Recession in 2025? Looming Market Crash in 2025? Navigating Retirement Risks Now

If you're nearing or already in retirement, the whispers of a potential market crash in 2025 can be downright unnerving. Will a new administration be positive or negative for the markets? If the current administration is re-elected, does that change anything? Will inflation continue, and how will the markets react?

With the economy in flux and the market showing signs of volatility, it's natural to feel anxious about your financial future. While predicting the future is impossible, staying informed and prepared is crucial.

Let's explore the current economic and market outlook, potential downturn risks, and actionable steps you can take right now to safeguard your retirement. Understanding these factors can help you make smarter investment decisions now and provide peace of mind amidst the uncertainty.

Is a Crash Coming?

Economists are divided. Some, like Harry Dent of HS Dent Investment Management, predict a "crash of a lifetime" by May 2025. For several years now, Dent has predicted the biggest crash ever, when the stock market's "monster bubble," as he calls it, will finally collapse, resulting in "the crash of a lifetime."

We're getting very close.

According to Business Insider, research firm BCA Research forecasts a 32% plunge in the S&P 500 as the Federal Reserve struggles to contain a recession.

BCA Research predicts that the S&P 500 will plunge 32% in 2025 as a recession finally hits the U.S. economy. The firm said the Fed will fail to prevent a recession as it takes its time cutting interest rates. Rising unemployment and constrained credit will curb consumer spending, worsening the downturn.

However, these are outlier predictions.

The Current Outlook for 2025

The Federal Reserve is raising interest rates to combat inflation, potentially triggering a recession in late 2024 or early 2025, according to BCA Research. If interest rates continue to increase, it could lead to a market downturn but not necessarily a crash.

According to Greg McBride, CFA, Bankrate's Chief Financial Analyst, the Federal Reserve and the market are currently disagreeing about the pace of future interest rate cuts.

The Fed has signaled they're preparing to cut borrowing costs at some point this year, but not likely as aggressively as the market is currently anticipating.

Downturn Risks and Retirement Impact

A significant market decline can erode your retirement savings, forcing you to delay retirement or reduce your desired lifestyle. If you are already retired, you might need to tap into savings at a faster rate, jeopardizing your long-term financial security.

Chuck Greenblott, a financial advisor at Power10 Financial Partners and specialist in long-term care planning, says that the markets go up, and the markets come down.

Markets go up and down; they always have and always will. The best advice is not to chase and react to the markets.

Instead, Greenblott advises diversifying your portfolio, regularly rebalancing and reviewing it, and considering various options to protect yourself and your family, particularly regarding long-term care insurance opportunities.

Here are steps you can take to strengthen your retirement plan:

• Diversify your portfolio: To mitigate risk, spread your investments across asset classes like stocks, bonds, and cash equivalents. Consider a target-date retirement fund that automatically adjusts your asset allocation as you near retirement.
• Rebalance regularly: Reassess your asset allocation periodically and rebalance to maintain your desired risk profile.
• Stress test your plan: Use retirement planning tools to model your finances under different market scenarios. This helps identify potential shortfalls and adjust your plan accordingly.
• Consider Long-Term Care Insurance: The cost of long-term care can be substantial. Long-Term Care Insurance benefits are guaranteed and will help protect your retirement savings by covering these expenses, which can happen unexpectedly.

Planning for Long-Term Care

Longevity has become a significant concern in retirement planning. You can't predict the markets or when your health, body, or mind might decline. Often, financial advisors overlook the consequences of future long-term care on a retirement plan. Many of us also fail to realize the impact aging will have on our families and finances.

However, considering that the risk of needing help with daily living activities or supervision due to dementia is 56% for those reaching age 65, according to the U.S. Department of Health and Human Services, this is a "portfolio risk" you can't ignore.

Long-term care planning is crucial, as most long-term care costs are not covered unless you have Long-Term Care Insurance or qualify for Medicaid due to limited financial resources.

Health insurance and, for those 65 and older, Medicare doesn't cover most long-term care costs; they only pay for short-term skilled care. Long-term care expenses are your responsibility, and long-term care costs are increasing rapidly.

Cassandra Watson, an expert in long-term care planning and President at Platinum LTC Solutions says that Long-Term Care Insurance has been identified as a critical way to protect your assets heading into retirement.

A large percentage of Americans rely almost exclusively on 401(k), IRA, and other qualified accounts for their retirement income. Given that the market will always fluctuate, top financial professionals recognize that the tax-free, guaranteed nature of Long-Term Care Insurance is a useful way to insulate people's assets from the uncertainty of the market.

Watson emphasizes that without LTC Insurance, those same 401(k) dollars that generate income and are subject to market performance must also be used to fund long-term care.

You can lessen the impact of a long-term care event on those assets by obtaining LTC insurance when you're relatively young and healthy.

Long-Term Care Insurance premiums are an affordable solution to safeguard your retirement accounts from the risk of long-term healthcare. However, LTC Insurance premiums can vary dramatically between insurance companies. Be sure to seek help from an independent Long-Term Care Insurance specialist to help you shop for the best coverage based on your age and health.

Worry? Don’t Act from Fear

While a market crash in 2025 is a possibility, it's not a certainty. Being worried is different from being prepared. Kimberly Palmer, CFP®, a Personal Finance Expert at NerdWallet, says to avoid acting in fear.

It's important to remember that downturns are a normal part of the investment cycle. The key is to stay focused on your long-term goals and avoid making rash decisions out of fear.

However, by taking proactive steps like diversification, stress testing, and including Long-Term Care Insurance options, you can build resilience into your retirement plan and weather any potential storms.