How recessions can affect retirement savings

Understanding recessions

Recessions are technically defined as when the country’s gross domestic product—which means how much we produce—shrinks two quarters in a row. Put simply, that means six months of the economy not growing. When you hear on the news that production and consumer spending are down while unemployment and the cost of living are up, those are usually telltale signs that we may be in or near a recession.

The United States has had 34 recessions since 1857. The longest recession lasted five years, but recessions in the past 50 years have been much shorter. Even the recession that was kicked off by the COVID-19 pandemic in 2020 was relatively short—although it was more sudden and sharper than most.

Causes of a recession

Recessions often happen when there’s a major change in a key industry (such as real estate in 2007), a sudden shock to the economy (like COVID-19), or even psychological forces (such as extreme optimism with the dot-com bubble). 

Managing retirement savings in a downturn

The stock market may go down quite a bit during a recession. If you have money in a 401(k) or other retirement accounts, the falling stock market could lower your account’s value. You may also see your house and other investments lose value. 

In a recession, if you don’t plan on retiring and using your money right away, you might consider staying the course, even if you see your retirement savings balance go down. Whether market prices rise or fall, it’s not a gain or loss until you sell. So if you sell when the market is down, you’ll lose money. But if you can keep your money in the market, your balance could go back up when the stock market recovers. 

It can be hard for you to watch the stock market—and your investments—go up or down, but try not to make decisions about your savings and investments out of fear and stress. If you’re confident that your money is invested based on your comfort with risk and how long before you plan on retiring, then you’re likely better off waiting for the market to rebound—because it always has historically. 

Helping build your retirement savings

Staying focused on your long-term goals might be better than letting your emotions make your financial decisions. Remember that recessions are a normal part of the economic cycle. You can consider working with a financial professional to help you manage risk, seek opportunities, and guide you in both up and down markets.

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Neither asset allocation nor diversification guarantees a profit or protects against a loss. There is no guarantee that any investment strategy will achieve its objectives. Past performance does not guarantee future results.

It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.