Protecting Your Lifestyle Before a Recession

by Lawrence S. Tundidor AIF®, AAMS®, AWMA

Recessions are a normal part of the economic cycle. Most recently, the 2008 and 2020 recessions were responsible for great losses and anxiety for many Americans. Many of those who had not adequately prepared for difficult times experienced a higher level of pain than those with a written financial plan.

According to the Bureau of Labor Statistics, the Consumer Price Index (CPI), which measures the prices consumers pay the price for all goods rose 9.1% for the previous 12 months ending in June, which is the highest increase since 1981. With all of the recent talk of a possible recession in the near future, Ideal-Living Spoke with Financial Advisor Lawrence Tundidor, AIF®, AAMS®, AWMA® of the Tundidor Wealth & Investment Group to find out what folks nearing retirement or in retirement could potentially be doing to prepare.

Develop a Holistic Written Financial Plan

Some have said that goals without a plan are just dreams. One of the most important things Americans can do is to create a financial plan that takes into account their short and long term goals. Having that plan in place allows individuals and families to create a roadmap that shows where they currently stand in relation to achieving the economic and lifestyle goals they have set and what needs to be done year by year to help stay on track.

Another important benefit of a financial plan is the ability to run hypothetical scenarios like a recession and any negative impact it could have, such as losses in retirement accounts, losses in home value, or losses of employment.

While no report can accurately predict the future (these scenarios are hypothetical, do not reflect actual investment results, and are not guarantees of future results) and certain outcomes cannot be prevented, having a course of action for a worst case scenario allows any “cracks” in the financial plan to be potentially addressed way in advance.

Have an Adequate Cash Reserve

One key thing Americans can do to prepare for difficult times is to build an adequate cash reserve that is right for their needs and lifestyle. Many have said that 3-6 months of expenses is the right amount. The issue with a generalized number like that is that everyone’s situation is different. One must look at their specific expenses, existing debt, upcoming large expenses and the viability of their income during a recession.

For example, a business owner or someone employed in an economically sensitive sector may need more in cash reserve than someone in a position where their employment is may be less volatile in an economic downturn. For those close to retirement or looking to purchase a new home in retirement, consider the cash needed to lessen the chance that your plans or timeline may need to be altered.

Reduce Debt

Carrying large amounts of high interest debt during a recession can create great strain on a financial plan. As people prepare for the next recession, consider all existing debt and make a plan on how to reduce or refinance that debt. Consider existing cash savings or monthly investment contributions to decide if that money is best utilized where it is currently being saved or whether it makes sense to pay down debt n. With interest rates at historic lows, review existing mortgage debt as well as the ability to consolidate debt for the possibility of reducing the interest rate or monthly payment amount. Another benefit of reducing debt before a recession is the ability to take advantage of potential discounts on items such as cars, recreational vehicles, or home improvements during recessions. Having a reduced debt load allows you the possibility of taking advantage of those opportunities or qualifying for a new mortgage.

Another benefit of reducing debt before a recession is the ability to take advantage of potential discounts on items such as cars, recreational vehicles, or home improvements during recessions. Having a reduced debt load allows you the possibility of taking advantage of those opportunities or qualifying for a new mortgage.

Keep an Eye on Your Portfolio

Taking steps to help weather market volatility, especially for those nearing retirement is extremely important. After all, investments are not guaranteed and there’s always the risk that you may end up with less than you originally invested. According to Barron’s, equity markets have hit its worst downturn in the first 6-months of this year since 1970 and paired with higher than average inflation, now is a great time to review your current allocation and risk tolerance.

Many have had the same investment strategy for years without considering that they are now closer to retirement or their portfolio no longer matches their needs and risk tolerance. While using asset allocation as part of your investment strategy, neither assures nor guarantees better performance and cannot protect against loss in declining markets. It is a recognized strategy to help mitigate the ups and downs of the market. With equity returns being strong over the past decade, it is easy to consider the return on investment as the primary bellwether for whether a change to the strategy is needed. It is important to remember, however, that for most individuals, retirement requires a distribution strategy as opposed to an accumulation strategy in your working years. Ones ability to recover from a downturn when you are no longer contributing and are now withdrawing may be more difficult than someone who is not. Many wait until things get worse in order to consider making necessary changes, but it is advisable to be proactive instead.

Evaluate Income Needs and Distribution Strategy

One of the most important parts of a financial plan and preparing for a recession is a true evaluation of income needs that encompasses not just minimum expenses to live on but the amount needed to fulfill the lifestyle that you chose. One must ask themselves, if during a recession the market has one or more negative years where will my income come from? Consider income from protected sources such as social security and pensions, and what portion of those income needs are met utilizing those sources. If there is a gap, there are a variety of options available to consider in order to fill that gap and prepare a drawdown strategy. The point of planning a carefully thoughtout drawdown strategy is to minimize having to liquidate investments at the wrong time and hurting chances of recovering when things take a turn for the better.

Although recessions cannot be prevented, you can take a pro- active approach to prepare yourself and take steps to minimize the potential impact. It is important to remember that a financial plan is based on the individual and their short/long term goals. Post-retirement living is very different, so take the time to explore your options well in advance of your retirement age. We encourage you to sit down with an independent financial advisor that puts your best interests first and helps you compose a written personalized and holistic financial strategy with the goals of preserving your retirement, investments, and securing the next chapter of your financial future. To learn more about the topic above, please attend Lawrence’s in-person seminars this September held at the Hanover Marriot in Whippany, NJ and the Ritz-Carlton in Tysons Corner, VA. In the meantime, if you have any questions, feel free to contact Lawrence at LawrenceT@ ceterawealth.com or 215-375-5984.

IInvestment adviser representative and registered representative of, and securities and investment advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and registered investment advisor. Cetera is under separate ownership from any other named entity. (1800 JFK Blvd Suite 300 Philadelphia Pa, 19103 Registered branch phone number 215-399-9389) Tundidor Wealth & Investment Group is not a subsidiary of nor controlled by Cetera Advisor Networks LLC.

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.