CAPITAL IDEAS: How could a recession affect your retirement?

Recessions can be unnerving, especially when you are near or in retirement. With the U.S. economy currently wobbling due to factors like President Trump’s recent “Liberation Day” tariffs, the anxiety for soon-to-be retirees is understandable. However, understanding how a recession impacts retirement and how your financial strategy can adapt is crucial in helping you navigate uncertainty.

What exactly is a recession?

Economists often define a recession as two consecutive quarters of declining gross domestic product (GDP). However, the National Bureau of Economic Research (NBER), widely seen as the authoritative voice on recessions, looks more comprehensively at indicators such as employment rates, household income, industrial production, and retail sales.

Historically, recessions vary significantly in terms of their causes and severity. For instance, the Great Depression of the 1930s saw GDP plummet by roughly 27 percen, and unemployment soar to around 25 percent. In contrast, the Great Recession of 2007–2009 resulted in a GDP drop of about 4.3 percent, with unemployment peaking at 10 percent. Most recently, the COVID-19-induced recession was brief but severe, causing unemployment to spike to 14.7 percent in April 2020.

Today, with Trump’s tariffs threatening to escalate into a prolonged global trade conflict, investors and retirees alike are rightly concerned about recession risks and what they might mean for their retirements.

Will a recession delay my retirement?

The direct answer: not necessarily. A recession’s impact on your retirement largely hinges on your financial preparedness. Your personal financial outlook, including savings, portfolio composition, and projected expenses are crucial determinants. A skilled financial advisor can perform comprehensive stress tests and analyze different scenarios, giving clarity on whether your retirement plan remains viable.

Many financial advisors subscribe to planning software that shifts the conversation from platitudes (“This, too, shall pass.”) to artful science by using historical data and advanced financial modeling tools to determine how economic changes might impact each individual client.

For example, clients at my company, Berkshire Money Management, have access to online tools called the “Play Zone” and the “What Are You Afraid Of?” so they can visually see how a range of scenarios that could potentially crush their portfolio might impact their ability to reach their goals. (Of course, ideally, I would step in to stop the bleeding ahead of time, but clients still find value in knowing the outcome of worst-case scenarios).

Factors determining retirement feasibility during a recession

Several factors can influence whether your retirement plans can withstand a recession:

1. Sequence of Return Risk: If markets decline significantly just as you retire and begin withdrawals, your portfolio could face outsized negative effects. To combat this, at Berkshire Money Management (BMM), we strategically position retirement assets to mitigate the impact of poor early returns. You can do this on your own, by tactically allocating some of your proceeds into the buffer funds I have extensively written about. A more textbook-like approach would be to allocate a portion of the investment portfolio to income-producing assets, such as bonds or dividend-paying stocks.
2. Portfolio Protection: Proactively protecting your retirement savings is essential. Leading up to and following President Trump’s tariff announcements, we shifted our clients’ portfolios toward more stable assets, including utilities and consumer staples stocks and shorter-duration bonds. When you approach retirement, you could do something similar, replacing the over-allocated high-flying investments in your portfolio with lower-volatility positions (at least until there is a better opportunity to get back into those more aggressive investments).
3. Cash Flow and Spending Flexibility: Those with guaranteed income streams (like pensions or Social Security) and spending flexibility often weather downturns better. Adjusting your lifestyle temporarily during downturns can significantly safeguard your financial health. To avoid making unnecessary sacrifices, I suggest you review your plan to know whether a change is needed at all.

Steps to limit recession impact on retirement plans

Here is how you can proactively minimize the recession’s impact:

1. Tax-Loss Harvesting: Following the tariff-induced market volatility, we executed tax-loss harvesting strategies in our clients’ portfolios, which you can easily employ. This involves intentionally realizing losses on investments (selling while the market is down) to offset taxes on gains elsewhere in your portfolio, enhancing long-term tax efficiency and flexibility.
2. Avoiding Extremes: I have been known to raise significant amounts of cash to defend a portfolio when things get back to the market. However, I do not advise other investors to try to do what I do; it is a difficult strategy to employ. Often, investors sell at the bottom and then miss opportunities by not getting back in. Historical data consistently shows that stock market recoveries typically start months before recessions formally end, underscoring the importance of staying strategically invested. Rather than making extreme moves, a near-retiree can make measured adjustments.
3. Liquidity Management: Maintaining sufficient liquidity through designated “cash buckets” can prevent the need to sell investments at unfavorable prices during downturns.
4. Tax-Free Income: If you have a non-Roth Individual Retirement Account (IRA), 403(b), or 401(k), you could convert it to a Roth when the account value is lower. This conversion triggers a taxable event. However, when you withdraw money from the account later, it will be tax-free. Another benefit: Roth IRAs do not require mandatory distributions (RMDs) during your lifetime, giving you more flexibility and potentially further reducing future taxes.
5. Refinance Debt Strategically: Take advantage of the lower interest rates that typically come with recessions to refinance mortgages or other outstanding debt, reducing monthly expenses and preserving liquidity.
6. Accelerate Contributions Post-Downturn: Increase or accelerate retirement account contributions immediately following major market declines to maximize the recovery potential of your retirement portfolio.

Planning retirement after a recession

If retirement is on your horizon shortly after a recession begins, gradual risk reduction in your portfolio could be significant. Transitioning methodically to safer assets ensures your long-term retirement plan is not compromised by short-term market volatility. Historically, the stock market performs well after a recession and through a recovery. However, the economy remains fragile—it is recovering, not recovered.

Market downturns are unsettling but also inevitable parts of economic cycles. Temporary declines do not equate to permanent losses unless you lock them in by selling during downturns. Staying invested typically allows your portfolio to rebound as markets recover.

Portfolios for many near-retirees should remain growth-oriented, albeit cautious. Diversified portfolios structured to manage the sequence of return risk continue growing through market cycles, offering long-term appreciation and stability before and during retirement.

A recession strategy for retirees and near-retirees

If you are thinking about retiring and a recession hits, your top priority is probably protecting the money you have worked so hard to save. That starts with running through a few “what if” scenarios, like a drop in the market or higher inflation, to see how your finances would hold up. This kind of stress testing can give you peace of mind and help you make smart decisions.

Once you know where you stand, the next step is to prepare for the recovery. That might mean shifting from defensive investments to ones with more long-term growth potential. Along the way, your advisor may look for opportunities to lower your tax bill through tax-loss harvesting or Roth IRA conversions and other adjustments to help you avoid running out of money in retirement.

Growing your retirement investments through a recession

Contrary to fears expressed by retirees who feel their earning days are “gone forever,” your investments continue working and earning for you throughout retirement. Even during recessions, balanced portfolios have historically provided reliable returns over longer horizons, allowing retirement accounts to bounce back after downturns.

An example is the aftermath of the Great Recession, where the market bottomed in early 2009 but rebounded sharply by year end, rewarding investors who maintained strategic positions.

Reassurance amid uncertainty

If you don’t have the skill or desire to shift your portfolio from conservative to aggressive when the time comes, your retirement plan should be designed to be resilient through multiple economic cycles. Economic downturns will test our collective resolve, but informed planning, strategic portfolio management, and historical perspective can significantly reduce recession impact by guiding the design of proactive and reactive tactics.

Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.