3 Tips For A Recession Proof Retirement
It's January 23, 2023 and all the media pundits are trying to predict a recession as if they have any idea about anything at all. In my opinion, and by definition, the American economy was and is already in a mild recession. Let's define what a recession is and what the Gross Domestic Product is and what this means to you. Then we will talk about tips to help you through a recession. And before we start, I urge you not to panic. Recessions are common and often they are exactly what can cure a struggling economy. They are NOT to be feared!
What is a recession and what is GDP?
Let's define the terms recession and Gross Domestic Product because chances are you are going to hear these terms, if not in the next few days, then at some point in the future.
Recession- Two consecutive quarters (6 months) of negative Gross Domestic Product (GDP) growth. Remember this already happened in 2022.
Gross Domestic Product- The total value of goods produced and services provided in a country.
When GDP is negative, that is a sign that the economy, for lack of better words, is sick. Numerous things can cause this and without getting political, it's been caused by bad policy and bad politicians on both sides of the aisle. So what should you do?
Three tips for a recession proof retirement
1. Have an emergency fund. If you are retired, a good rule of thumb is to have 2-5 years of cash on hand to weather a recession. This will keep you from borrowing money and/or panicking when the market takes a temporary dip.
2. Live within your means. If you make it a habit to live within your means each and every day during the good times, you are less likely to go into debt when gas or food prices go up. Debt begets more debt when you can’t pay it off right away. If you think gas prices are high, wait until you’re paying a 30% annual percentage rate (APR) on them by fueling up on a credit card.
3. Invest with a plan and for the long term. So what if the market drops and brings your investments down 20%? If you don’t sell, you won’t lose anything. The market is cyclical. It always has been and always will be. However, if you stay calm and stick to a plan you will win in the long run.
That being said, as you near retirement age, you should make sure that you have enough money in liquid, low-risk investments to retire on time and give the stock portion of your portfolio time to recover.
Remember, you don’t need all of your retirement money at age 66—just a portion of it. It might be a bear market when you’re 66, but it could be a bull market by the time you’re 70.
Did you know that if you hold a S&P 500 mutual fund for 10 years, you have a 99.5% chance of a positive return? And typically that return is 7-10%.
Are we going to have a recession or are we in a recession already?
Here is what we know right now:
- A recession is either coming or it's not. When you get out of the market in contemplation of a recession, you have set the probability of it happening at 100%. Can you really be that sure of anything?
- If a recession comes, there is no reliable way to predict when it will begin, how deep it will go in terms of a peak-to-trough GDP decline, nor when it will end.
- Wait, it gets worse: there is absolutely no reliable correlation between the onset of a recession and an equity market top. Nor between the end of a recession and a market trough.
- If anything, the stock market tends to hit bottom well before the recession ends—and very long before the Government confirms that the recession is over.
- Once again, we find that the economy cannot be consistently forecast, nor the market consistently timed.
It's times like these where having a plan in place makes all the difference in your retirement. At 80/20 Financial Services, we don't question if it's going to rain at some point, we plan for the rain we know is coming.
You need a plan
A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services our specialty is retirement planning for electric cooperative employees within 5 years of retirement or already retired.
Our mission is to make sure you never run out of money in retirement while paying as little income tax as legally possible.
Contact us for any general questions.
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