're crystalizing the losses.  
  • Diversification—Financial experts recommend mixing up—the experts call it diversifying—your investments among different types, sectors, and geographic regions, so that if some aren’t doing well, others may help make up for that. Combining investments with varying risk and reward profiles can smooth out your investment returns over time. A recession may not be an ideal time to move funds around, but it may be a good time to think about de-risking and diversifying your investments once the market settles. 

In a recession, if your investments are diversified and based on your goals, your best bet could be to stay the course, even if you see your retirement savings drop in value. Whether market prices rise or fall, it's not a gain or loss until you sell

3. Set a withdrawal strategy for your living expenses

You should have an investment strategy and a withdrawal strategy because you’ll still need cash to pay for your living expenses. 

In retirement, there are three sources of income:

  • Government income
  • Group savings income (through work)
  • Personal income

You may have several types of retirement savings plans, and you should be familiar with which ones have retirement-related rules and which don't. If you have registered retirement accounts, other than a tax-free savings account, you're required to convert them to retirement income accounts no later than the end of the calendar year when you turn 71.

Once you convert what needs to be converted, review where to draw money from first. You can retire and choose to delay your government income. Because government benefits are guaranteed for life, you can get more by delaying. This decision depends on your health, life expectancy, other savings, and whether you have other sources of guaranteed income. If it’s right for you, it may make sense to draw from your retirement savings first. If you can, try not to withdraw from market-related funds while they're down. 

Setting a withdrawal strategy isn’t straightforward. A financial advisor can help you make a plan that works for you. 

4. Don’t get panicked by the stock market

When you watch the markets—and your investments—go up and down in value, it’s hard not to feel emotional. But fear and anxiety can lead to shortsighted decisions about your savings and investments.

Try to take your emotions out of the equation. Historically, markets recover and move up. Staying focused on your long-term goals might be better than letting your emotions dictate your short-term decisions.

5. Work with your financial advisor 

Remember that recessions are a normal part of the economic cycle—they come and go. Like any other time of market uncertainty, remember to stay focused on your financial goals. 

If there’s a recession, it doesn’t mean that your retirement strategy is suddenly out of date. You can work with a financial advisor to make sure your retirement portfolio is ready for the challenges and opportunities ahead. Financial advisors can help you manage risk, seek opportunities, and guide you in both up and down markets.

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.