6 Retirement Planning Lessons From the Great Recession

Amid market fluctuations and rising interest rates, it’s a good time to visit downturns in the past, including the Great Recession. From 2007 to 2009, the housing market plummeted while foreclosures and mortgage defaults soared, stocks suffered a bear market and many Americans found themselves living on less income.

Given today’s high inflation and volatile market, it can be concerning to look at your investments and think about saving for the future. Historically, it has taken some time for the economy to recover from a recession. Looking at the past can make it easier to navigate uncertain times ahead.

Some retirement planning lessons from the Great Recession include:

1. How to protect your 401(k) during a recession.
2. The safest place to put your retirement money.
3. Invest with a long-term view in mind.
4. Saving consistently is key.
5. Choose the right level of risk.
6. Purchase a house that is within your means.

If you have a 401(k) through your employer, a market downturn may present some long-term advantages. “If possible, continue contributing to your 401(k) during a recession,” says Doug Carey, president and owner of WealthTrace. “Market downturns present an opportunity to buy stocks at lower prices, and consistent contributions allow you to take advantage of this strategy known as dollar-cost averaging.”

With dollar-cost averaging, you invest a fixed amount at regular intervals regardless of market conditions. Over time, this could build your long-term returns, as the investments could grow during the coming years and be greater in value when you retire.

If you are concerned about a bank crash, determine how your 401(k) is protected from such events. Retirement accounts typically have some safeguards in place. The amount of protection you have will depend on factors such as the type of investments you have and your plan’s custodian.

Allocating funds to low-risk investments may seem like a good approach to keep your money secure. However, sometimes even longstanding institutions can falter. During the Great Recession, financial institutions like Lehman Brothers did not survive. In recent times, banks have collapsed, including First Republic Bank in San Francisco, Signature Bank in New York and Silicon Valley Bank in Santa Clara, California.

Putting all your funds into one type of investment is not a low-risk strategy. “Spread your investments across different asset classes, such as stocks, bonds, real estate and international investments,” Carey says. You might choose a mix of stocks, bonds, an IRA, a 401(k) and real estate or insurance products. “Diversification helps mitigate risk and reduce the impact of a downturn on your portfolio,” Carey says.

If you have money invested in the stock market, a market downturn will often cause its value to decrease. “When a stock’s value plummets, it’s the worst time to sell,” says Leslie Tayne, founder and managing director of Tayne Law Group. “If you hold onto your investment long enough, it will eventually recover and possibly hit its highest level ever.”

In addition, if you have the resources, you might continue investing. “The stock market recovered dramatically starting in 2010 and had doubled from its lows by the end of 2013,” Carey says. “Those who stayed out of the stock market during that time missed out on this recovery.”

Some investors try to time the market with the idea that they can buy low and sell high. “By their nature, markets are fickle, except that they mostly go up in the long term,” Mark Murphy, chief executive officer of Northeast Sequoia Private Client Group, says. “Therefore, you should anticipate setting aside a regular monthly dollar amount in a retirement account, and when possible, a company-sponsored 401(k).” If you get a raise, you might decide to allocate part of the additional income to long-term savings.

Over time, you can evaluate your investments to ensure they align with the level of risk you’re comfortable with. “The closer you are to retirement, the more conservative the investments you should choose,” Murphy says. “Think in terms of dividends and CDs, guaranteed or nearly guaranteed income that comes with little to no risk.” You might revisit your plan once a year to assess your risk tolerance and consider how many more years you want to work.

Prior to the Great Recession, some homebuyers purchased properties that were difficult to afford. Since the pandemic, rent and housing prices in certain areas of the country have risen substantially, creating hardships for some Americans looking for a place to live.

As you search for a home to buy, evaluate your overall budget and savings and use a mortgage calculator to see what you can afford. “It’s imperative to know what life costs for you month to month,” Murphy says. After setting up a long-term savings plan, look at setting aside enough funds to make a down payment. You may also want to determine the portion of your income that will be used to make house payments so that you don’t stretch your budget too far.