Those who are still working and approaching retirement seem to be the ones facing the most crucial decisions. Young people have time at their disposal for financial markets and the economy to improve. Those who have been retired for a while have probably already made many of their big decisions, for better or for worse.
Future retirees are reassessing things like when to stop working, whether to move, and how to plan their spending. There is no single, simple answer, but there are several ways to prepare, as well as some helpful things to keep in mind when making these decisions.
First, if you are an older worker, remember that in a recession you are more likely to lose your job than a prime-age worker. This means that you will need emergency money. Make sure you have enough money to pay your basic expenses for a few months. If you don’t have this setup yet, but were planning on buying a new car or taking a vacation, make an emergency fund your priority. Still, I understand that it may be unrealistic for those who are already cash strapped to find a cash cushion.
It is also reckless to try to time life decisions based on what the stock or real estate markets are doing or might do. If you need to move, move. Downsizing is generally a good idea because it likely means a smaller down payment (with cash left over), and a smaller house or apartment will be cheaper to maintain. That condo may seem “overpriced,” but then again, your suburban home is “overpriced” too. Even in a recession, the same rule applies: buy if you stay in your place for more than five years, rent if less.
For those who can afford a larger down payment, it is prudent to do so, especially now that mortgage rates are rising. That said, you shouldn’t dip into your retirement account for extra cash. This is because retirement accounts get special tax treatment, which is actually an indirect contribution from state and federal governments. In addition, retirement accounts often receive employer contributions. Diverting money from them leaves employer and government money on the table.
And if you feel like you’re stretching your finances, consider buying a cheaper home and taking out a 15-year mortgage rather than a 30-year one. You’ll pay more monthly, but less interest overall.
In terms of investing, think about your time horizon. If you’re planning to retire in the next five years, the money you need in the short term shouldn’t be heavily invested in stocks. But if you have more time, don’t worry. Stocks may be down, but that means they’re cheaper. If past recessions are any guide, it will take about five years for the stock market to recover.
When determining how much longer to work, remember the benefits of delaying Social Security. Although job uncertainty and high inflation make it tempting to take payments from an early age, almost everyone benefits if they delay collection. For a married couple, Social Security and Medicare benefits can total over $1 million if delayed until full retirement age. If you apply for Social Security benefits before age 70, they are worth up to 30% less.
Finally, it is worth taking advantage of the temporary labor shortage to your advantage while you are currently working. Ask for a raise or a promotion while employers scramble to retain and attract workers. Highlight how you help solve your employer’s problems. No one will be convinced if you say you need more money because a recession hit when you were planning to leave when the sun went down.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Teresa Ghilarducci is Schwartz Professor of Economics at the New School for Social Research. She is a co-author of “Rescuing Retirement” and a board member of the Economic Policy Institute.
More stories like this are available at bloomberg.com/opinion