How a Recession Could Affect Your Retirement Income Plan—and What to Do Now

Stock market volatility and gloomy headlines can make anyone nearing retirement feel like they’re standing on a financial fault line. If you’re within five years of retirement—or already living on your nest egg—you might worry that a recession could destroy the retirement income you’ve spent decades building.

The good news? A recession doesn’t have to derail your retirement plan. With clear information, a few stress tests, and timely tactics, you can keep those retirement paychecks flowing even when the economy slows. 

What is a recession?

According to many economists, a recession is two consecutive quarters of falling Gross Domestic Product (GDP).

The National Bureau of Economic Research (NBER) calls a recession “a significant decline in economic activity, spread across the economy, lasting more than a few months.” That definition includes job losses, lower incomes, weak factory output, and soft retail sales.

Either way, a recession is a broad, prolonged slump – not just a few bad market days.

A 90-second history of recessions

The Great Depression (1929-1933)

GDP drop: 29%
Peak Unemployment: 25%

The Great Recession (2007-2009)

GDP drop: 5.1%
Peak Unemployment: 10%

COVID-19 Recession (2020)

GDP drop: 9.6%, briefly
Peak Unemployment: 14.8%

The moral of the story? Every recession is different but every recovery, so far, has rewarded investors who stayed in the game.

The retirement-specific danger: sequence-of-returns risk

Sequence-of-returns risk means the order of market gains and losses matters more than the average return. If stocks drop right after you start taking withdrawals, you’re forced to sell more shares to pay the bills, leaving fewer to rebound later.

How sequence risk can impact your retirement portfolio

Two investors retire with $1 million, each withdrawing the same amount (in this example, $40,000) per year.

Investor A enters retirement to 9 years of 6% growth. In the tenth year, their investments lose 20%.

Investor B retires with the same mix, but the opposite order of events. A recession cuts 20% from their portfolio during the first year, followed by 9 years of 6% growth.

At the end of 10 years, Investor A has approximately $120,000 more in their portfolio than Investor B, thanks to the sequence of returns.

My solution: As clients prepare to enter retirement, we may reallocate some investments to buffer funds – ETFs that track an index, such as the S&P 500, but use options to limit the downside. Buffer funds can reduce the amount investors lose in a downturn but also cap the amount they can earn when markets surge. 

As part of their financial plan, near-retirees should also focus on having an emergency fund they can fall back on. That buys time for volatile stocks to heal from any potential downturn without gutting principal in those critical early years of retirement.

Expect the unexpected: how to stress test your retirement plan

When you’re worried about your retirement savings, platitudes like, “This, too, shall pass,” or, “Historically, the market always comes back,” don’t cut it. The best way to ease your mind is to know where you stand by understanding how economic changes will affect you specifically. For our clients at BMM, that means stress testing.

During our financial planning process, we consider how different factors impact each plan’s Probability of Success. And when clients are up late at night, worrying about how a market decline, medical expenses, or even the loss of Social Security income might impact their future, they can test their own worst-case scenarios in the online “What Are You Afraid Of?” tool.

Key Factors That Determine Retirement Feasibility During a Recession

Sequence-of-Returns Risk
As I explained above, when markets drop early in retirement, withdrawals bite deeper into principal. I address this by utilizing buffer ETFs. Our financial planners often recommend stashing an emergency fund in cash, money market funds, and conservative short-term bonds, so clients aren’t forced to sell stock at fire-sale prices.

Portfolio Mix & Protection

A portfolio overloaded with volatile growth stocks is more vulnerable in a slump. Ahead of tariff headlines in 2025, for example, we trimmed the aggressive names and added steadier assets such as utilities, consumer-staple companies, and shorter-duration bonds. That shift reduces day-to-day swings without abandoning long-term growth.

Reliable Income & Spending Flexibility

Pensions, Social Security, and other steady income sources soften the blow of a recession because those checks keep coming no matter what the market does. The more of your basic living costs they cover, the less pressure you feel to tap investments at the worst time. On the spending side, having leeway to delay a new car or big trip for a year can make a meaningful difference to portfolio longevity.

Six smart moves to protect your retirement income during a recession

1. Harvest Losses for Tax Savings
   Realizing losses on positions that are temporarily down lets you offset current or future capital gains, trimming your tax bill without changing your overall allocation.
   
2. Make Adjustments — Not All-or-Nothing Bets
   Panic-selling at market lows and staying in cash can cause long-term damage. Instead, consider small, strategic shifts (like utilizing a buffer fund) that protect downside while keeping long-term assets invested for the rebound.
   
3. Maintain a Liquidity Cushion
   Cash reserves you can tap in an emergency can prevent forced sales of securities at depressed prices.
   
4. Consider Strategic Roth Conversions
   Converting part of a traditional IRA to a Roth when account values are lower means paying tax on a smaller balance today for tax-free withdrawals later. 
   
5. Refinance Costly Debt When Rates Dip
   Recessions often push interest rates lower. Locking in a cheaper mortgage or HELOC frees up cash flow you can redirect toward lifestyle spending or portfolio preservation.
   
6. Boost Contributions After a Market Slide
   If you’re still working, max out 401(k) or IRA deposits while prices are low. Historically, buying during market downturns has boosted long-term portfolio growth.

Implementing even a few of these tactics can make a recession significantly easier to weather—and keep your retirement income plan on course.

Planning to retire during a recession? Your three-step checklist

1. Reduce risk in stages, not sudden jolts. Shift a portion of equities to bonds or cash over 12–18 months instead of one big trade.
   
2. Lock in guaranteed income. Double-check pension payout options and your chosen Social Security start age; those checks should meet basic living costs.
   
3. Keep growing money you won’t need for 5–10 years. Recoveries often begin months before recessions officially end; balanced portfolios historically capture that upswing. Going to cash will not.

Frequently asked questions about retirement and recessions

Q: Should I move everything into cash if markets fall 20%?

A: Going 100 % cash may feel safe but usually locks in losses. Holding a diversified mix with a cash buffer lets you ride out declines without selling growth assets at the worst moment.

Q: Could Social Security checks be cut in a recession?

A: Social Security is funded by payroll taxes, not stock prices. Benefits have never been reduced because of a single recession. 

Q: I’m already retired—do these tactics still help?

A: Absolutely. Tax-loss harvesting, spending flexibility, and managing sequence risk remain useful whether you retired yesterday or fifteen years ago.

The bottom line:

Recessions are inevitable; running out of money is not. Stress-test your plan, protect near-term cash flow, and stay invested for the rebound. 

Get help preparing your retirement for the next recession

We specialize in helping our clients avoid their biggest fear: running out of money in retirement. If you’d like someone to help you stress test your retirement plans, let’s talk.

Schedule a free consultation about my retirement income strategy.