Retirees imagine their post-working lives relaxing in the shade on their comfortable porch. The view before them glistens with the fresh growth of green. The sweet light of the morning sun warms the dewy grass. They’re happy, at ease, and totally unfazed by economic headlines.
And they wouldn’t be wrong.
Unfortunately, far too many people—retired or not—seem to prefer to listen to the shouting heads on cable TV rather than their own common sense.
What a difference a few months (and a new president) make. A Deloitte report issued in late January predicted the 2025 GDP would come in at 2.4%. Even in the worst case, Deloitte felt the 2025 GDP would come in at no less than 1.6%. A recession requires a sustained period of negative GDP.
By the second week of March, Time Magazine was instructing its readers, “How To Prepare For A Recession.” At the same time, with more of a blunt flair, Dow Jones’ MarketWatch ran a story under the headline “‘Is it finally time to freak out?’ I’m in my 50s and worried about the $650K in my 401(k).” And if you needed elaboration, its subhead read, “‘Recession is in the air. The stock market is in a downward spiral.’”
Who could blame you if you’re not frightened? Having not experienced one in over fifteen years, we’ve built up recessions as something alien, something scary. And they can be, especially for those facing the challenges of retirement. A falling stock market only intensifies the anxiety.
“The greatest risk is if a retiree needs to sell investments at a loss to cover living expenses,” says Chad Gammon, owner of Custom Fit Financial in Cedar Rapids, Iowa. “That can accelerate the depletion of the account and make it harder for income later in retirement.”
Should I cash out my stocks in a recession?
Known as the “sequence of returns” risk, a falling market can be problematic if it occurs immediately at retirement when there’s less certainty what your actual retirement expenses will be. It doesn’t have to be problematic, of course, but that’s another story. For those even a few years into retirement, the potential downside of a recession is avoidable. It just takes a little foresight and self-discipline.
To understand this, you must first understand the history of bear markets. Recessions generally bring three things: 1) Fewer jobs (relax, you’re retired and out of that game); 2) Lower prices (you’re not going to complain about this, are you?); and, 3) Falling stock prices. OK, this last one gets you most worried as this brings on bear markets.
How long does it take to recover from a bear market?
It’s important to understand this tried-and-true rule as it pertains to bear markets: Buy low, sell high. When the market is falling, you want to be buying. You don’t want to be selling. What makes you sell? The need for cash. What makes you need cash? The lack of incoming revenue. Well, you’re retired, so you probably have no incoming revenue beyond Social Security. Does that mean you must sell? Not necessarily. Not if you plan ahead. How do you do that? The answer is apparent: put away enough cash to survive until the market recovers.
Historical data for bear markets from 1957 to 2020 shows stocks typically recover within 19 months from the beginning of a recession. If you’re careful not to sell your stocks during these dips, you can better protect long-term retirement funds.
What are the best safe investments for retirees?
Here’s where many retirement investors slip up. They’ve successfully set aside roughly two years of expenses. Now they want to know where to invest that horde of cash. Well, there’s the problem right there. They’re using the word “invest.” You don’t want to “invest” the money you’ve set aside to pay your cost of living. You want to keep it safe. The answer to this real question is staring right at your face. It’s boring. It’s embarrassingly simple. And it’s not something you’d normally brag about while drinking coffee with your friends.
But it gets the job done. And everyone is going there.
“Money market funds are liquid, which is why they’re so important to retirees,” says Jordan Mangaliman, owner of Goldline Financial Services in Fullerton, California. “Liquidity in retirement can help protect a retiree from upending their financial security in retirement due to a financial emergency. Keeping up to two years’ worth of expenses in a liquid account will help.”
If you have two years of expenses set aside in cash or money markets, are you worried about a recession? Think about it for a moment. You have no reason for panic selling. You can afford to wait for the inevitable rebound. Better yet, if you’re really thinking ahead, that modest grin on your face might just turn into a beaming smile.
How do retirees benefit during a recession?
Cash is king during retirement. It’s the safest way to ride out a recession unscathed. However, all but the wealthiest can afford to put all their retirement assets in cash and cash equivalents. You probably have a good many years, possibly decades, ahead of you in retirement. You still need to invest for the long term.
When stock prices fall and you have more than two years of expenses stashed away in cash, you have the prospect of turning the lemon of recession into the lemonade of future growth. Take some of that excess cash and put it to work for you. Remember what “buy low, sell high” means. That first part still applies in retirement. Take advantage of it. Your retirement will outlive any recession.
Moreover, if for some reason you had to take out a loan in the past year or so, a recession will likely offer an opportunity there, too. You can’t have a recession without an economic contraction. You also can’t have high interest rates during an economic contraction. Ergo, a recession usually ushers in a period of lower interest rates. This opens the door to refinancing those high-interest loans.
“Sometimes interest rates can fall during a recession lowering prices and the cost to borrow money,” says Lisa Greene-Lewis, tax expert with TurboTax in Ladera Ranch, California. “Recessions have not lasted long in the past, but your retirement savings will continue to grow and bounce back over time.”
Why should retirees want a recession?
If you’re already retired, recessions have nothing on you. You’ve weathered storms of all kinds before. Congratulations! You’ve come out ahead. Retirement is your victory lap. You no longer have to race against the job market, the economy, or even the Dow Jones.
Recessions bring lower prices, lower interest rates, and lower stock prices. No doubt the stocks in your retirement portfolio have given you solid gains over the last decade or so. There’s no problem banking some of those gains for a rainy day.
And should a recession rain down, relax and smile. Your nest egg’s tougher than any headline writer’s words.
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