How do recessions affect your retirement?
Canada Life - Feb 03, 2023
During a recession, stock and other markets can dip, which can impact retirement savings and investments.
How does a recession impact retirement savings?
During a recession, stocks and other investments can drop in value as cautious investors sell or divest to protect their portfolio against losses. Market volatility can impact the performance of investments as well as retirement savings accounts.
How to manage your retirement savings during a recession
Early career
You may shift your financial priorities to deal with the immediate impacts of a recession, such as cutting back on non-essentials to ensure you can pay bills and cover everyday expenses.
You may have to re-evaluate your budget or create one to help reduce your spending. As a result, you may contribute less to your savings. This could be helpful in the short-term, especially if you're struggling. However, if you stop contributing to your retirement savings, even for a short time, you could be affecting how much you'll have to use at retirement.
The money you invest grows over time through compound interest. The less you save now, the less interest you earn over time, which ultimately means you’ll have less money in total when you reach retirement age.
When you look at your budget, if you feel you need to adjust it to deal with a recession, consider reducing your contributions to your personal savings and/or workplace savings plan instead of stopping completely.
Mid-career
If investing is part of your financial plan for retirement, you could find your portfolio is impacted by the stock market. During a recession, consumer confidence drops and interest rates often rise. Both of these can cause stock market volatility.
Why is my Registered Retirement Savings Plan (RRSP) losing value?
If you have an RRSP, the money in it is invested. This means that if the stock market or real estate markets drop, the value of the RRSP may also lose value.
However, this loss may be temporary. The stock market is cyclical, meaning it goes through both highs and lows. Making changes to your asset allocation during a low period could mean missing out on gains when prices recover. Instead, you may consider making consistent contributions, even when markets have dropped. This is an investment strategy known as dollar-cost averaging, which can help you buy more shares at a lower price point.
Avoiding emotional investing and ensuring your portfolio is diversified can help you manage periods of uncertainty in the market.
Nearing retirement
If you’re nearing retirement, you may want to weigh the pros and cons of waiting another year or two before you retire.
If you choose to keep working a little longer, you could contribute more to your savings while the government takes measures to manage a recession and markets correct themselves. However, I understand if you’re eager to start the next chapter of your life, regardless of a recession.
Each situation is unique, and the picture of retirement looks different for everyone. To help you make the best choice for you, talk about your retirement plans with your loved ones and with me.
Already retired
If you’re already living on retirement income, you may need to consider other things when it comes to retiring in a recession.
For example, you may already have a plan in place for how long you want your retirement savings to last. You may have based that plan on receiving a set income each month to pay for set expenses.
However, periods of recession are often tied to rates of inflation. If your retirement income remains the same but your expenses suddenly start to rise due to inflation, you may find your money is not stretching as far as you hoped. You may need to re-examine your retirement budget. I can help you determine where and if you can make changes.
If you continue to invest during your retirement, you should consider carrying out a portfolio review to make sure your investment allocations and risk levels remain aligned to your goals.
The stock market can react to recessions too, but the good news is government pensions such as the Canada Pension Plan (CPP) / Quebec Pension Plan (QPP) and Old Age Security (OAS) are indexed to keep up with inflation. The CPP is adjusted every January and OAS is adjusted each quarter so these payments increase as the cost of living does, helping retirees manage.
No matter which life stage you’re at, I can help you adjust your financial plan to meet the challenges of a recession. Contact me today.
Ask an advisor: The importance of continuing to contribute to your RRSP – Canada Life
Don’t let inflation and a recession derail your retirement savings plan. I can help you adjust your financial plan to keep you on track.
View video script
Description: This animated video introduces a character named Nora and her advisor with illustrated graphics to explain the importance of continuing to contribute to your RRSP.
Text: Ask an advisor: How does inflation affect my retirement savings?
Description: Nora sits at a table across from her advisor.
Nora: My grocery bill is going through the roof. Rising costs are really squeezing my budget. I’m not sure I can afford to continue contributing to my RRSP and I’m worried about how a possible recession could impact my investments.
Advisor: I understand your concerns.
Description: Fade to a hand holding a coin, then placing it on a slope. The coin begins rolling downhill, then uphill, then downhill again.
Advisor: However, not contributing to your registered retirement savings plan, even for a short time, can really affect whether you reach your saving goals. And that can affect your retirement income and lifestyle.
Description: Coin rolls into a graph on a upward slope that shows how your investments and interest dramatically increases over 25+ years of contributing.
Advisor: That’s because what you invest now will grow over time through compound interest.
Description: The coin rolls through the graph again on a less dramatic slope.
Advisor: The less you save now, the less interest you’ll earn over time, which means less money when you retire.
Description: Nora speaks at the table.
Nora: What would you recommend then?
Description: Transition to three illustrations with a word above each one – mortgage, retirement and travel. Advisor’s finger enters frame and touches the illustrations. A risk tolerance slider appears below each graphic and moves between low and high.
Advisor: To start, I can help you create a budget and if necessary, revisit your savings goals and risk tolerance.
Description: The words “on track” appear below each graphic and risk slider.
Advisor: That way, you’ll keep your retirement savings goals on-track and find opportunities to grow your investments as the economy improves.
Description: Transition to a circle graph with the heading RRSP and $300 per month. A finger enters the frame and adjusts the graph to $150 per month.
Advisor: If you’re still feeling a spending pinch, you could consider just reducing the amount you’re saving for retirement, rather than stopping completely.
Description: Transition to advisor at table talking with Nora.
Advisor: Let’s talk about ways you can stick to your retirement savings plan while managing rising costs and an uncertain economy.
Description: Text – Let’s talk. Contact me today appears onscreen with the Canada Life logo and legal line: “Canada Life and design are trademarks of The Canada Life Assurance Company. canadalife.com 1-888-252-1847."
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
Canada Life and design are trademarks of The Canada Life Assurance Company.