Naz Financial

A Personal Financial Blog from Naz Miller

Planning to Retire in a Market Downturn?
Read this First …

Planning to retire in a market downturn has its risks. This post is specifically aimed at those on the cusp of retirement. It aims to explain those risks and present some options for making the most of the situation. It’s a longer-than-average post for me, but I know it’s important to many of my clients right now.

But first, let’s look at the state of the economy.

It does seem that we’re headed towards a recession, right now. The inevitability is based upon:

  • Current inflation (as measured by CPI in the UK) is 10.1% (July 22)
  • US inflation is similar at 8.2% (July 22)
  • The Bank of England is steadily increasing interest rates, which could precipitate further recessionary trends as households feel even more of a squeeze. In the USA, the Federal reserve have mad more aggressive increases.
  • Pay increases are struggling to keep up with inflation but are generally exceeding what the Government want.

 

So, if you’re still able to save for retirement, there may be some opportunities to acquire low-priced assets. However, if you’re planning to retire in a market downturn it looks like a scary time ahead. You may be concerned by your portfolio’s fall in value. Even with a drawdown pension fund, if you start withdrawing now, it may take longer than expected to replenish value. With lower fund value growth projections, do you have enough saved?

So, if you were planning to retire in this market downturn, what are your options?

Cash Reserves are Good if You’re Planning to Retire in a Market Downturn

cash_reservesInflation is going to erode the purchasing power of your cash so it’s a good idea to spend your cash reserves first. If you have enough savings available in cash, you could draw from this instead of your investments over the next year or so. This will help to provide a little time to allow your pension fund to recover. Please ensure you always retain enough emergency funds though.

If you have no option but to draw on your portfolio, perhaps just make sure it’s smaller, regular amounts rather than large lump sums.

Don’t panic and jump to cash

In my view, the worst thing you could do right now would be to ‘jump ship’ and move all your investments to cash, though. You’ll take a major value hit and will simply miss out on a recovery, whenever that is. Remember, this money needs to last you perhaps 30 or 40 years so keeping it invested will give you the best chance of long-term success.

Take Defined Benefit Pension Benefits Early

If you have a defined benefit (DB) pension, you could possibly extract a cash lump sum to support your spending needs over the next year or 2. However, this will reduce the long-term income it’ll provide. So, be sure to test the affordability of this option with your financial adviser.

Also, you could also take an income from the DB scheme, perhaps sooner than planned. This might soften the financial impact of recession, as you can delay drawing on your other investments. DB pensions are often index-linked, to protect your income against inflationary effects. Again, consider this with care and take professional advice before making a change.

Retirement Timing

planning to retire in a market downturnOften, the timing of your retirement often has the greatest impact on how long your money will last. The impact of annual compounding is significant. If you don’t absolutely need to retire right now, it may be prudent to just hold on a little longer.

Market corrections (falls > 10%), happen around once every 2 years. They’re considered ‘normal’ events and usually recover in a few months.

Since the end of World War II, there have been 14 bear markets where losses exceeded 20%. Many recovered in less than one year; the average recovery was 14.5 months. All of them fully recovered inside two years.

So, delaying retirement a little longer may not sound ideal, but you probably won’t have to wait too long.

If you do have some flexibility around your retirement date, consider how another year or two of earning a salary could affect your financial security. Use that time to pay down debt and increase your cash reserves.

Lastly, delaying your state pension benefits means a higher benefit amount throughout your retirement.

Consider Working Differently

Also, retirement needn’t be an abrupt end to your working life. You could decide to phase retirement and reduce the number of days you work. This is often regarded as good from a mental health perspective, depending upon your circumstances. And it would provide some income and reduce the pressure on your investments.

Even into retirement, the flexibility to increase income—whether through part-time work or finding innovative ways to turn a hobby or talent into extra money—can be rewarding.

You may have already made the decision to quit the workforce, but don’t discount the possibility of doing something different.

Also, retirement needn’t be an abrupt end to your working life. You could decide to phase retirement and reduce the number of days you work. This is often regarded as good from a mental health perspective, depending upon your circumstances. And it would provide some income and reduce the pressure on your investments.

Even into retirement, the flexibility to increase income—whether through part-time work or finding innovative ways to turn a hobby or talent into extra money—can be rewarding.

You may have already made the decision to quit the workforce, but don’t discount the possibility of doing something different.

Review and Reduce Spending

To bolster your cash reserves, especially if you’re planning to retire in a market downturn, take a hard look at your current expenditure and see what can be cut.

This is a good thing to do in any recession, whether retired or not.

Most of us can’t spend at the same level in retirement as we did in employment. Cut living costs now to reduce the amount withdrawn from your pension fund. Or, if you’re still in work, use any savings to boost cash reserves.

Maybe also reconsider plans for large expenses:

  • Do you need to buy that new electric car, or can your current vehicle last a couple more years?
  • Do you need to take that world cruise right now?
  • Can the home improvements wait?

Downsize early

If downsizing your home is already part of your long-term plan, maybe you could bring it forward. This could help to build up your cash reserves, too.

Stay Flexible

be_flexible_in_retirement_planningAs with all aspects of life, nothing is certain in retirement.

You may change your mind about how you want to live. Or a medical crisis, or the birth of grandchildren may alter your financial plans.

So, your pension plan must stay relevant to your goals, as they evolve. And as they do, you’ll need to periodically review your drawdown strategy.

Ask for Assistance

Don’t be afraid to ask a professional adviser for assistance. That’s what we’re here for. Even if it’s just to run a ‘sanity check’ on what you’ve decided, rather than asking for direction. There’s no absolute right or wrong in when you decide to retire, see my earlier post on the subject.

In conclusion, if you’re planning to retire in a market downturn, be aware of the risks, make sure your long-term plan remains viable and adjust your expectations in line with changed circumstances. Reduce expenditure where you can, it’s good for the long-term as well as the immediate future.

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

AAA Rating

In short, AAA ratings (‘triple-A‘ ratings) are the highest credit rating available for an investment, such as a bond or company.

AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.

Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.