In the past year, signs ranging from slowing manufacturing to dips in the Architectural Billings Index, as well as the cyclical nature of economic growth, have some worried that another downturn may be just around the corner. This three-part series will examine the ways in which architecture firms and practicing professionals can protect themselves against the potentially devastating effects of a recession.

Retirement during a recession can upend years of planning. With economists predicting another downturn by the end of 2021, late-career designers must plan accordingly. Here, practitioners and financial planners offer guidance on preparing for retirement during an economic low.

Save, Save, Save
Recession or not, “Retirement planning is not a short-term exercise,” says Michael Strogoff, FAIA, president of Mill Valley, Calif., management consulting firm Strogoff Consulting. “It takes decades of discipline to save enough to fund one’s retirement. If one starts thinking about it when they start hearing news about an upcoming recession or downturn ... it’s way too late.”

Employers continue to utilize 401(k) plans to encourage employees to save for the long term. According to AIA, 83% of all firms and 100% of the firms with more than 100 employees offer some form of defined contribution retirement savings plan, such as a 401(k), Simple 401(k), or Simple IRA. Defined contribution plans appreciate savings by allowing employees to invest their a portion of each paycheck in a variety of financial products incrementally. Unlike pensions, however, these plans do not guarantee employees a certain amount, but a number that changes with market forces.

Some companies incentivize larger deferrals by matching employee contributions up to a certain percentage of their paycheck. In this case, “the company is giving employees free money [for] their retirement plan,” says John Piombino, head of human resources for the U.S. office of BuroHappold Engineering. The global engineering firm matches up to half of the first 6 percent and also automatically enrolls employees at 1 percent after two months of employment. Employees utilizing these programs can check their investments online, which Piombino suggests doing it at least twice a year. Employees approaching retirment age can also contribute to a Roth IRA, which are offered by various banks and allow for tax-free investment.

Fortunately, for those who might not have saved earlier in their career, architects can practice long past what society traditionally considers retirement age, Strogoff notes. Many want to work into their 70s and 80s because “architecture is more a passion and a calling than just a job,” he says. Each year an architect delays retirement and continues to earn income, the easier the retirement. “So if you are fortunate enough in a recession to have a well-paying position and have the energy to continue to work, I think that’s the best thing you can do,” Strogoff says.

Factor in Succession Planning
Identifying, grooming, and incentivizing the next generation of leaders can take years to plan and execute even when market conditions are optimal. When conditions are not, the idea of owning and leading a firm quickly loses its appeal. The finances of such a transition are equally challenging. Because very few architects can afford to buy into a firm, ownership transfers are internally funded through bonuses or loans given to employees identified as future owners. The employees then use the money to buy shares or units. The value of a share or unit is determined through a business valuation—performed annually—and then subject to the terms of the buy-sell agreement. “The process is a heavy tax environment because you get taxed when you receive the bonus, and the firm gets taxed when it receives the funds,” says Rockland Berg, AIA, principal and founding member of Dallas-based ThreeArch. As a result, owners may be unable to sell their interests.

Prioritizing funding succession requires discipline, Berg explains. While downturns are not ideal for ownership transfers, ThreeArch prioritized retaining its best leaders in the last recession. As the economy slowed and the staff was reduced by more than half, the firm continued to offers bonuses its key people. “Even though times were hard, we found a way to invest in them and give them a vision to the horizon,” Berg says.

Create a Payment Plan
Having a comprehensive buy–sell agreement that offer a blueprint for selling ownership in a business can make it easier for owners to retire if a slowdown does occur. Savvy firms include provisions that allow them to delay or extend the duration of payment to an outgoing owner when there isn’t enough liquidity, Strogoff says. When Princeton, N.J.–based KSS Architects co-founder Allan Kehrt, FAIA, retired in 2011, he continued to receive monthly payments with interest for his share of the company for five years.

Firms should also establish a system that regularly ensures all owners agree on the worth of their practice. KSS’s partners, for example, begin each year by reviewing the valuation of the business and signing off on the value of the firm and the individual shares. If profitability is down because of a recession, “everyone would understand that,” Kehrt says. A partner who decides to retire anyway would have to accept that they would be leaving with less.

In the current market, Strogoff suggests owners looking to retire can start gradually selling their interests, if they haven’t already, to better prepare themselves for when the next downturn happens. He also advises monitoring project backlogs and modifying staff levels if necessary. “It’s counterintuitive, but making adjustments now will make it easier for retirement later,” he says. “Owners [need] to take decisive action early to ensure the firm remains financially viable.”

Consider Additional Income Sources
Some retirees elect to work part-time or as independent consultants to ensure some new income and to stay active. Senior interior designer Terry Harris, who plans to retire from the Boston office of architecture firm Dyer Brown Architects at the end of 2019, envisions picking up a part-time job “in the next couple of years” either in design or a new field altogether. “I can see a lot of possibilities in doing something and still [earning] a little income if that need be,” she says.

Harris and her husband are also relocating to South Carolina, where the cost of living is much lower from their previous home city of Boston. “[W]e started investigating other parts of the country where we wanted to live,” Harris says. Five years ago, the couple bought a house in the South using the cash from selling their home up north and started renting it out for additional income. In the meantime, they are renting in Boston.

Harris, who doesn’t have an ownership stake in her company, is counting on her 401(k) savings as her principal source of retirement income. She has always paid into a workplace retirement account, but after being laid off during the last downturn—as was her husband—Harris significantly boosted her 401(k) contributions when she rejoined the workforce, deferring as much as 11 percent of her salary a couple of years ago.

While the couple has carefully planned their next stage of life, Harris admits to being nervous about a potential slowdown: “We’ve been through two of them and it’s scary.”