For months now, many experts have been warning that a recession will be coming in 2023. While it's impossible to know for certain when or if a recession will happen, it's a daunting time for retired seniors.
The past year's market downturn may have already hurt your savings, and even with Social Security's massive cost-of-living adjustment for 2023, inflation is making it harder for seniors to make ends meet.
If we do face a recession later this year, how will it affect your retirement? And if you're not retired yet, is now really the right time to do so? Here's what you need to know.
Is your retirement safe right now?
Market downturns and recessions are never easy to stomach, but they can be particularly tough for retirees. When you're relying on your savings to pay the bills and those savings suddenly take a hit, it can be nerve-wracking. If a recession is on the horizon, the stock market could have further to fall.
One of the most important things to know about a recession or market downturn is that when stock prices fall, it's wise to avoid withdrawing as much money as possible.
When prices drop, your investments lose value. While that's normal, it also means that if you withdraw your money during a downturn, you may be selling your investments for less than you paid for them -- and locking in losses.
If you're already retired, you may have no choice but to withdraw at least some money to cover your expenses. But if you're thinking about making any big purchases, it could be smart to hold off until the market starts to recover.
If possible, it may also be a good idea to rely more heavily on other income sources (such as Social Security) to leave more of your savings untouched. By simply leaving your money in the market until stock prices bounce back, you can avoid locking in those losses.
Should you postpone retirement?
For those who are not yet retired (or are considering going back to work), your strategy may differ slightly.
Whether now is the right time to retire will depend largely on your financial situation. If you have a robust retirement fund, you may not need to worry as much about a recession hurting your investments. Similarly, if you're receiving other income sources, like Social Security or a pension, it may be easier to minimize your retirement fund withdrawals.
On the other hand, if your savings are falling short, a recession could make it harder for your money to last throughout retirement. In this case, it could be worthwhile to consider delaying retirement by a year or two until the market is on the upswing again.
One simple step to help protect your money
Whether you're already retired or are planning to retire soon, one way to ensure your savings are as protected as possible is to double-check your asset allocation -- which is essentially how your investments are divided up within your portfolio.
When you're younger and have decades to prepare for retirement, your portfolio will generally contain a higher percentage of stocks. If your investments take a hit in the short term, you have plenty of time for them to recover before you need that money.
As you get older, though, your portfolio should gradually shift to be more conservative, weighing more heavily toward bonds and less toward stocks. While you'll generally see smaller returns with a conservative portfolio, bonds are also less affected by market volatility -- which can better protect your savings during a market downturn or recession.
Because stock prices have already fallen significantly, now may not be the best time to swap your stocks for bonds if you find that your asset allocation is too risky for your age. But once the market recovers, it may be wise to look into adjusting your portfolio to prepare for the next inevitable downturn.
Nobody knows for sure whether a recession will happen in 2023, but it doesn't hurt to start preparing now. By understanding how a recession could potentially affect your retirement, it will be easier to protect your savings.