Retiring in a Recession
July 13, 2022
Recession is a scary word. It may not be as scary as “depression”, but it’s still scary. In fact, the main reason economic downturns are called recessions nowadays is because the word depression carries some unwelcome connotations and the main reason the word “depressions” were used was to replace words like Panic! and Crisis!. There is no formal definition for “depression” in economics, though the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) has the honor of being the official namer of recessions and recoveries. The NBER uses a whole lot of factors to identify what is a recession and doesn’t solely rely on GDP as a measurement.
I’ve written about how bear markets are normal and unfortunately the same is true for recessions and wide-spread economic contraction. Recessions bring stress, uncertainty, and fear while they also bring opportunity. There is a great need to combat the (very normal) emotional reaction to the volatility that happens during contracting markets, and that need is even more amplified if the goal of retirement is quickly approaching. With that in mind, here are some (hopefully) helpful thoughts and ideas to consider when retiring in a recession.
As is often the case, a little understanding of history can put things into perspective and help to serve as a reminder that the wisdom of Solomon also applies to markets and economies. There is indeed nothing new under the sun as the Preacher explains in Ecclesiastes 1:9, so when worrying and planning for the future it’s helpful to remember that.
The original “great depression” happened all the way back in 1873, lasted 65 months, and was referred to as such until the next big one came in 1929. That original depression was arguably the harshest and it caused the stock exchange to close for 10 days. The Great Depression of 1929 lasted 43 months and was so bad that polite society decided to stop calling anything afterwards a depression, but many recessions still happened after that.
Using data back to 1857 the average length of a recession is around 17 months, but the post WWII era has a much shorter duration of recession; averaging around 11 months. The average time between recessions since WWII is about 5 years. The shortest recession in history is in recent memory: the Pandemic Recession, and it only lasted 2 or 3 months (with ripple effects still having an impact as of the date of this writing).
Recessions and even depressions are a normal part of economic cycles and if we don’t recover from the next one it will be the first time in the history of the United States that has happened. Using history as our guide we can expect that the next recession will be unpleasant, but that it will also probably be survivable and may even be a blessing.
When investing in the market(s) whether stocks, bonds, or real estate, there is one unifying principal: don’t jump in and out. One of the best times to invest cash has been at market and economic bottoms, but it’s extremely hard (maybe impossible) to time that out perfectly. There are merits to pushing available cash into the market in rough patches like Warren Buffet does, but there are much greater risks in trying to time when to move out of investments and into cash. Josh Brown of “The Reformed Broker” put it this way last week:
Who wins? The person who does the least.
The person who does the most always loses. Despondently bullish on Tuesday, hopeful on Wednesday, bearish again by Friday, buying on green, selling on red, mood changing with every day’s narrative, chopping yourself up at every twist and turn – this is how you can take a bad situation and make it ten times worse. I don’t recommend this sort of behavior. I’ve never seen it work.https://thereformedbroker.com/2022/04/29/its-less-complicated-than-you-think/
If retirement is incoming, the last thing you want to do is try to get cute with your investment strategy right when volatility is ripsawing through your portfolio. Staying invested, diversified, and patient is the best way to maximize your results through recessionary periods. If you feel like you must do something then put some more of your cash to work in the market, or use it on the next idea…
This is a bit of a no-brainer, but worth mentioning. Spending less means keeping more money and keeping more money is very heavily correlated with having more money. A great use of extra cash it to pay down high interest debt while in a recessionary period. Not only will that stop the incessant compounding of interest that increases liabilities, it frees up monthly cashflow that was previously being sent to creditors. Paying off an 18% interest rate credit card can be similar to an 18% market return when it comes to a personal balance sheet.
Aside from paying down consumer debt, cutting back on luxuries while in a recession is a normal (sometimes absolutely necessary) method to deal with the uncertainty. Humans have a very hard time imagining what life will be like in the future, but by realistically looking at how much can be cut from monthly spending we can increase feelings of security. This is where cutting out the daily cappuccinos can actually come into play. In a crunch beans and rice sustain us just as well as steak and scallops. Dialing back cost of living expenses is a really easy lever to pull in case of a financial emergency. Some of us have experience using that lever already (remember being newly married and broke??).
Lifestyle creep is a real thing, and if left unchecked can run rampant and out of control. If you want to be able to retire in a recession having a handle on expenses is vital. If you can be content with waiting to live the high life for about a year (on average) through a recession then you can likely continue with your retirement plans.
There is absolutely no shame in “un-retiring”. Those skills that funded the 401(k), IRAs, and brokerage accounts, the knowledge and expertise that put kids through college and kept food on the table, the determination and work-ethic that bought a house and started a business are ALL still there.
It’s not the end of the world to have to supplement income with part-time or even full-time temporary work. In fact, this is a large portion of many people’s legitimate retirement plans. It’s a good idea to not just retire and wait to die playing golf anyway, since we exist to love God and our neighbor and it’s hard to do that while selfishly living the last 30 years of life. So why not consider working again if anxious about retirement?
You may not even need to keep working, but if you’re scared about retiring in a recession just remember that you have the option of working again available to you. Especially right now when so many companies are looking for workers with skills that you probably have in spades.
Often bear markets and recessions cause pre-retirees to keep working because they have grand plans for a family Hawaii trip or European vacation that is supposed to mark a grand finale to their working careers. There’s nothing wrong with that! However, a simple way to continue on with the retirement plan is to wait to make big spends out of invested assets while in a downturn.
Ideally, there would be plenty of cash available in anticipation of the big spend, so plans aren’t derailed. In fact, a recession can be a blessing if you were planning to buy a home, build an addition, buy a car, or travel soon. A big impact of recessions are drops in prices of all of those things as consumers focus on not losing their house and feeding their families. If you have the cash, it’s a benefit (to you) that the economy is resetting.
If you don’t have the cash and would have to tap into investments at a depressed value, then the best answer is to simply wait. Be patient. We know that every recession so far hasn’t been permanent (and if the next one is we’ll have bigger problems) so the best answer is to just wait for values to recover and get back on track with the plan.
My pastor often tells me a story of a really, really rough time in his life. Death, job uncertainties, failures, and all of that stuff was going on and he was bearing his soul to his pastor at the time. After all of his exasperated venting and emotional unloading his pastor looked at him and said “You know what your problem is? You don’t trust Christ. You need to trust Christ”.
What an infuriating thing to hear in the midst of sorrow and pain and uncertainty! But it’s true.
Surely there are more compassionate ways to put it, and we always feel like our situation is more complicated or unjust and requires a more delicate and articulate answer. But it is that simple.
Put a real perspective on your worry and trust Christ.
25“Therefore I tell you, do not be anxious about your life, what you will eat or what you will drink, nor about your body, what you will put on. Is not life more than food, and the body more than clothing? 26Look at the birds of the air: they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they? 27And which of you by being anxious can add a single hour to his span of life?g 28And why are you anxious about clothing? Consider the lilies of the field, how they grow: they neither toil nor spin, 29yet I tell you, even Solomon in all his glory was not arrayed like one of these. 30But if God so clothes the grass of the field, which today is alive and tomorrow is thrown into the oven, will he not much more clothe you, O you of little faith? 31Therefore do not be anxious, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ 32For the Gentiles seek after all these things, and your heavenly Father knows that you need them all. 33But seek first the kingdom of God and his righteousness, and all these things will be added to you.
34“Therefore do not be anxious about tomorrow, for tomorrow will be anxious for itself. Sufficient for the day is its own trouble.https://biblehub.com/esv/matthew/6.htm