The U.S. economy is in trouble right now, with unemployment at a record high and the country officially in a recession. While this is bad news for every American, you may be especially troubled by all this disturbing economic news if you were considering retiring soon.
Whether you've already set the wheels in motion to retire, had been planning to give notice, or are thinking about retiring because you've lost your job due to COVID-19, you need to make sure you're still on track.
Retiring during a recession can be very different than quitting work during boom times, so make sure you've taken these three steps to shore up your finances and avoid money troubles after leaving the workforce.
1. Have liquid cash to cover expenses for 24 months
Recessions can lead to market corrections, and it often takes a long time for investments to recover. You don't want to be forced to sell investments at a loss to support yourself. So make sure you aren't put in that position. If you have enough money outside of the stock market and accessible to cover you for two years, you should be able to wait out any downturns and take advantage of the inevitable recovery.
2. Evaluate your Social Security claiming strategy to see how much income benefits will produce
Social Security will likely be one of your most important sources of retirement income, but if you'll be relying heavily on it, you want to make sure you don't inadvertently reduce the size of your checks in your eagerness to retire.
Under the current Social Security rules, you'll need to claim your benefits at a full retirement age (FRA) --between 66 and 67 depending when you were born. Claiming ahead of that age will result in an early filing penalty that reduces your benefit by a small amount each month -- which adds up to a 6.7% annual reduction for each of the first three years ahead of FRA and a 5% annual reduction for each additional year you're early.
If you're worried about your savings lasting during retirement, not only will you want to consider waiting to claim benefits until you've hit FRA but you may even want to think about delaying even longer. Each month of waiting after your FRA comes with delayed retirement credits that boost your benefits by as much as 8% annually up until age 70. Since Social Security is guaranteed to last for life and is somewhat protected against inflation, you may opt to wait to claim it so you can get more of this money later to see you through potential tough times in the future.
3. Create a retirement budget to see how much income you'll need
Finally, you'll want to get a realistic idea of how much money you'll need to live on so you can make sure you'll have it. Since going back to work or finding a side gig in a recession can be tough, you don't want to retire only to find you need supplementary income and can't find it.
Not only is it a good idea to make an estimated budget to ensure you'll have enough income -- it's also a good idea to try living on that budget for a while. You'll see if you can really make the numbers work or if you're being unrealistic. And if your sample budget is below what you're currently spending, you can pocket the extra savings to help shore up your savings or investment accounts.
Are you really ready to retire?
If you retire in a recession, it may be much harder to reverse your decision due to the difficulties of finding work, especially in the current unemployment environment. You don't want to regret your choice or end up with too little cash late in life, so be sure you've got these questions answered before you act.