We love to run our numbers through Monte Carlo retirement calculators because nothing causes a retirement bummer like money trouble. Who doesn’t like the feeling of using historical investment cycles to validate our retirement plans? But another historically repeating economic cycle is often forgotten, especially when things are looking so good. It’s the dreaded “R” word- Recession. Chances are that we will have the displeasure of going through some recessionary periods during our retirement. They come in different flavors and can strain both our portfolio and well-being regardless of what the calculator results said. It’s a common retiree fear. That’s why I have thought lately about what it takes to have a recession hardened retirement. I believe it’s impossible to be totally recession-proof because anything can happen. But hardening our retirement to resist a recession’s damaging effects to our overall retirement into the future is worthy of looking at.     

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What We Can Do For A Recession Hardened Retirement

There were plenty of lessons learned after the Great Recession that is officially listed as lasting 1.5 years from December 2007 to June 2009. All I can say about that is the Great Recession’s official end was nowhere near the breakeven point for our portfolios, the job market, or anything else.

A quick look at Dow Jones Industrial numbers shows it at 13264.82 on December 1, 2007 before going into an extended free-fall and didn’t get close to that number again until December 1, 2012 at 13101.14.

The S&P 500 in December 2007 was 1468.36 and didn’t approach that number again until January 2013 with 1426.18.

Stock Market recovery took 5 years before reaching breakeven. That’s 3.5 years after the recession’s official end of June 2009.

List of recent history’s recessions and their official lengths:

By looking at our history of other recessions we also get a quick glance at recession frequency. I’m sure if we took a deep dive into investment loss to recovery, it took much longer to reach portfolio breakeven than the recorded official recession timeframes.

• Roosevelt Recession 13 months: (May 1937 – June 1938)
• Union Recession 9 months: (February 1945 – October 1945)
• Post-War Recession 11 months: (November 1948 – October 1949)
• Post-Korean War Recession 10 months: (July 1953 – May 1954)
• Eisenhower Recession 8 months: (August 1957 – April 1958)
• Rolling Adjustment Recession 10 months: (April 1960 – February 1961)
• Nixon Recession 11 months: (December 1969 – November 1970)
• Oil Crisis Recession 16 months: (November 1973 – March 1975)
• Energy Crisis Recession 6 months: (January 1980 – July 1980)
• Iran/Energy Crisis Recession 16 months: (July 1981 – November 1982)
• Gulf War Recession 8 months: (July 1990 – March 1991)
• 9/11 – Dotcom Recession 8 months: (March 2001 – November 2001)

These lessons play a part in a recession hardening retirement strategy.

Lesson #1- Investments can fall for a long time and take even longer to recover. When it comes to retirement, portfolio recovery is what really matters to retirees.

Lesson #2- Stay invested no matter how bad things look, and by March 2009 of the Great Recession it looked really bad. Markets do eventually recover and those who fought the urge to run eventually ended up whole.

Lesson #3- When income and portfolios get slammed, debt still needs to be paid. Thinking you can sell leveraged assets during a recession to cover your keister is near impossible when nobody is buying anything that isn’t extremely discounted.

Lesson #4- Investment diversification reduces risk but won’t eliminate risk. Every asset class – stocks, bonds, housing and commodities all took massive hits. But not all at the same severity.

Lesson #5- Experts really don’t know everything. Most dropped the ball in calling the Great Recession. Recessions seem to come from some financially linked dirty corner that isn’t regarded as being economically dangerous until it’s too late.

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Preparing For The Best WHEN The Worst Happens

Defense Wins Championships

Everyone loves to score. Having investments gain in value gets all the attention and makes us cheer. But a recession can also score big numbers against us if we don’t have a good defense. Concentrating some of our resources on defense may lower what we score during good offensive runs, but it prevents the opposition, in this case a recession, from out scoring us. The goal is to win.

The Need For Cash

Having a portfolio full of cash isn’t going to earn enough to keep up with inflation. But having enough cash to get through a recession and spare us from selling too many stocks or bonds at a big loss is a good defensive move. If Social Security and other guaranteed income like a pension or annuity pays all or most essential retirement living expenses, then less cash is needed for a recession hardened retirement. For retired people like myself with several years to go before Social Security, the portfolio carries the entire load. Having enough cash to play portfolio defense is a hardening move and is also an important element of a retirement bucket strategy.

How much cash to hold depends on your portfolio size, the amount of your retirement budget that depends on the portfolio, your age, and your risk tolerance guided investment allocations. You do not want to over play your cash defense. You still have to score points by investing to win the long game. I recently increased my portfolio cash holdings for various reasons. I took it to an amount that still allowed overall portfolio performance to meet my retirement funding needs. As it turns out, it also recession hardened my retirement portfolio. Always run your numbers through a good retirement calculator. Adjust your cash holdings for the right balance of defense and offence to meet your long-term and recession hardening strategy.  

The Need For Investment Diversification

While stocks score all the points when they have opportunities to score, not all stocks are the same nor move in the same lockstep. Broad diversification in stock asset classes across different industry sectors reduces risk. Bonds also play a huge role for portfolio diversification. Not only for their fixed income (although usually unable to outpace inflation), but they offer lower volatility than stocks. Bonds were still hit during the Great Recession but not as severely as stocks. According to the Allegiant: Minimizing Portfolio Losses: Lessons of Diversification July 2017 study, diversified stock and bond portfolios recovered faster after the Great Recession than an all stock portfolio. Since having a diversified portfolio should recover faster it reduces the amount of portfolio defensive cash needed to wait out post recession portfolio recovery in our recession hardened retirement plan.

Great Recession Diversified Portfolio Recovery Details

Stick To Your Investment Strategy and Stay Invested

One of the biggest investment risks we face during a recession is behavioral risk. Everyone behaves differently in a crisis. A recessionary financial free-fall certainly triggers crisis behavior. Trust in your plan and stick with it. Don’t allow your emotions about current events dump it. Selling low is a sure way to feel the pain of a recession for years to come.

Whatever your plan’s stocks/bonds/cash asset allocation was set for, make sure to rebalance on a regular basis. During the Great Recession, stock vs bond allocations required rebalancing. This not only maintained our plan’s allocation positions but we benefited for the long run by moving our higher flying bond assets into the depressed price stock market.

Avoid Debt and That Other Debt, Service Contracts

In a booming economy when everything looks so good it’s easy, even for retirees, to take on easy money. Taking a defensive mindset thinks first that borrowing money that looks affordable now may not be if a recession hits. Debt limits our budgeting options and can be difficult to clear. It isn’t just the standard new car loans or charging a vacation that should be avoided. But also those 2 year interest free home window replacement, kitchen update, or flooring deals you want to go with.

There’s also those internet, cellular, and cable/satellite TV contracts that will still be binding if a recession hits. It’s ok to grab these deals, but only if you have the cash reserves to clear them or could have paid cash for whatever it is you feel you need in the first place. It’s easier on our portfolio and our mental state to get through a recession when all we have to concentrate on is our day-to-day living costs instead of paying debts from yesterday.

Create A Rescission Hardened Retirement Plan during the Good Times

The time to rebalance to get the diversification and cash allocation to fulfill our recession hardened retirement plan is before the feces hits the fan. Experts won’t tell you with any advance when a recession is coming. Take profits and make your portfolio rebalance before you need to. Once the experts admit we are headed into, or already in a recession it will probably be too late.

Stacking An Offensive Bench

Anything can happen and recessions are seldom the same. Since their severity can be anything from mild to “OMG” the worst in history, having some additional offensive plays is something to consider. If our defense begins to struggle against a recession onslaught we can do things to add a little more scoring power to our offence.

Additional Income Streams

Picking up extra income through a retirement job should be on the table. As we learned in the Great Recession, when companies were dumping employees left and right, finding a job was difficult. It took great time and effort. It’s important to maintain our professional network and connections. I landed my encore career during the Great Recession’s recovery through LinkedIn. Staying in contact and active within our professional/social circle can be a huge advantage. We should also gain and maintain payable skills we wish to use. Another option is starting a side hustle working for ourselves. Starting a small business or contracting is another way to make and offensive move, from Lyft/Uber to handy-person services. Passive income can also come from renting out a room in our home.

Make Adjustments To Our Cost Of Living

Most retirees I know have already cut waste from their lifestyle. However, there is always places to scale back to reduce our living costs to better match our recessionary income needs. Choosing to make temporary budget cuts to our hobbies and other perks of retirement should be on our offensive bench. We can always add them back in once a recession and financial recovery is complete.

Everything here are things retirees should consider doing regardless if there’s a recession threat or not. In using a recession as a way to visualize and test for the worst economic situation that will happen during our retirements, we can see how our retirement plan holds up. It’s all about creating a retirement plan that we can be confident will last as long as we do.