How to Recession Proof Your Retirement

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From that first day in kindergarten to the age of retirement, the journey that is life revolves around one major goal: To build a financially secure future.

And the best way to measure the future is via the probability theory which says:

Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return.”

This could be one reason why, when it comes to financial investment, people measure returns based on risk.

How to Recession Proof Your Retirement

Building an investment plan is like formulating a diet plan – totally dependent on your goal. When you visit your dietician for instance, one of the first questions asked is about your goal – Do you want to lose weight, build muscle, or you wish to celebrate food?

But moderation, as any good dietician will tell you is the key; it’s only when everything you need is in your plate, in the right quantities, that you can achieve your goal, as well as enjoy each bite and every taste. A dietician’s plan begins from this understanding.

Investments also need planning, and this planning should be based upon your risk-taking ability and your life goals.

Risk & Investment in the Post Pandemic Era

Planning for investment becomes even more crucial in this “New Normal,” where most have lived through a pandemic of this intensity for the first time. For this generation, a recession would refer to the last Great Recession of 2007 -2009.

It’s expected that a post-pandemic financial horizon will be different from anything we know, and we need plan our investments based on that.

“We all want to return to the way things were before COVID-19. But there is one area where I hope we never go back! Our complacency about pandemics. We can’t get ahead of infectious disease outbreaks…” – Bill Gates.

Of course, the insightful Bill Gates was speaking on being ready with mega-testing diagnostic platforms, but his thoughts triggered mine too, albeit in a different direction.

Every entrepreneur or business owner’s life revolves around how to be recession-proof, especially in the case of the current generation, who have just entered the pandemic hit and bruised market.

How can they plan to recession-proof their retirement?

Fact Check                                                          

There are a number of things to understand about the best plans for retirement and rest-of-life. First and foremost, you cannot avoid all adversity. Pandemics, recessions, depressions, or high inflation do happen. Loss is inevitable. Something, at some point in time will hamper your financial planning.

But what you can do is take care of your health. Because, in a crisis that helps in thinking clearly, taking action, and even protecting you against other risks.

“As we recover, we will have a huge population of people who will want to rebuild and move ahead.

So, I am unconcerned about longer-term property and share values. The trick is to try to stay healthy so that we and our money see the other side. The rule shown so clearly by history is not to panic and start selling quality assets like shares and property. When our mortgage hit 18.75% in January 1990, Vicki and I had to sell our car, cancel holidays, stay home, have a food plan and stick to a tight budget. The other option was to lose the house. The short-term pain worked. Our home’s value rapidly recovered.” – Paul Clitheroe, Australian Television Presenter.

That is how you plan.

Stick to your ground. Even when your finances are not in good shape, or when the market, at large, falls due to economic turbulence, you have more power than you realize.

Here are seven steps you can take to increase the odds of surviving a recession during your retirement years by keeping your financial plan on track during uncertain economic times.

Emergency Funds and Debt Payments

The most important step would be to make sure you have an emergency fund. It is suggested that emergency funds should be approximately 6 months’ worth of income. That is not going to save your life if you lose your job and high unemployment prevails, but it will give you some options and opportunities to make adjustments.

“By definition, saving – for anything – requires us to not get things now so that we can get bigger ones later.” — Jean Chatzky, Personal Finance Journalist.

Many people found themselves in financial distress during the last recession when they lost their jobs and had no reserve funds. It is wise to pay down loans such as home mortgages when you can. I say this looking at experience from the past. In the last recession, many people who faced a financial crunch had very expensive mortgages, which resulted in foreclosure. People lost their homes and had no way to pay their bills.

Paying an extra hundred dollars a month towards a home mortgage may be one easy way to lower principal balances and paying less interest overall.

Paying down credit cards also helps in reducing financial stress. A lot of Americans pay only the minimum; and do not realize this is mounting expensive debt, which leads to more and more trouble.

Live Within Your Means

Adjust living expenses to match your retirement income from all sources. If you make it a habit to live within your means each and every day during the good times, you are less likely to go into debt when gas or food prices go up, and more likely to be able to adjust your spending in other areas to compensate.

I recently read this story of hostess-turned-travel blogger Kesi Irvin who used to live an unconventional, nomadic life. She had been on a travelling spree, and supported herself through seasonal work as a hostess for travel companies. This of course meant that she hardly had much to save as emergency funds.

But during the pandemic, when the travel industry came to a standstill, she realized the importance of sustainability.

“The pandemic came in like a wrecking ball, and all my travel plans were cancelled, and I was forced to slow down.” – Kesi Irvin, Travel Blogger.

Irvin picked herself up. She started a travel blog that she monetized to help her stabilize.

Stay in the Market

Investing in the stock market always comes with some risk. In exchange, over time you are typically rewarded with higher rate of returns than those you get from savings accounts, fixed deposits, and the like. There may be cases when the market dips, and your portfolio may take a hit, but that too shall pass.

As people are living longer than ever before, money needs to last a long time. Keeping assets invested can help you beat inflation & enjoy the unique financial growth that can come from investing.

“Stay the course with long-term stock market investing in volatile periods, because history has shown changes in behavior during a crisis may not last long beyond it” – Dennis Lynch, head of Counterpoint Global at Morgan Stanley Investment Management.

A solid financial plan will account for the ups and downs of the market. When you are younger, that may mean simply riding out a downturn and waiting for your portfolio to recover. That is fine, because you will not need to withdraw from your investments any time soon. If you are older and need to regularly withdraw money from your savings, you will want a mix of investments and assets that are not tied to the market.

Identify ways to cut back

It is always a good idea to go through monthly expenses and identify discretionary services or items that you do not need. Keep an eye on the spending for necessities as well. The discretionary items are most likely ones that you can either remove now or in the future.

Most certainly your starting point would be the discretionary items — subscription services or even just spending patterns. Dinners out or nights outs with friends can seriously add up over time and affect your health too. So, my advice would be to stick to a routine, and give yourself occasional breaks.

That way you will skip the monotony of life as well as, save effectively.

It’s a good way to gain back some control by taking ownership of our spending. – Drew Harris, CFP, Greenway Wealth Advisors.

Have Additional Income

Even if you have a great full-time job, it is never a bad idea to have a source of extra income on the side, whether it is a little consulting work or selling collectibles on eBay. With job security so unreal these days, more jobs mean more job security. Diversifying your streams of income is equally important as diversifying your investments.

“Money is multiplied in practical value depending on the number of W’s you control in your life: what you do, when you do it, where you do it, and with whom you do it.” – Timothy Ferriss, author of ‘The 4-Hour Workweek’.

Once a recession hits, if you lose one stream of income, at least you still have the other one. You may not be making as much money as you were before, but every little bit helps. You might even come out the other end of the recession with a growing new business as the economy turns upwards.

Invest for the Long-Term

So, what if a drop in the market brings your investments down 15%? If you do not sell, you will not lose anything. The market is cyclical, and in the long run, you will have plenty of opportunities to sell high. In fact, if you buy when the market is down, you might thank yourself later.

Long term investments are always better than short-term trading. Stock market drama such as the recent GameStop case is a good example; where an outdated brick-and-mortar store within a year became a highly valued stock, but a sudden stop in the purchase led to a ruckus in the market. What it indicates is stock market volatility, that you need to keep in mind while investing.

As you near retirement age, you should make sure you have enough money in liquid, low-risk investments to retire on time, and give the stock portion of your portfolio time to recover. Remember, you do not need all your retirement money at 65 – just a portion of it. It might be a bear market when you are 65, but it could be a bull by the time you are 70.

Diversify Your Investments

Without appropriate diversification, the market risk to your portfolio is a lot higher. The goal of diversification is to keep a portfolio healthy, regardless of what the market is doing. If the market does fluctuate, a portion of your portfolio will respond positively and may offset some of the negative impact.

It is therefore wise to use the conservative method to save a fair portion of your wealth.

“It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is way to go.” – Charlie Munger, Berkshire Hathaway.

“Diversification is an established tenet of conservative investment.” – Benjamin Graham.

So, make sure your portfolio includes a system of checks and balances. What is means is not only having a mix of stocks, bonds, and cash in your portfolio, but also a mix of different groupings or sectors where investments are made within each asset class.

I acknowledge that many of these steps are easier said than done. But nobody promised that it would be easy to live a long time and survive multiple significant recessions.

It will take resilience and resolve, but in a crisis, you can find strength that you might not have known you possessed. And it helps to band together with relatives and friends who are in the same boat.

Stay Well! Save Well!