When some expert announces fears of a recession you can be sure that within five minutes another expert will share advice on how to keep your retirement save. Today, too! The tips are often very similar but one advice is often particularly hard to swallow.
It goes something like this: “Uh, you want to retire or have just retired during a recession? Might be a good idea to pick up a part-time job.”
You don’t retire to just pick up work again right away … so why are people repeating that advice anyway?
That’s because they want to protect you from selling assets at a particularly bad moment—and too early.
Why sell at a bad moment?
When a recession is about to hit us or we’re in the middle of it, stocks crash, bonds are down, house prices suffer, generally a lot of assets are down.
Now, assuming you’re in the US or your retirement pot depends heavily on stocks and other such assets, then having to sell when prices are low is painful. But it’s particularly painful when you start retiriment now.
Why starting retirement during a recession is bad
Your costs of living are not changing much, right, or maybe they go up thanks to energy prices skyrocketing and food becoming more expensive right now. That means to cover these expenses you’ll have to sell more stocks etc than you expected—because they’re so cheap in a recession.
The brutal thing is when you do that early in your retirement: it shrinks your money pot early on—and that eats into compound interest. When planning your retirement fund, you very likely expected interest to compound over your retirement years … so if you sell early, you have a knock-on effect in later years long after the recession is over. This will likely take years off your retirement funds.
To avoid these knock on effects in later years, you got to avoid selling stuff early on while prices are low.
That’s why folks advise you get a part time job when retiring during a recession.