Retiring soon? Understand how recessions affect retirement savings

[Updated article; original publish date 6/12/24]

What’s a recession?

A recession is a period during which a country’s gross domestic product—a key economic indicator that gauges the health of its economy—shrinks for two quarters in a row. This means six consecutive months of the economy not growing.

When you hear that consumer spending is down, unemployment is up, and it’s harder to get a loan, these are all signs that a recession is approaching.

Recessions often occur when there’s a major change in a key industry (e.g., real estate in 2007) or a sudden shock to the economy (e.g., the COVID-19 pandemic).

Managing retirement savings in a downturn

The stock market may go down quite a bit during a recession. If you have money in a 401(k) or other retirement account, the falling stock market could lower your account’s value. You may also see your house and other investments lose value. 

In a recession, if you don’t plan on retiring and using your money right away, you might consider staying the course, even if you see your retirement savings balance go down. Whether market prices rise or fall, it’s not a gain or loss until you sell. If you sell when the market is down, you’ll lose money. But if you can keep your money in the market, your balance could go back up when the stock market recovers. 

It can be hard for you to watch the stock market—and your investments—go up or down, but try not to make decisions about your savings and investments out of fear and stress. If you’re confident that your money is invested based on your comfort with risk and how long before you plan on retiring, then you’re likely better off waiting for the market to rebound—because it has historically. 

Helping build your retirement savings

Staying focused on your long-term goals might be better than letting your emotions make your financial decisions. Remember that recessions are a normal part of the economic cycle. You can consider working with a financial professional to help you manage risk, seek opportunities, and guide you in both up and down markets.

Visit our market volatility resource page for more helpful articles about the financial markets and the economy.

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

Even in a recession, you can position your savings and investments to lower the risk you might face in retirement. Here are five steps to consider.

1  Ask yourself if now’s really the time to retire

Recession or not, choosing the right time to retire is always challenging. Delaying your retirement or easing into it may be options you want to consider.

Pushing your retirement date back means you can earn your full income for a little while longer, allowing you to top up your Registered Retirement Savings Plan and other investments. If you delay retirement until you’re 70, you could receive up to 42% more from your Canada Pension Plan.¹ If you start claiming after your 65^th birthday, your benefit increases by 0.7% for every month, or 8.4% more for every year. Postponing retirement can significantly increase your pension, providing you with a little extra cash in retirement.

2  Review your investment strategy and retirement portfolio

If returning to work or staying at your current job isn’t an option for you, one way to weather a recession may be to adopt one of these investment strategies:

·       Asset allocation—Asset allocation refers to how you spread your investments across asset classes, such as stocks, bonds, and cash and cash equivalents. When times are challenging, it can be tempting to convert your savings into cash. However, you should think carefully before doing so, since it can be difficult to figure out the best time to reinvest that cash into stock investments. If you sell when the market’s down, you’re crystalizing your losses.  

·        Diversification—Financial experts also recommend mixing it up, also known as diversifying, your investments across different types, sectors, and geographic regions. This means that if some investments aren’t performing well, others may help make up for it. Combining investments with different risk and reward profiles can help to stabilize your investment returns over time. Although a recession isn’t an ideal time to move funds around, it could be a good time to consider derisking and diversifying your investments once the market has settled.

If your investments are diversified and aligned with your goals, your best strategy in a recession may be to stay the course, even if you see your retirement savings drop in value. Whether market prices rise or fall, there’s no gain or loss until you sell.

3  Set a withdrawal strategy for your living expenses

In retirement, there are three sources of income:

1 Government income

2 Group savings income (through work)

3 Personal income

Since you’ll still need cash to cover your living expenses during retirement, it’s wise to have both an investment strategy and a withdrawal strategy in place.

You may have several types of retirement savings plans, and you can familiarize yourself with those that have retirement-related rules. If you have retirement savings accounts, other than a tax-free savings account, you’re required to convert them to retirement income accounts by the end of the calendar year in which you turn 71.

Once you’ve done so, review where to draw money from first. 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. 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 create a plan that works for you.

4  Don’t panic about the stock market

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

Try to keep your emotions out of the equation. Historically, markets have recovered and moved upward. Focusing on your long-term goals may 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. The important thing to do is to stay focused on your financial goals.

Just because there’s a recession doesn’t mean that your retirement strategy is suddenly out of date. You can work with a financial advisor to ensure your retirement portfolio is prepared for the challenges and opportunities ahead.

Financial advisors can help you manage risk, identify opportunities, and guide you through market volatility.