How to Retire During a Recession

Photo: Dwight Stone

If there’s any group more worried about the long-term effects of the recession than new grads, it’s the soon-to-retire. The economy is forcing nearly everyone to reevaluate their financial plans and goals and (for better or for worse) is making most of us settle in for a few more years of work before we can retire.

As I listen to all the talking heads discuss new strategies for working longer and later in life, it seems that the old three-legged stool model of retirement is all but obsolete. The three legs of retirement — Social Security, an employer-sponsored retirement plan, and personal savings — are shaky at best. Economic forces have reduced both personal savings rates and retirement plan balances. And just keeping the bills paid has cut into the new money we can contribute.

So is there a way to retire in the middle of a recession? Maybe. By reconsidering the three-legged stool model and taking a bit more aggressive and holistic approach to retirement planning, jumping off the work treadmill might still be possible. Here are the five steps that can help you prepare for retirement during a recession. (See also: Deciding What You Want Out of Retirement)

1. Pay Off Your Mortgage

Paying off our largest fixed expenses well before retirement is an obvious, but seldom discussed part of a real retirement strategy. Saving more for retirement depends on knocking out the big bills and devoting more money and energy to personal savings and other asset-building activities. Don’t discount the valuable peace-of-mind that mortgage-free living can give you as you settle into retirement.

2. Downsize and Downshift

Many financial advisers base their retirement calculations on replacing enough income through savings to support pre-retirement lifestyles. But is this realistic? What exactly do we sacrifice in putting off retirement until we have enough in savings to support our current standard of living? Maybe enjoying our golden years is enough of a reward to sacrifice a few of life’s luxuries. A more modest home, a smaller budget, a used car, and fewer vacations all seem like worthy trades for time and a bit of freedom.

3. Save More

Of course, savings is always an essential component of a retirement plan, and saving more is usually a winning strategy. Many financial experts see the writing on the wall with pre-tax 401(k) contributions and are now advising their clients to redirect a larger share of money to Roth IRAs. Personal tax rates are bound to increase and the old advice of socking away pretax money while we’re young and enjoying a lower tax rate upon withdrawal at age 59½ may not hold true much longer. Whatever vehicle or approach you choose, having more choices later in life typically means crunching the numbers and saving till it hurts.

4. Get Creative

Getting creative with expenses and income may be the unspoken fourth leg of the new retirement stool. Solutions like trading a large home for a small duplex can reduce expenses and provide rental income. Phasing out of our careers slowly, going part-time, or switching to contractor or consultant status is another way to test to the waters of retirement while still keeping the money coming in.

5. Supplement

Even post-retirement, some folks are choosing to go back to work part-time in their previous fields or explore new, lower-stress jobs. The days of all-or-nothing retirement may be over, but that doesn’t mean that it’s not possible to thoroughly enjoy the retirement part of semi-retirement. Extra income during these years can supplement personal savings and help retirees feel engaged and plugged in to their local communities.

For those of us who believed that retirement would be as simple as that old three-legged model, the rules seem to have been suddenly and unfairly changed. Still, retirement is possible — maybe just not in the form we anticipated or as quickly as we had expected. The new retirement stool is made of up of many legs, and we’re responsible for the stability of most of them. The time to start planning is now.

How have your retirement plans changed in the last three or four years? Do you expect to enjoy the kind of the retirement your parents have? What advice would you give middle-aged readers who are rethinking their retirement strategies?

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