Many people are growing worried that the United States is headed toward a financial downturn. While this is a bad situation for anyone, it can prove particularly stressful for people who are retired since they are on a fixed income. Often, retirees already live on a budget, so preparing for a financial downturn can seem impossible. At the same time, there are things people who are retired can do to protect themselves from a recession. A little bit of preparation can help give you more of a cushion with your money, which can ultimately ease a lot of the anxiety that comes along with a financial downturn.
Making Sure Your Emergency Fund is Adequate
One of the most important things for retirees to do to prepare for a financial downturn is beef up their emergency fund. After all, a recession is an emergency in a lot of ways, so increasing that cushion is a very good place to start. If you do not have an emergency fund, you definitely need to create one. If you already have one, it is important to make sure that it is commensurate with your retirement budget. Ideally, you should have enough money in the fund to cover at least three to six months’ worth of expenses. Be sure to create a separate account for the emergency fund that it is protected from the rest of your money and to reduce the temptation of dipping into it.
If you are building the account from scratch, do not get overwhelmed by the amount of money you need to save. Start small and make achievable goals. Achieving these goals will help you to see progress and keep you motivated to save. Continue to set larger goals until you finally hit the six month mark. To build the fund, you may need to tighten your budget so that you have money left over each month. Of course, you can also consider working or doing other things to make money while retired. Bringing in additional income is a fast way to build the fund and can be a great choice when you feel the pressure of time.
Once the fund is there, don’t hesitate to use it for true emergencies. This will help you weather the storm of a recession. Whenever possible, be sure to pay the fund back.
Evaluating and Changing Your Debt Burden
After creating a substantial emergency fund to protect you during a recession, the next thing to think about is your personal debt burden. During a financial downturn, many things will be outside of your control, but personal debt is not one of them. Paying down your debt can help reduce the financial burden on you during a recession, especially if you are able to eliminate some of the debt altogether. Reducing debt is one of the most effective ways of controlling risk. This includes credit cards, mortgages, student loans, and more. When fixed costs are high, the variability of returns during a recession can prove very stressful. If your fixed costs are low, then the pressure is much less.
Focus on high-interest debt first. You may want to put all of your extra money toward a particular debt instead of spreading it out to help eliminate it as quickly as possible. Once it is eliminated, you can focus on other debt. Obviously, having fewer fixed bills increases your flexibility in retirement, and this is especially true during a recession. By eliminating these monthly expenses, you may be able to protect yourself from needing to make major sacrifices or from digging into your emergency fund prematurely.
Adjusting Your Spending During a Recession
Once a financial downturn happens, you will likely need to make some serious changes in your spending. Cut back on your expenses as much as possible. Think about your entertainment budget and if you can potentially reduce it. Consider your subscriptions and think about if you really need them. Look closely at things like your cell phone plan. Often, you can go to a cheaper plan without significantly impacting your quality of life. Start making your meals at home and reserve dining out for very special occasions. Pursue the changes that make the most sense for you. Try to avoid making a life that feels pressured or strained but also make sure there are no non-essential expenses.
Depending on your situation, you may need to make very drastic changes to your expenses. For example, you may need to move to a smaller living space that costs you less money. If that is not an option, consider refinancing your mortgage at a lower rate if you still have one. You may want to sell your vehicle and depend more heavily on public transportation or simply replace an expensive car with a more affordable one. Think about your retirement savings contributions and if you can sustain them. If you need to cut back on your savings for a period of time, do so.
Reduce the risk levels in your investment portfolios
Recessions knock the stuffing out of stocks and many bonds, so mutual funds, or ETFs that hold them can also suffer greatly in an economic downturn. While no one likes or looks forward to declines in the markets, they do occur regularly, and can be prepared for. A down cycle in the stock or bond market is called a “bear market”. Over the past 100 years or so, in a typical bear market, stocks fall 40%, and these bear markets occur every seven years or so, on average. The last two bear markets, in 2000-2002, and 2008-2009, saw the major market index (the S&P 500) fall 49-52%, respectively. Several prominent and highly regarded analysts and money managers are concerned that the next bear market may be worse than a 50% decline, because nothing was really fixed, or corrected in the last market crash-in late ’08 and early ’09.
So, getting a majority of your funds our of the markets near all-time highs, and before a recession is generally acknowledged may be wise, and preserve a lot of capital, and provide some peace of mind. While history shows that the markets “climb a wall of worry”, history also shows that if you suffer through a deep bear market while taking income from that portfolio to live on, it can be very difficult, if not impossible, to recover from. Don’t let the “pie chart” people at all the big-name brokerage or mutual fund companies talk you out of selling, and reducing your risk levels a lot. They get paid by keeping your money in the pir chart. They are never going to tell you to sell, or even significantly reduce your risk levels. They are always going to tell you to “stay the course” or “ride it out” because “the markets always come back”. The problem is, is that this is terrible advice, and can cost you a secure retirement, and lots of peace of mind. The truth is that while no one can time the top or bottom of the market, per se, it is quite possible and even obvious when markets are expensive and defying gravity, or too cheap, and reflecting only fear and pessimism. There are times when you should NOT be buying that condo in Miami or Vegas, for example, or bonds, or stocks, etc.. There are times when it is best to be in more of a “preservation of capital” mode, than the more usual “pursuit of long-term growth” mode. If the brewing recession is becoming more obvious ( like right now) , and you feel that you could not “ride it out” for 5-15 years ( if it took that long to recover ) while still possibly taking funds out of the portfolio to live, then it is best to protect more of that capital base, and get through the storm intact.