Should You Retire Early During a Recession?

Financial advisor explaining paperwork to elderly retired couple front of desk.
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If you’ve been working hard and diligently saving, you may be looking forward to an early retirement. But what happens if, just as you’re ready to walk out the office door for the last time, a recession hits? Should you retire early during a recession? If you do, what could happen? And what should you do? Here’s what you need to know.

What Happens During a Recession?

A recession is defined by most economists as two consecutive periods of negative GDP growth. This means that the amount of goods and services that are produced in this country, known as gross domestic product, declines for two straight quarters. During a recession, prices tend to go up as seen with inflation, jobs become scarce and consumer spending declines.

What Should Retirees Do During a Recession?

If a recession is accompanied by a down stock market, it can be a risky time to retire. But that doesn’t mean it’s impossible. And there are steps you can take if you are already retired. Here are some things to think about.

If you are newly retired and still relatively young or considering retiring, you could pick up a part-time job to supplement your income. It could be something you’ve always wanted to do or something you can do from home. Try to let go of any preconceived notions of what you should be doing and try something that you’ve always dreamt of doing.

Retire Comfortably

Be aware if you’re already collecting Social Security — if you’re under your full retirement age — Social Security will deduct $1 in benefits for every $2 you earn above $19,560 in 2022. Once you reach full retirement age, you can earn as much as you want and your benefits won’t be reduced.

You could also consider other sources of income. If you are entitled to a pension, you may be able to live off that until the markets recover.

Reducing expenses is another option. Selling the large home where you raised your children and moving to a smaller home in a less expensive area is one option. You may find you only need one car instead of two when you’re retired. Take a good look at your budget and see if you’re paying for things you no longer need.

Postponing Social Security if you’re not already taking it can be a good option for many people. If you have other sources of income, wait until age 70 to begin collecting Social Security. Your benefit grows 8% per year between full retirement age and age 70, so waiting can pay off. You get the higher benefit every month for the rest of your life.

Sequence of Returns

If you do have to draw on your retirement savings during a recession, there’s an important concept you should understand. The big difference between supporting yourself by working and supporting yourself with your savings is a concept called sequence of returns. This concept basically says that what is happening in the market can make a big difference when you take money out of your retirement accounts.

Retire Comfortably

Stock market returns vary from year to year. Some years, the market goes down and, assuming your money is invested in the market, so will your retirement account balance. Other years, the market goes up, and your balance will go up along with it. While you’re saving, this is not a big deal, since the down years will, hopefully, be offset by the up years, and the overall market trend is up. It doesn’t matter which years are negative and which are positive — you’ll still end up in the same place.

The challenge comes in when you’re taking money out of your retirement account. That’s when the ups and downs of the markets can make a big difference.

Here is an example: suppose you have saved $1,000,000 for retirement. You will need to withdraw $50,000 per year to fund your lifestyle in retirement. If the planets align, and your annual return in the first five years is +5%, +28%, +22%, -5% and +20%, your balance would be $1,543,684, even if you withdrew $50,000 per year. Granted, these are big returns, but they’re certainly not unheard of, and there’s a negative year in there as well.

Retire Comfortably

If you retire during a bear market, the scenario could be quite different. Suppose your annual returns for the first five years were -25%, -14%, -10%, +16% and +21%. Notice that the first three years were down, but there was a nice little rebound in years four and five. Even still, if you withdrew $50,000 per year, your balance at the end of five years would be $516,628.

In this scenario, retiring during a down market means your retirement portfolio could be worth $1 million less than it would have been if you’d retired during a bull market. And that’s after just five years!

How Can I Protect My Retirement Savings in a Recession?

If you’re considering early retirement, you may be wondering where to put retirement money in a recession. It’s tempting to take it all out of the market and put it in cash or to pull it out of your 401k or IRA altogether. But this is not the best way to protect your retirement savings in a recession.

It certainly makes sense to move to safer investments as you get closer to retirement. You may choose to have a larger percentage of your portfolio in cash but remember that returns on cash rarely, if ever, outpace inflation. So, keeping all your money in cash will result in you having less purchasing power. A conservative asset allocation including stocks, bonds and cash makes sense for most retirees.

Resist the temptation to withdraw money from your 401k until you need it to live on. Remember that you’ll be taxed at your regular income tax rate on any money you take out.

Retiring early can be a risky endeavor, particularly during a recession, but it can also be a rewarding experience. By fully understanding the risks involved, and how you may be able to minimize them, you can make the best decision about retiring early and live out your golden years in comfort.

Information is accurate as of July 28, 2022.

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About the Author

Karen Doyle is a personal finance writer with over 20 years’ experience writing about investments, money management and financial planning. Her work has appeared on numerous news and finance websites including GOBankingRates, Yahoo! Finance, MSN, USA Today, CNBC,, and more.
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