Recession-proof your retirement
If you haven’t heard the warnings: “recession is coming” yet, you must have been on the moon. Everywhere you look, every TV channel and every paper are yelling about it. Another great negative topic for them to scare the public.
For the news industry, the bad news sells, so they are very happy and productive in their scare tactics.
I am by no means saying that this information is false or incorrect, after all the evidence is in the pudding – the inflation is rising, interest rates are going up, market across the globe have been very volatile showing a great deal of uncertainty and unpredictability.
But rather than using the scare tactics that only increases anxiety and panic, it would be so much better if we actually were talking about the ways to be ready for this recession, if it is going to eventuate, and the steps we could take to protect ourselves and our nest-egg, especially if you are nearing your retirement or you have already retired and there is no employment income to count on, but rather your savings alone.
And today we are talking if the expected recession is going to destroy your retirement, and what steps you should take to protect yourself and your savings for the future.
Many economists are speculating that recession is coming, most likely in 2022/23 financial year – therefore now.
As I said this is still speculations, however to be ready for this eventuality, first we really need to understand what recession is.
In general terms, recession is a period of very weak or even negative GDP growth (Gross Domestic Product) that often happens together with high level of unemployment.
This is usually happening due to a prolong time of well performing economy, that got “overheated”, meaning the demand is greater than supply of goods and a low unemployment rate.
To “slow down” the “overheated” economy, governments introduce increase of interest rates, which in turn will reduce our retail as well as corporate spending. Life is becoming more expensive, it costs us more to pay off our debts, companies also feel the budget pressures, often letting some people go, hence the unemployment starts rising.
Then we are entering a period of negative growth, higher unemployment that could lead to recession.
If we do experience a recession, general view is that Australia has 50% chance to have one, however the believe is that should we enter any kind of a recession, it will not last long and will be followed by a strong recovery.
Considering Australian economy that continues to be strong, I really hope this prediction is going to be a correct one, and personally I am not panicking, however I believe you really need to take certain steps and recession-proof your upcoming or current retirement to minimise any eventual negative outcomes.
This is why I prepared a list of steps you should take. to put yourself in a better position and not really worry about all the bad news that the press is trying to sell to you:
1. Top up your emergency fund
I have been saying about the emergency accounts since I’ve started my channel, and it is still one of the most important accounts you can have. Your emergency account should have anywhere between 3-6 months worth of your spendings, and if you have retired, that should also hold funds for urgent repairs plus any upcoming pleasures plus holidays, so you do not have to draw money from your pension account, especially in a depressed market.
2. Get rid of your debts
With interest rates now heading north, you really need to be focused and keep paying off your debts, starting with the once that are either the easiest to get rid of or the ones that charge the highest interest.
3. Credit cards and personal loans
Out of all your debts, credit cards are the worse if you cannot pay them off in time.
Why? Just watch my video “How banks keep you poor – shocking truth” and you will never ask that questions again. I’ve introduced a little game, but this is an eye opener, you should watch it, together with your kids or your grandkids, they will learn a lot while hopefully having a bit of fun. But that knowledge could save then lots of grief and money in the future.
4. Get best deal on your bills
Cutting on unnecessary bills can save you lots. Check your mobile phone usage and what you need, and then compare providers. You might find that a small company such as amaysim might save you lots of money in comparison to staying with Telstra.
Apart from telco companies, check your electricity and gas – those are some of the biggest bills you have to pay. then review and compare your insurance for home, contents, car.
Stop being loyal to any brand of company, believe me you are not going to get any loyalty back. This is all about business and making money from you as a consumer.
5. Live Within Your Means
One thing that I changed many years ago, I get the bill, I pay it immediately. Not by the due date, not the last minute, but the moment I get the bill.
I know, you might call me crazy, why would I spend money a month earlier than needed, but I know that once a bill is paid, I cannot get into a trouble of forgetting, receiving reminders (which I hate). Once the bill has been paid, I cannot spend this money on other silly shopping or emotional spending.
Keep couple of bank accounts, one for “necessities” and the second for your pre-calculated leisure. Once you spent your “leisure” money, bad luck, no more fun, until this account is replenished with a new allowance.
6. Have Additional Income
With an amazing technology I am constantly amazed with ideas that some people come up with to earn extra money. It turns out that no matter your age, or experience, there is always a way to earn extra dollars. You just have to put your mind into it.
Even if you are retired, and you are on Age Pension, please remember that yes, there is an Income Test, but it is very generous, so you can earn extra money to keep you afloat when life gets tough.
7. Invest for the Long Term
If you think that this is just a term used by fund managers or financial planners to keep your money invested, think again.
Let’s imagine that there has been a drop in the market and your investment balance by 12%? Many investors can actually expect this rate of return for the period of the last 10 months since 01/01/22. If you don’t sell, you won’t lose anything. This is just a paper loss. I keep saying over and over, would you sell your family home if it reduced in value by 20% just because there is a buyer? Especially if you don’t need to sell you home? Of course you wouldn’t.
So why we don’t think in the same way about our super? Do you need all your money today? NO, so why sell it? why accepting those losses? Markets work in cycles, and you will have plenty of opportunities to sell down your investments when the price is high.
But in retirement, your strategy should change. You should make sure that you have enough money in liquid, low-risk investments to pay you the income you need. But the bulk of your money should be invested in the market for long-term. Your savings are there for your retirement. As much as you need your income today, you will most likely need it in 10 or 15 years, so don’t make mistakes like accepting losses in your super fund savings, just because we have a short-term volatility.
Bear markets end and get replaced with wonderful bull markets when you get rewarded for your patience.
8. Rebalance your investments
When investing and leaving money to its own devices, just because growth assets generally grow faster than income assets, with time your portfolio that originally started as a balanced for example, will turn to resemble a growth portfolio or even high-growth.
What you need to do is to make sure that you rebalance your portfolio every so often, so it stays within the parameters intended. This is good money management. and those big market shake ups, are great moments to do just that.
Once the market starts to recover, your portfolio will be ready for a great start.
9. If retired, make sure that part of your income is guaranteed
I have been talking about this “guaranteed income” on my channel almost in every single video. Check your cash bank account, have emergency fund, maximise Age Pension, look at investing into annuities those are all examples of how you can introduce security and guarantee of a stable income into your life. If you are not sure how to do this, just make an appointment with me and we will get to work to set it up correctly for you.
10. Diversify
Another “must” in investing is to diversify, diversify.
There is no such thing as a perfect or best investment. Every investment is great in some point in time and not so good in other times. The trick is to have a mixture of those investments, so when the economy is questionable, and returns uncertain or volatile like today, that investment variety will reduce the severity of negative impact. try to build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (like stocks and bonds).
11. Work with an expert
Just like when you are sick, you need a good, caring doctor, or when you need your will drawn up, you will be searching for a reputable lawyer, or when your roof is leaking, you will search for a high-quality roof -restoration company, the same applies to investing. Find an adviser that you trust, that you can talk to, that makes you feel at ease, and create a plan and your investment portfolio that will support you in the future with the income and a capital for all your life needs.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
