How to Help Recession-Proof Your Retirement Savings

After the rollercoaster has been  2020, it’s natural to wonder if you’re doing as much as you can to protect your retirement nest egg from the market’s ups and downs.

Even when the market falls during economic turbulence, you have more power than you realize. These five steps can help to keep your financial plan on track during uncertain economic times.

1. STAY IN THE MARKET

Investing in the stock market always comes with a measure of risk. In exchange, over time you’re typically rewarded with higher returns than those you’d get from savings accounts, CDs and the like. But sometimes the market dips, and your portfolio takes a hit.

So should you get out when the market drops? Probably not in most cases, says Jennifer Raess, CFP®, a member of the Advice Practice Team at Northwestern Mutual. “People are living longer than they ever have before, so you need your money to last a long time,” she says. Keeping your assets invested can help you beat inflation and enjoy the unique financial growth that can come from investing.

A solid financial plan will account for the ups and downs of the market. When you’re younger, that may mean simply riding out a downturn and waiting for your portfolio to recover. That’s OK, since you won’t need to withdraw from your investments any time soon. If you’re older and need to regularly withdraw money from your savings, you’ll want a mix of investments and assets that aren’t tied to the market (more on that in a bit).

2. MAKE SURE YOU’RE REBALANCING

Through your life, you’ll want a mix of riskier assets for growth and safer assets for stability. “The closer you get to retirement, the less risky you usually want to be,” Raess says. She notes that targeting the risk level that’s right for you is critical.

But in addition to setting your asset allocation (your mix of risky and safe assets) and changing it as you get closer to retirement, you should also rebalance regularly. That’s because a long run of stock market returns can actually leave you taking more risk than you should. Here’s why: Say you set your asset allocation at 80/20 (80 percent stocks and 20 percent safe assets like bonds). After years of growth in the stock market, your asset allocation could turn into 90/10 if your stocks grow faster than your bonds. When you rebalance, you sell some stocks and buy bonds to get back to 80/20. Then when the next downturn hits, the gains from the stocks you sold will be in safe bonds.

3. GUARANTEE AT LEAST PART OF YOUR RETIREMENT INCOME

Utilizing guaranteed income sources, which are not impacted by market volatility, and accumulating a cash reserve can be smart ways to ride out a recession without serious loss. “You have something you know will be coming in every month, and know the amount won’t be impacted by the market,” Raess says.

Pensions, annuities and Social Security are examples of stable sources of retirement income. If you’re on the verge of retirement, consider keeping enough cash in a risk-free location — like a savings account — to cover a couple years’ worth of expenses. Cash value in permanent life insurance can be another tool for you to use to fund a cash reserve. In a low-performing market, you’ll be able to tap that cash supply instead of selling investments at a loss.

RELATED CONTENT: How much do I need for retirement? Our retirement planning guide can help you better understand the road to retirement — and how to craft a financial plan that’s built around your unique goals.

4. DIVERSIFY, DIVERSIFY, DIVERSIFY

 “Without proper diversification, the market risk to your portfolio is a lot higher,” Raess says.

The goal of diversification is to keep your portfolio healthy, regardless of what the market is doing. “If the market does fluctuate, you may have a portion of your portfolio that will respond positively and may offset some of the negative impacts,” she adds.

So make sure your portfolio includes a system of checks and balances. That means not only having a mix of stocks, bonds and cash in your portfolio, but also a mix of different groupings or sectors where your investments are made within each asset class.

5. WORK WITH AN EXPERT

Facing an uncertain market — especially as you close in on retirement — comes with high stakes. “But you don’t have to go it alone,” says Raess. She recommends working closely with a knowledgeable financial advisor.

A great advisor understands your financial goals and can guide you to options that truly fit your needs. After all, strong financial plan can prepare you for the ups and downs of the market to allow you to weather a recession and focus on what’s really important: enjoying your retirement.

All investments carry some level of risk including the potential loss of principal invested. No investment strategy can guarantee a profit or protect against loss.

Utilizing the cash values through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).