How To Ensure That A Recession Won’t Hurt Your Retirement!

invest

A recession is a period of depreciating economic performance across an economy that lasts for several months (at least 6). Companies will have fewer sales during this period, stocks will fall, and unemployment will rise. Although a recession is a normal part of the economy, many future retirees are worried about their investments, job, and if they need to delay their retirement. Knowing how much risk you can handle is essential to avoiding losses and finding the best strategy that fits your needs.

Let’s ensure you can survive a recession and come out stronger than before it started.

Recession Cycle

A recession is measured by gross domestic product (GDP). The GDP has to drop for two consecutive quarters for a recession to start. 

This is what the recession cycle looked like in the past. 

  1. Inflation starts to go up significantly.
  2. Federal Reserve (US central bank) gets involved and raises interest rates
  3. Inflation starts to slow down
  4. Stock Market pulls back heavy
  5. Recession starts

A recession can make the people who prepared for it break those who didn’t. If you start mentally preparing for a recession right now and put your money in the right places, you can avoid financial hardship. Now is the time to think about your investment strategies.

Consequences a recession may have on the economy:

  • Unemployment rates increase: businesses are more likely to lay off workers, which leads to an increase in the unemployment rates.
  • Consumer spending decreases: People tend to spend less money during a recession because they are laid off or concerned about losing their jobs. 
  • Business investments decrease: businesses are selling less  –>, slowing down the production –> which can lead to even more layoffs.  

How can you prepare for a recession?

1. Save: consider waiting on large purchases; during a recession, prices most likely drop

2. Invest: declines often start before the recession starts and continue during the recession. This is an opportunity to invest and look for quality and essential businesses. Stay diversified. 

3. Skills: companies often lay off employees during a recession, do what you can to ensure it is not you. This will help you get a promotion or a better job in a different sector. If you lose your job during a recession, look for necessary jobs or jobs that would be booming during a recession.

4. Pay-down high-interest debt (such as credit card debt). You will save money on the interest that would be charged.  

5. Review your costs and expenses, determine what is essential, and cut back on things you don’t need. This will free up some extra cash you might need for unexpected costs.  

6. Have an emergency fund in place. This way, you can protect yourself from unexpected expenses and job loss, relieve yourself from financial stress, and give yourself more freedom since it will make you less dependent on financial institutions. Build up your emergency fund to cover at least six months of living expenses.
 

What type of investments performs well during a recession?

Consider your investment goals:

  • Do you want to minimize the risk that the price will go down?
  • Want to maximize your long-term investments?
  • Create passive income?
  • Buy stocks when the prices are low?
  • Secure retirement plan?

1. Real Estate: 

If you go back in time and look historically, real estate has been going up, except for 2008. In 2008 there was inflation, the fed got involved, and there were too many properties built compared to the number of home buyers.

It is the opposite right now. There are more buyers than properties, and people are paying over the asking price. If there is a shortage and a recession simultaneously, the real estate market prices will continue to rise. This would be a good investment during a recession to generate passive income. You could rent out your property during the recession, which gives you a steady income, and sell it for an even higher price when the economy is out of the recession.

2. Stocks

If you notice the cycle of stocks going down for an extended period, a recession could be coming up in the future instead of jumping on the selling bandwagon. You should recognize when this is happening and reorganize your investments in time. Sometimes it is better to do nothing if you have a long-term investment strategy. 

Some stocks do perform during a recession. Our financial advisor could help you make these decisions. The investment sectors below have been performing well during a recession in the past.

  • Healthcare: people always need medical care.
  • Consumer goods: foods, electricity, household items
  • Materials
  • Energy
  • Utilities
  • Communication/information technology
  • Real estate

3. Mutual funds:

Investing in a stock bundle rather than an individual stock could be less risky. If only one company in your bundle is performing poorly, the other companies performing better can compensate for your losses.

4. Dividend stocks:

Can generate passive income. The companies split a portion of their profit with their shareholders. These stocks can have less volatility because many people reinvest the portion they earned into the stock.

5. Annuities

Fixed and fixed index annuities and bonds are less volatile investments. You can also consider a deferred annuity that has a lifetime income rider.

6. Your long-term investments:

Don’t panic when you see your long-term investments drop during a recession. Hold on to your long-term investments. Stick to the investment plan you build and stay diversified. Don’t put all your eggs in one basket.

Long-term investments are most likely able to bounce back in the long term. If you are not confident that your investment plan is set up correctly, feel free to schedule a meeting with our licensed financial advisor.

→ What to look for when buying stocks 

  • High-cap stocks show that the company has more chance to stay stable during a recession. They are most likely well-established companies and have a lower risk of going out of business.
  • Look at the price performance; see how individual stocks performed compared to the market overall over a certain period. Remember that previous performance does not guarantee that it will perform similarly in the future.
  • Determining how much risk you can handle during a recession is crucial. You could end up with losses due to the recession, so make sure to go over your investment plan with or without a financial advisor and adjust your financial plan if needed.

What about my 401K & the recession?

  1. Review your asset allocation to make sure you positioned it correctly for success. You may want to diversify it if you haven’t done that yet. Investing in stocks might be riskier, resulting in high returns and losses, while investing in bonds can give you a more stable but lower return. A stable value fund could be another option. No matter what you do, Finding the right balance that matches your investment style and financial goals is crucial. 
  2. Keep contributing to your retirement funds. Delaying saving/investing for your retirement can leave you with financial difficulties in the future. Try to set a monthly amount that you save or invest wisely.  
  3. Consider a fixed indexed annuity

Everyone has an investment risk number. Use our free risk analyzer tool to find yours. This can help you create an investment strategy that is right for you.

 

This Content being shared is for informational purposes only; you should not construe any such information or other material as legal, tax, investment,  financial, or other advice. You alone assume the sole responsibility of evaluating the merits and risks associated with using any information provided in this post or speaking with a licensed financial advisor first.