How retirees and retirement savers can prepare for a recession
1. Save. “Avoid risk if you think a recession is around the corner,” says John Lonski, president of Thru the Cycle, an investment advisory firm. The biggest risk for pre-retirees: losing your job. If you’re working, be sure you have an emergency fund you can tap if the paychecks stop. Financial planners often recommend that you have three to six months’ worth of expenses in your emergency fund.
2. Pay down debt. The money you save in interest can be used to build your emergency fund. And, all things being equal, paying off a credit card that charges 16 percent interest is the same as earning 16 percent on your money.
3. Keep a cash stash. Retirees who are taking withdrawals from their savings should keep about a year’s worth of expenses in cash in their retirement account. (If you’re not taking withdrawals, it’s generally best to wait it out.) Bear markets in stocks typically last about a year. You don’t want to sell stocks when the market is falling unless there’s no other option. If your stocks are down 10 percent and you withdraw 5 percent, your stock portfolio is down 15 percent.
4. Stay safe. Most cash options pay little to nothing in interest. Money market mutual funds, a typical cash option in brokerage accounts, currently pay 1.38 percent in interest, the Federal Deposit Insurance Corporation reports. That’s not much, but it’s better than a 20 to 30 percent loss from stocks in a bear market. If you take cash withdrawals from your retirement account during a bear market, you’ll give your other, riskier investments time to recover.
5. Sit tight. Sooner or later, you’ll be tempted to buy stocks while they appear to be cheap. Take your time going back in. Keep in mind that by the time the NBER has officially declared a recession has started, it’s probably near the end. After all, economic data usually lags, particularly GDP. The average recession lasts about 10 months, and the NBER typically needs about nine months to collect all the data it needs to declare that a recession has started.
