No one can predict exactly when a recession will hit, but everyone knows that it will eventually happen. This is why it's important to plan for your retirement with the assumption that your retirement portfolio has to withstand an economic crisis.

 

A case in point – despite a record 11-year bull run in the stock markets, the Covid-19 pandemic has jolted many industries and led to a nearly 30% plunge in the stock markets.

For individuals, the worst possible time for a recession to occur is when you are on the cusp of retirement.

 

Just as you are about to start withdrawing from your retirement nest egg, the value of your investment portfolio plunges. Furthermore, you now need to liquidate more of your investment assets to drawdown the same amount of income. This double whammy can deplete your financial resources much more quickly than you had initially planned.

 

Worse still, if you are heavily reliant on a few investments for your retirement income, you may end up not just with a depleted portfolio value, but may also experience a cash flow threat if coupon payments, dividends and rental income are reduced, from your bonds, stocks and property investments respectively.

 

Apart from financial pressure, this will likely also cause emotional stress that may lead to sub-optimal personal and money decisions.

 

To avoid this, you can't simply settle on an arbitrary number you want to save for your retirement – like $1 million – or pray that an economic downturn does not happen at the wrong time. You need a game plan to build a stable retirement nest egg capable of riding out such downturns.

You never know what may derail your retirement fund – recessions, personal health crises, retrenchments and other factors can affect your ability to continue earning an income to put towards your retirement. Some people may even be forced into retirement early.

 

By starting early, you can grow your retirement fund for a longer time and be able to endure periods when you may be unable to make regular contributions.

 

Another important reason to start early is to allow you to take full advantage of compound interest. By earning interest on your past returns, you can grow your portfolio to a substantial sum over a runway of three to four decades spanning your career, even with a smaller contribution.

Few people start off living a luxurious lifestyle. Only when they start climbing the corporate ladder does lifestyle inflation creep in, sometimes without them even realising.

 

By living well within your means, you put less financial and emotional pressure on yourself and your loved ones. This can lead to better outcomes in your career as you can choose to enjoy your work, without constantly being occupied by financial worries.

 

As you limit your lifestyle expenses, you can channel more funds towards a larger retirement nest egg as well.

 

A modest lifestyle today will also prepare you for a modest lifestyle in retirement. Often, you may think it is easy to downsize your lifestyle once you retire. However, after being accustomed to a certain standard of living for a long time, be it living in a condominium, owning a car, going on multiple overseas holidays or always buying the latest gadgets, it may be difficult to scale it down during retirement.

If you are dreaming of an early retirement, or are just waiting for the moment you reach the official retirement age, you may be in the wrong job.

 

Consider work that gives you fulfilment. Even if it does not pay as well, being happy with your job is a fantastic trade-off. It means that you are happy to work, rather than to see your job as simply a means to an end.

 

The reality is that many things can wreck your plans for early retirement. There is also a greater risk that once you retire early, your nest egg will not be able to last your entire lifetime.

 

If you are truly unhappy in your current line of work, think about what it is you want to achieve after being able to retire early. You can choose to do that today, and earn less but be happier to work past your retirement age.

 

This also goes back to the earlier point about living a modest lifestyle because it gives you freedom to work in the job that will give you more meaning instead of chasing a larger pay cheque.

Don't put all your eggs in one basket.

 

This is a good analogy for why you should spread out your investments. If anything affects one investment, your entire retirement income will not be in jeopardy. Doing this will also prevent you from reacting emotionally during downturns.

 

In retirement, your CPF LIFE monthly payouts forms the base layer of your financial security. However, the payout may only be able to pay for a basic standard of living.

 

To enjoy a higher standard of living during retirement, you can choose to contribute more to your CPF accounts during your younger days for higher CPF LIFE payouts. To diversify your income streams, you may also want to invest in other assets, including stocks, bonds and, if you are able to afford it, investment properties.

 

You can also supplement your retirement income with a retirement plan, such as AIA Retirement Saver (IV). You can enjoy guaranteed monthly income for 15 or 20 years, starting from your desired retirement age. Regardless of how the economy fares, every dollar you contributed on yearly basis will also be guaranteed upon reaching your chosen retirement age. If the markets perform well, your retirement income stands to grow, cushioning you from the impacts of inflation and potentially enhancing your living standards in retirement.

 

Remember, if one income stream is affected, you need to be able to rely on other sources to continue receiving an income.

By over-preparing for retirement, you can make use of the recessions to bulk up your nest egg. Beyond just your working years, a recession early in your retirement can also be a boon as you have several decades worth of funds to continue growing in the markets.

 

As you near your retirement, you could also be prudent in gradually reducing the risk in your investment portfolio. Apart from just diversifying, you may want to allocate a larger proportion to bonds or even contributing a lump sum to your CPF LIFE for higher monthly payouts.