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U.S. recession fears are growing, and retirees should pay close attention. Recently updated data revealed that Europe’s economy entered a recession over the winter months. While the economic contraction has so far been mild, Europe’s recession is probably going to get worse before it gets better, as the European Central Bank and the Bank of England both raised rates in June, likely creating more economic distress and exacerbating the cost-of-living crisis.
This has added to the recessionary fears in the U.S.
Retirees often underestimate the potential impact of recessions on their financial well-being. With reduced concerns about job security and a reliance on fixed income sources—many of which can perform well in recessions—retirees may delay preparing for economic downturns until it’s too late. However, recessions can significantly affect retirees’ income and investment portfolios, materially decreasing lifetime income potential.
There are several essential strategies and preparations that retirees should employ to prepare for and navigate recessions successfully. By understanding the potential impact on investment portfolios, making prudent financial decisions, and exploring alternative sources of support, retirees can safeguard their financial stability and maintain a comfortable lifestyle during challenging economic times. But these preparations need to start early. Here’s where to begin.
Protect your investment portfolio
The stock market acts unpredictably around recessions and can drop significantly on worse-than-expected earnings or economic news. Retirees should recognize the potential for market drops during recessions and ensure that their equity exposure is at a tolerable level. Allocating to durable, dividend-paying value stocks can help mitigate the risk of a drop in higher risk U.S. stocks. Consider diversifying globally, if you haven’t already done so, as the growth and recessionary cycles hit different countries and economies at different times.
Retirees should consider investing a portion of their portfolio in fixed-income securities. Fixed income has generally held up better in recessions than equities, but that doesn’t mean the asset class is free of recession-related risks. Retirees should evaluate and potentially pare down exposure to high-yield corporate bonds since defaults generally rise during times of economic distress. Consider the safety of U.S. Treasurys as a potential investment option—U.S. Treasurys still serve as one of the most reliable sources of income during turbulent times. When evaluating the tradeoff between risk and current income, keep in mind that recessions are short-lived, but defaults can be highly damaging to long-term income potential.
Distribution planning should also be strategically defensive preceding and during recessions. When liquidating assets for distributions, consider taking profits from any stocks that have outperformed over the last few years. That should help reduce the risk profile of your portfolio. If you haven’t started already, it may be a good time to begin working with a financial adviser to optimize distribution planning and tax efficiency.
Other ways to prepare
Rebalancing investments is probably not all that’s required to handle a recession. Developing emotional resilience and identifying credible financial resources can help retirees tune out the noise and avoid impulsive financial decisions. Rely on reputable sources of information, such as a financial or tax adviser, to help you navigate the recession and prepare for what’s next. Here are some additional tactics retirees can implement to weather a downturn.
· Decrease and delay personal consumption: If possible, reduce your cost footprint now. Evaluate and cut down your nonessential spending, practicing frugality by prioritizing needs over wants. It can be uncomfortable at first, but tightening your belt sooner can help avoid having to take more drastic measures deeper into your retirement. Delay any purchases that require you to borrow money, if possible, while interest rates are high. As recessions deepen, the Federal Reserve generally cuts rates, which will be a better time to borrow and take advantage of lower interest rates.
· Seek additional income opportunities: If you are able, consider part-time employment to supplement your retirement income, particularly if it helps keep you from drawing down retirement accounts in a declining market. As companies look to reduce their payroll in recessions, they often trim full-time employees and hire part-time employees instead. Take advantage of this opportunity to find a manageable amount of work. Retirees have also accumulated a lot of experience and expertise that can be valuable to offer on a consulting or freelance basis.
· Access assistance programs: There are many different social services that seniors may qualify for based on their age, health, and economic status. These services may include food and housing assistance to help cover the basics; however, these programs can get overwhelmed and backlogged if you wait until the middle of a recession to apply, as millions more may be seeking these services. So, start early and evaluate your eligibility now.
· Grow your social network: A supportive social network is one of the most valuable assets for persevering through a recession. Check in with your family, friends, and neighbors. Is there support you can agree to now in case you or anyone you love falls into tough financial times in the future, such as meals, daycare, or home maintenance? It can be difficult to engage in tough conversations about our financial worries, but keep in mind that your neighbors are probably worried about economic issues too. Approaching difficult times with a community-oriented mind-set can solve many problems in surprisingly rewarding ways.
Retirees need to be proactive in preparing for recessions to mitigate the potential impact on their financial stability. By starting early, shoring up their investment portfolios, and looking at other measures to save or earn money, retirees can weather a rocky market and have the best chance to maintain a comfortable lifestyle during and after a recession.
Adam Taggart is chief executive and founder of Wealthion.
