Preparing for Retirement in a Post-Pandemic World

Recessions are a normal part of the economic cycle, yet the 2020 recession was anything but normal. A close to complete shutdown of the economy in March sharply consolidated economic losses that would normally occur over months into a few weeks.

The 2020 recession has been responsible for great health, lifestyle, and economic losses for many Americans. Those who had not adequately prepared for difficult times experienced a higher level of economic pain and anxiety than those with a solid written financial plan. With the U.S. economy showing signs of recovery, many have asked what could be done to potentially better prepare for the next recession. To help answer this question, Ideal-Living spoke with Financial Advisor Lawrence S. Tundidor, AIF®, AAMS®, AWMA® of the Tundidor Wealth and Investment Group to find out what folks nearing retirement or in retirement could potentially be doing to prepare.

1. DEVELOP A COMPREHENSIVE WRITTEN FINANCIAL PLAN

Some have said that goals without a plan are just dreams. One of the most important things Americans can do is create a solid financial plan that considers their short- and long-term goals. Having that plan in place allows individuals and families to create a roadmap that shows where they currently stand in relation to achieving the economic and lifestyle goals they have set, and what needs to be done year by year to stay on track. Another important benefit of a financial plan is the ability to run hypothetical scenarios like a recession and any negative impact it could have, such as losses in retirement accounts, losses in home value, or employment losses. While certain outcomes cannot be prevented, having a course of action for a worst-case scenario allows any “cracks” in the financial plan to be potentially addressed way in advance.

2. HAVE AN ADEQUATE CASH RESERVE

One of the best things Americans can do to prepare for difficult times is to build an adequate cash reserve that is right for their needs and lifestyle. Many have said that three to six months of expenses is the right amount. The issue with a generalized number like that is that everyone’s situation is different. One must look at their specific expenses, existing debt, upcoming large expenses, and their income viability during a recession. For example, a business owner or someone employed in an economically sensitive sector may need more in cash reserve than someone in a position where their employment is more likely to be safer in an economic downturn. For those close to retirement or looking to purchase a new home in retirement, consider the cash needed so that your plans or timeline do not need to be altered in any way.

3. REDUCE DEBT

Carrying large amounts of high-interest debt during a recession can create a great strain on a financial plan. As people prepare for the next recession, consider all existing debt and a plan on how to reduce or refinance that debt. Consider existing cash savings or monthly investment contributions to decide if that money is best utilized where it is currently being saved, or if paying down debt offers a better long-term return. With interest rates at historic lows, review existing mortgage debt, as well as the ability to consolidate debt for the possibility of reducing the interest rate or monthly payment amount. Another benefit of reducing debt before a recession is the ability to take advantage of potential discounts on items such as cars, recreational vehicles, or home improvements during recessions. Having a reduced debt load allows you the possibility of taking advantage of those opportunities or qualifying for a new mortgage.

4. PROTECT YOUR PORTFOLIO

As we saw earlier in 2020, recessions usually come with stock market downturns. Protecting your portfolio from losses, especially for those nearing retirement, is extremely important. With equity markets returning all-time highs, now is a great time to review your current allocation and risk tolerance. Many have had the same investment strategy for years without considering that they are now closer to retirement or their portfolio no longer matches their needs and risk tolerance. With equity returns being strong over the past decade, it is easy to consider the return on investment as the primary bellwether for whether a change to the strategy is needed. It is important to remember that for most, retirement requires a distribution strategy vs. an accumulation strategy in your working years. One's ability to recover from a downturn when you are no longer contributing and are now withdrawing is much more difficult than someone who is not. Many wait until things get worse to consider making necessary changes, but it is advisable to be proactive instead.

5. EVALUATE INCOME NEEDS AND DISTRIBUTION STRATEGY

One of the most important parts of a financial plan and preparing for a recession is a true evaluation of income needs that encompass minimum expenses to live on and the amount needed to fulfill the lifestyle you chose. One must ask themselves if the market has one or more negative years during a recession,