With ongoing trade wars, upside-down yield curves, and slowing global development and economic growth, it’s essential to understand how you can prepare for a recession. When will happen doesn’t matter. What’s important is you’re ready for it in terms of financial planning.
So how do baby boomers plan for a recession in order to enjoy their retirement despite the unfavorable economic conditions?
What Is a Recession?
Before we discuss the main topic for this article, let us first understand what recession is, and how it affects you as a retiree and your life as a whole.
Recession refers to the significant decline of an economic activity that lasts for several months. Typically, it’s visible in industrial production, employment, real income, wholesale-retail sales, and real GDP.
It starts when the economy has reached the limit of activity and lasts until the economy has reached its trough.
In general, recessions are considered a deceleration of an economic activity that is measured by gross domestic product. They can last for two successive quarters or even longer, depending on specific measures.
There are various factors that policymakers and economists use to determine when economic activity slows down or when the economy is at risk. This helps them identify potential actions to manage financial issues effectively.
How to Protect Yourself in a Recession
Recessions are usually a part of economic cycles. No one can predict when it will exactly happen, but you can protect yourself during these trying times. Consulting a financial professional can help you create a feasible plan.
Having cash and going all-in on a market dip is only two of the most common ways people do to protect themselves during a recession. However, the best way to prepare for the unexpected is to have a plan.
For businesses, this is essential in managing cash flow, expenses, and inventory. But for retirees, having a sound financial plan helps to navigate the ever-changing economic environments.
Whether you’re near retirement age or already retired, a plan makes sure you won’t make rash decisions that can affect your retirement negatively. You need a specific plan that is not focused on predicting recessions.
Instead, your plan should acknowledge that a recession will eventually happen in your retirement. The type of plan you need to make is an action plan in order to determine what you should do or not do to remain financially stable.
The best plan should be modeled out of your expenses and income over certain market conditions. It should also provide tips when you have to adjust your investments and reduce spending.
You will know what actions to take once the financial metrics go down your established threshold amounts. However, it’s essential to understand that this plan doesn’t mean that you’re entirely protected from a recession.
Your recession plan will only help you in terms of the actions that need to be taken when it happens. Also, such preparation will provide you with enough savings to spend in case of a prolonged recession.
For instance, if you’re predisposed to long-term investing, you might benefit from leaning toward 48 percent in secure investments. Perhaps you’re planning to cover your first five years of withdrawal that will cover the gap in order to take advantage of maximum benefits from Social Security.
If a bear market occurs, you can enjoy safe investments, depending on how many years you are covered. This will also provide you enough time until the economic cycle goes back to normal.
With an action plan, you won’t easily get affected by the headlines in a recession. Regardless of account types, home equity, taxes, and other income sources, your financial plan will align your resources and investments with the specific job they should accomplish for you.
Most importantly, an ideal plan includes a well-structured strategy that will allow you to manage the cycles of contraction and expansion. After all, nothing is permanent, and anything can significantly affect your finances.
Why Having Cash during a Recession Helps
After the Great Depression, the United States experienced 13 recessions that mostly lasted less than a year. The aftermath of each recession, however, gave varying impacts – some were longer-lasting while others only lasted for months. Still, each one resulted in substantial financial losses.
Regardless of how long the recession lasted, it certainly caused permanent financial damage to people who were not prepared. If you want to recover from any financial trouble easily, build a plan today.
Otherwise, you might also suffer the fate of the millions of Americans who were not able to recover from the Great Depression. So, how does having cash help during a recession?
Saving money for your retirement is the best way to live comfortably in your senior years. Therefore, it’s important to consider preparation for recessions using your income.
Baby boomer retirees probably have a minimum pension or none at all. Social Security also doesn’t cover all the living expenses that you might have in your retirement.
But if you make regular payments on your Social Security, it can help provide a better income stream in the future. It’s best to have an inflation-adjusted annuity in order to meet your financial needs as a retiree.
Typically, income security for recent retirees is about cash. Over time, you will decide to sell your investments to earn money for your living expenses. But if you have enough cash, you won’t have to sell your assets during a recession.
The question is, how much money do baby boomers need in order to prepare for a recession? If you want to survive a bear market, the ideal amount you need to save is three years’ worth of income.
On the other hand, you need a more significant amount in order to outlast a recession or depression. For instance, you may require up to 10 years’ worth of cash as well as some conservative investments to live comfortably as a retiree.
To hold the value of your money in a downturn, you need to have liquid assets. You can also diversify your financial portfolio by investing in gold, short term bonds, and other investment tools.
How Long Will the Next Recession Last?
How prepared are you when a recession hits? Taking some steps in advance to protect yourself from a downturn is essential. To best prepare for an economic turmoil, you need to understand how long recessions last.
The end of recessions is determined not by the economy’s full recovery to pre-recession levels, but when economic growth returns to normal. This only means that those who were affected may continue to struggle after economists have announced that the recession has ended.
Let’s look back to the time when the United States struggled with a mild recession from 1990 to 1991. It lasted for about eight months and resulted in a 1.4 percent GDP decline.
However, even after the economy went back to its normal economic activity, people still suffered from unemployment, which peaked at 7.8 percent as it continued to affect the country for 16 months. The recession was over, but the prolonged aftermath was still felt.
In the early 2000s, the trend remained the same when the recession led to another peaking rate of unemployment. It lasted for more than one year after the recession has technically ended.
The Great Recession and the rise in unemployment only prove how long people will struggle after a recession. It can last as long as job losses continue to affect many lives, especially the near-retirees.
While the economy gained back its course in 2009, the rate of unemployment peaked after four months. According to economists, that is a quick period for the unemployment rate to reach its peak and go back to create jobs again.
However, despite the return to job creation, the rate of job losses significantly peaked at 10 percent – double the rate at the beginning of the recession.
Unfortunately, unemployment remained at 9 percent for two years. It did not return to a 5 percent pre-recession rate or below in 2015. In other words, the slow recovery of jobs took six years after the recession technically ended, making the Americans struggle the most.
Based on the data presented by the Federal Reserve Bank of St. Louis, the median household income of Americans dropped to 10 percent after the Great Recession. The underemployed took jobs that offered lower pay than their work before the recession.
If you’re a retiree, how far can you stretch your savings until the recession is over? Do you have enough cash to spend during the recession and keep your savings for retirement? Preparation and planning can help you outlive recession when it comes.
Is It Good to Buy a House during a Recession?
Perhaps, you’re asking if seniors’ housing is recession-proof. Well, there are a few crucial factors to consider before you can say that a property is protected from a dwindling economy.
There’s no such thing as recession-proof home, but it’s a great bet. You just need to weigh in the best options and take advantage of the market before you move in.
Like any other real estate market, senior housing is also affected by the slowdown of construction and the rising costs of materials and labor. And today, it’s also important to know that lending parameters have become stricter than ever.
But don’t worry because there’s still some good news you need to hear. According to the National Seniors Housing Research Report, the slowdown makes the demand and supply catch up and benefit each other.
Also included in the report, senior housing significantly increased by 8,400 units from the previous year, with 12,100 units built. Presently, there are 24,000 units to be developed, which is 9.9 percent of the current inventory.
The report also revealed that the demand for the first quarter was down at 87.9 percent compared to the previous year. With the increasing rate of development, occupancy is foreseen to rise as well. The first quarter reported a stabilized occupancy of 90.4 percent.
The majority of the aging population is leveraging higher home prices in preparation for their retirement. It’s fueling the demand, particularly of the new retirees housing segment. Now, does the growing demand make your home recession-proof as a retiree?
The most straightforward answer to that question is there’s no absolute control over your assets and properties during a recession because rates are fluctuating. However, experts give assurance to seniors that the housing market is favorable for them despite the adjustments going on in the economy.
Since recessions don’t last more than two years anymore, unlike the Great Depression in 1929, the loss of consumer confidence, higher unemployment rates, higher interest rates, and falling stock prices are all reasonable times for you to invest in real estate.
However, make sure to understand the advantages and disadvantages of buying and selling homes before you decide to make a purchase. If you’re not sure, you can always work with a real estate consultant to help you plan your investments.
Now, what are the benefits of using a reverse mortgage to buy a home as a retiree? There are key pointers if you want to buy a home in a housing recession.
Forget about how low the prices of properties can go during a recession. Instead, focus on how much you can afford before the prices go up. Holding on and riding out means getting the best price in the market.
If you’re planning to buy a home during a recession, there are some advantages you can get. For instance, sellers won’t give high prices for their properties because of the depressed market.
Moreover, you can benefit from a reverse mortgage by borrowing equity instead of paying to a lender. Meaning, the lender is the one to make payments to you as the borrower through a lump sum, monthly, periodic, or a combination of these.
If you’re at least 62 years of age, you can qualify for this type of mortgage. All you need is to provide adequate equity in your home. Usually, 20 percent of equity is not enough, so you need to make sure you’re in a good position before applying.
Once you have provided enough equity, your existing mortgage is automatically paid off, your FICO scores don’t apply anymore, credit history becomes irrelevant, and deferred maintenance is required if it’s necessary.
How much you need to pay for a reverse mortgage depends on your lender, loan type, and third-party vendors. Be sure to get educated on the products available and speak to an exclusive reverse mortgage professional when possible.
The payments you make for your reverse mortgage cover the insurance premiums, lender fees, loan points, and the closing costs. You can borrow an amount based on your age, and the remaining equity after the existing mortgages are paid off.
To learn more about this highly misunderstood type of mortgage see our article called, “Reverse Mortgages are a Powerful Retirement Tool.”
Should You Prepare for the Next Recession?
Recession warnings usually come from banks. Do not ignore them, especially if you’re retired. Economists are expecting another global recession as the risk is high and rising.
The following are some helpful tips to prepare for the next recession:
- Don’t panic. Focus on the things that are within your control. Review your savings, investments, and spending. Also, look at your cash on hand and see if it can last until the recession is over.
- Build an emergency fund. According to financial experts, building an emergency fund should cover six months of your living expenses. However, during an economic downturn, the average period of joblessness is one year or so for people aging from 55 to 64.
- Spend wisely. If you’re building your retirement savings, create a monthly budget so you won’t be spending more than what you can afford. You can make adjustments to make room for more essential expenses or cut back on some items you don’t need.
- Diversify your portfolio. Aside from protecting your portfolio, you also need to diversify it. Know where you can put your hard-earned money so it will provide you with sufficient funds during retirement. Some experts advise Roth IRA and Roth 401(k) for more benefits.
So, is your retirement nest egg ready for the next recession? There’s nothing to fear when you’re prepared for the worse. If the economy gets smaller, tap on your investments, and cut back on your expenses.
But if you’re a wise baby boomer, you can retire comfortably with a protected portfolio and diversified investments aside from your retirement savings. After all, investing in the future is the best way to survive recessions, mild or severe.
Considering your time horizon is the first step in building a recession survival plan. Young professionals have a longer time to prepare for their retirement, while near-retirees only have limited time.
When you’re retired, it’s a struggle to recover from a recession, and even more difficult if you’re not prepared. So for the next downturn, you can shift your assets into cash or short-term investments in order to fund your retirement.
Remember, a recession means loss of income, especially during retirement. The more you prepare, the better you can outlive the recession. Now, can you confidently say that you’re recession-proof?