What If There Is A Recession When You Retire? How To Build A Stable Retirement Nest Egg

No one can predict exactly when a recession will hit, but everyone knows that it will eventually happen. This is why it’s important to plan for your retirement with the assumption that your retirement portfolio has to withstand an economic crisis.

A case in point – despite a record 11-year bull run in the stock markets, the COVID-19 pandemic has jolted many industries and led to a nearly 30% plunge in the stock markets.

You never know what may derail your retirement fund – recessions, personal health crises, retrenchments and other factors can affect your ability to continue earning an income to put towards your retirement. Some people may even be forced into retirement early.

By starting early, you can grow your retirement fund for a longer time and be able to endure periods when you may be unable to make regular contributions.

Another important reason to start early is to allow you to take full advantage of compound interest. By earning interest on your past returns, you can grow your portfolio to a substantial sum over a runway of three to four decades spanning your career, even with a smaller contribution.

Few people start off living a luxurious lifestyle. Only when they start climbing the corporate ladder does lifestyle inflation creep in, sometimes without them even realising.

By living well within your means, you put less financial and emotional pressure on yourself and your loved ones. This can lead to better outcomes in your career as you can choose to enjoy your work, without constantly being occupied by financial worries.

As you limit your lifestyle expenses, you can channel more funds towards a larger retirement nest egg as well.

A modest lifestyle today will also prepare you for a modest lifestyle in retirement. Often, you may think it is easy to downsize your lifestyle once you retire. However, after being accustomed to a certain standard of living for a long time, be it living in a condominium, owning a car, going on multiple overseas holidays or always buying the latest gadgets, it may be difficult to scale it down during retirement.

If you are dreaming of an early retirement, or are just waiting for the moment you reach the official retirement age, you may be in the wrong job.

Consider work that gives you fulfilment. Even if it does not pay as well, being happy with your job is a fantastic trade-off. It means that you are happy to work, rather than to see your job as simply a means to an end.

The reality is that many things can wreck your plans for early retirement. There is also a greater risk that once you retire early, your nest egg will not be able to last your entire lifetime.

If you are truly unhappy in your current line of work, think about what it is you want to achieve after being able to retire early. You can choose to do that today, and earn less but be happier to work past your retirement age.

This also goes back to the earlier point about living a modest lifestyle because it gives you freedom to work in the job that will give you more meaning instead of chasing a larger pay cheque.

By over-preparing for retirement, you can make use of the recessions to bulk up your nest egg. Beyond just your working years, a recession early in your retirement can also be a boon as you have several decades worth of funds to continue growing in the markets.

As you near your retirement, you could also be prudent in gradually reducing the risk in your investment portfolio. Apart from just diversifying, you may want to allocate a larger proportion to bonds or even contributing a lump sum to your CPF LIFE for higher monthly payouts.

You can also look to keep your mind and body working by taking up smaller roles to provide a token allowance during your retirement. Alternatively, if you do not need the money, contributing your time and effort to a worthy cause you believe in can keep you actively participating in the community.

Each individual will have his or her own unique retirement needs. If you are unsure about how to start planning for a secure retirement plan that can overcome a downturn, it can be beneficial to speak to a trusted AIA Financial Services Consultant who has experience and knowledge of helping their clients navigate uncertainties.