If you’ve been watching the financial headlines lately, it’s no secret that market watchers, analysts, and others are warning about the possibility of a recession. Opinions vary from “not an absolute certainty, at least within the current year” to “it’s inevitable.” Meanwhile, everyone is watching the Fed to see if the new “tight money” policy and higher interest rates can cool inflation without producing a “hard landing” for the economy and an ensuing recession.
For those in retirement or nearing retirement, talk of a recession is especially worrisome. At a time when they are looking forward to allowing their savings and investments to work for them, the prospect of a recession—with its attendant downside market volatility, high unemployment, and slowing economic growth—can be unsettling.
It may help to keep in mind that most Americans at or near retirement age have already lived through ten or more recessions; in fact, periodic recessions are a normal part of the economic cycle. The usual definition of a recession is “two consecutive quarters of negative economic growth,” which means that to qualify, a downturn must typically last at least six months. Since 1945, the average recession has lasted 10.3 months. The Great Recession lasted 18 months, from December 2007 to June 2009. The COVID-19 recession lasted just two months (shorter than the “official” definition).
Retirement during a recession can certainly be manageable, especially with some common-sense preparation. Let’s take a look at some ways you can maintain a secure retirement, even during an economic downturn.
1. Increase your emergency fund
When the markets are falling and the economy is looking weak, cash is your first line of defense. If you’re preparing for retirement, it’s a good idea to boost your emergency fund so that you can draw three to six months’ living expenses. That cushion can go a long way toward getting you through the worst of a typical recessionary cycle.
2. Review your “drawdown plan”
When the value of your stock holdings is declining because of a weak market, that’s not the ideal time to be liquidating shares. The fact is that most retirees need the future growth provided by stocks in order to ensure that their portfolio stays ahead of inflation and provides sufficient long-term value for their retirement lifespan. When you sell into a down market, you not only have to sell more shares to provide the needed amount of income; you’re also leaving fewer shares to provide that needed future growth when the market turns up again. That’s why the cash cushion mentioned in item 1 is so important. It can also make more sense to look at other parts of your portfolio, such as fixed income, to provide cash flow during a recession, and save your stock holdings.
3. Shed debt
Of course, this is good advice for any part of the economic cycle, but especially in a recession, you don’t need the drag on your cash flow that excess debt imposes. Even if you’re retired and not worried about the layoffs that typically accompany a recession, the ability to get by on less can be a key strategy for thriving during the economic downturn. And especially in the current environment, with interest rates rising as the Fed tries to curb inflation, it makes sense to keep your debt load as low as possible.
4. Stay calm and stick to your plan
Perhaps the most important thing to remember is that making financial decisions or changing your portfolio allocations based on the emotions created by market movement are not recommended ways of achieving long-term financial success. Instead, your first move should be to consult with a qualified, professional financial advisor to make sure your portfolio is properly designed for your needs. If you’ve got a well diversified portfolio that matches your needs and your risk tolerance, we recommend not making portfolio changes based upon emotions. Instead let’s talk and make sure we have you in the portfolio that is best suited to help you meet your long-term objectives.
Retirement and Recession Takeaways
Mathis Wealth Management believes that every client deserves sound advice, based on years of experience and the best available market and economic research. No matter what part of the economic cycle we’re in, we provide guidance tailored specifically to each client’s needs. To learn more, read our recent article, “Stairs on the Way Up, Elevator on the Way Down: Investing during a Bear Market.”
*This is meant for educational purposes only. Information presented should not be considered investment advice or a recommendation to take a particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions.