How To Stress Test Your Retirement Before It's Too Late

With a near-term recession almost guaranteed, today we discuss some ways to adapt your retirement saving strategy. And how to stress-test your financial security to make sure it’s truly as secure as you think…

How To Stress Test Your Retirement Before It Is Too Late
Photo by Tom Pumford

From Peter Reagan at Birch Gold Group

We are living in interesting economic times in the U.S., to say the least.

Inflation is soaring at a rate not seen since 1981, Federal fund rates are rising, and the yield curve yield curve is inverting (the most reliable indicator of incoming recession). It’s even possible that the GDP will run negative for the second quarter in a row on the next report, marking the start of an official recession.

Economic chaos like this can leave retirement savers searching for answers to the question: “How can I retire comfortably when things are going south?”

Thankfully, any saver can start immediately by considering common sense advice like the kind Rachel Hartman recently offered in U.S News & World Report:

To retire during a recession, it can be helpful to:

  • Look at financial projections.
  • Evaluate your portfolio.
  • Consider your work options.
  • Understand health expenses.
  • Review your Social Security benefits.
  • Lower living expenses.

So far, so good. More help for retirement savers can be found by considering investing ideas like compounding and opportunity cost. These are explained in another U.S. News a different article:

Compounding –when you invest money, earn a return, and then reinvest both your principal and your return.

Let's say you have $1,000 that you invest in the stock market. In reality, returns aren't the same every year, but the long-term average annual return is about 10.5%. If you earn 10.5% on your $1,000 every year for 40 years, without taking money out, you'll have $54,261.42 at the end of that period. If, on the other hand, you'd taken your 10.5% out at the end of each year and not reinvested it, you'd finish with $5,200.

Growth begets growth. This is what led Einstein to famously call compounding “the most powerful force in the universe.” Maybe, eventually, the Fed will raise interest rates to the point that compound interest is meaningful once again?

Now, a description of opportunity cost – otherwise known as missed chances:

Simply put, this is the highest benefit that you miss out on by making one decision over another.

If you invest your savings in an asset class that, say, loses 20% in a year, that stings. When you realize that you could’ve invested in something completely different that grew 2% instead, you start to realize you lost more than you thought…

Opportunity cost is Monday morning quarterbacking, to be sure. However it’s a crucial tool in helping you understand and appreciate the benefits of diversifying your savings with multiple asset classes.

Considering safer haven investments for your hard-earned retirement dollars during chaotic times like these, even when there’s a small cost associated.

But even with all of the helpful ideas outlined above, one strategy is missing. Before taking the plunge, we have to know the answer to the question: “Can my retirement savings endure a recession?”

Stress-test your retirement (before the markets do it for you)

The major market indices (Dow, S&P 500, and NASDAQ) have each lost a huge chunk of their value since January 2022.

That means it’s highly unlikely you turned a blind eye to your retirement account right now. In fact, according to Shelly Ann Eweka, Senior Director of Financial Planning Strategy at TIAA, any assumptions we’re making about the future right now could have a high price tag:

You can’t just assume that ‘I’m just gonna just keep putting money aside into my retirement account and see the value go up every year.’

“Just putting money aside” doesn’t account for costs during retirement, rising inflation, or other economic conditions that can negatively impact your nest egg.

So it’s a good idea to create a retirement plan that accounts for times when the market corrects itself. According to a recent CNBC piece, most people don’t even have that plan put together yet:

A recent survey found only 29% of Americans have a financial plan, even though having one could help them “stress test” their finances amid economic woes. North Carolina resident Connie Gores, 68, got a “wake-up call” from her financial advisor when she was in her mid-50s, and was able to shift gears enough that she could retire by 65. Advisors recommend getting a handle on expected costs in retirement, as well as expected sources and amounts of income.

With a solid plan in place, any retirement saver can take the market uncertainty into account and adjust that plan accordingly.

Without a plan, your retirement is subject to the whims of any volatile market like a leaf blowing down the street.

So ask yourself, at this point in your life…

How much of your savings are you willing to lose?

Most people will answer the obvious way:

None! If that’s not an option, as little as possible.

That means once you form a plan, you’ll need places you can tuck your hard-earned retirement dollars to protect your nest-egg when market chaos strikes.

Traditional “safe haven” investments including TIPS, Series I bonds, and physical precious metals like gold and silver are excellent ones to consider. Gold has an excellent track record over time, which is one of the many reasons gold remains the go-to investment during times of economic upheaval.

Take a few minutes to learn how you can insulate your retirement savings from the nearly-certain recession we're facing. Preserve as much of your savings as possible during tough times. After all, given the choice, the best answer to the question above is none.

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