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How to protect your retirement savings in a recession


Jar with label Pension plan and money on the table. (Photo: Getty Images / iStockphoto)

All this recession does not go away, while the production weakness was included in the reverse yield curve and other indicators pointing to a possible downturn. Recessions can be tough for everyone, but they can be especially difficult for people who save for retirement – or try to live through it.

We are not in a recession yet and may not be for months, possibly years. But it is wise for retirees and those who save for retirees to ponder some key issues while the economic backdrop remains favorable.

Would a recession affect the strategy for investing social security benefits?

This strategy rests on the notion of collecting social security. benefits that start at 62 or soon after, instead of waiting until a later age. The disadvantage of collecting early is that you would lock in smaller monthly payments compared to waiting, but the downside is that you will collect more payments.

Social security benefits increase by about 8% annually for each year you wait. So if you do not use the early checks and invest that money profitably, you can do well.

That's the idea anyway, but it's hard to come by.

You would need the discipline not to use the early social security. benefit payments. In addition, you want your investment portfolio to yield solid returns – 8% per annum is a good target – but gains that can be high can be elusive, especially amid the stock market turbulence that would accompany a recession. said he is extremely skeptical that most will be able to implement the strategy successfully.

"It might make sense to claim the benefits of buying stocks if you are a retiree holding 100% in the stock market," said Clements, who cited the strategy in a recent blog. "But I have yet to meet any pensioner who is a 100% stock market investor."

Rather, people who claim insurance early do most of the time either because they need the money to live off or hate the idea that they might die before retrieving everything they paid into the system, Clements said.

The investment strategy, he believes, is often only used as a justification for beginning to gather early.

Is it better to withdraw from certain accounts? [19659018] 401k written on a dollar envelope. Saving Concept. "width =" 540 "data-mycapture-src =" "data-mycapture-sm -src = "×333/local/-/media/2017/01/24/Phoenix/Phoenix/636208686993146109-GettyImages-528288920.jpg" />

401k written on a dollar envelope Savings Concept (Photo: Getty Images)

Recessions are often times when people have to lean on their investment portfolio to make ends meet. For other reasons, it is better to tap some accounts than others.

For example, if you collect funds, withdrawing money from a traditional IRA or 401 (k) account may push some of your benefits into the taxable category. However, if you have money in a Roth IRA, your income will usually be tax-free – and would not make your income taxable.

If you do not collect social security You may not have to worry about this, but there may be other tax landmines. For example, taking a loan from your workplace 401 (k) account can be a quick, easy way to access parts of your balance, and no taxes are due if you repay the money. However, tax applies if you cannot or cannot repay the loan.

Collection of 401 (k) plans when leaving jobs, with outstanding loans or not, is one of the main causes of "leakage", or premature removal of money from retirement plans.

As another example, cash would be accessed as a permanent withdrawal from an IRA or 401 (k), while still employed, would normally trigger taxes and possibly a 10% penalty if you are under 59 1/2. Nevertheless, Internal Revenue Service 18 lists exceptions to this 10% penalty rule, and some differ depending on whether the account is a 401 (k) or IRA.

The point here is that tapping into retirement accounts can be complicated, with many tax wrinkles. The best strategy is to not touch this money if possible. The next best strategy is to review the implications of loans and withdrawals before the need arises.

Should you stop contributing to a 401 (k) plan or IRA?

There is no requirement to stop contributing, provided you are still employed with work-related income, but circumstances may dictate a stop if you do not plan ahead. For example, the money flowing into 401 (k) plans peaked before the Great Recession in 2007 and has never fully recovered, according to data compiled by the Investment Company Institute.

But assuming you are still employed, you can continue to contribute to a retirement account, recession or not.

In fact, the recession may represent large investment opportunities, giving a chance to buy cheaply in the event of a sharp fall in the stock market, before the possible recession. The broad market lost more than half its value in the depths of the Great Recession, but has accumulated more than 300 percent since then.

Still, the timing of the market is difficult, especially during the recession, when emotions run high and financial scare stories dominate headlines. In such times, it is often best to just keep investing regularly and not think about it. That's what "average cost of ownership" is all about.

Participants in 401 (k) plans automatically benefit from this strategy as they divert a portion of each paycheck and invest regularly, without considering any purchase or sale decisions. .

It is easier to implement your retirement plan with autopilot, recession or not, if you have cash reserves on the side. With funds you can access quickly, easily and without penalty – in a bank deposit account, money market fund or whatever – you won't be tempted to withdraw money from your retirement account.

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Still, it is an elusive goal for millions of Americans to raise an emergency fund. Respondents to a recent LendEDU survey reported having median or midpoint savings of only $ 712, which doesn't provide much of a buffer. One in three said they had nothing.

Lack of emergency savings is one of the main problems that gets people in financial trouble, and the pressure will intensify the next time the economy stumbles.

Reach Wiles at russ.wiles @ or 602-444-8616.

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