How to Prepare for Retirement When a Recession is Looming

The current bull market is the second longest in history. However, the excitement over tax reform is beginning to fade somewhat. Someday our long run of economic growth could end in a damaging recession, and the way things are going, it could be in the next two years. When this happens, jobs will disappear, paychecks will shrink, and investors will panic.

How do we know a recession is looming? Here are some signs for concern from economists:

  • Trade-war fears have escalated, as the Trump administration has imposed import tariffs on steel, aluminum and on many Chinese goods. The administration is now threatening 25% tariffs on $200 billion in Chinese imports, more than double the previous levy threat. According to Next Avenue, “the economic impact from the tariffs has been muted and limited to certain industries — so far. But if the trade war of words turns into actual widespread tariffs and steep trade barriers, the global economy including the U.S. will be hit hard.” Economists believe that Trump’s tariff policy puts the economy at risk of a recession, as raising the price of raw materials such steel, aluminum and lumber would serve to both squeeze corporate profit margins and make goods for consumers more expensive. With consumers facing higher prices, they’re able to buy less, hurting corporate revenues.
  • Yield Curve: A classic signal that a recession is lurking is when the yield on 10-year Treasury bonds is lower than the yield on three-month Treasury bills. This is not happening yet, but today’s interest rate trends may be signaling slower growth ahead. According to economist Noah Smith, the yield curve points to a recession in about 2020, at least if the current flattening trend continues.
  • Rise in Interest Rates— Another factor beyond economic trends that could have an impact on labor costs, commodity costs, and profit margins is the rise in interest rates. A lot of debt was issued during the last several years when interest rates were low to finance stock buybacks. For companies that carry a lot of debt, re-issuing debt as it comes due at an interest rate two or three percentage points higher than it was when issued several years ago will be enough to cause problems.

Outlook beyond 2018

Things could change quickly. This bull market could continue for more than another year or two, but there are so many things that could go wrong that it is difficult to form much conviction beyond 2018. This is more reason to plan for retirement, using the right strategie to ensure that you can live comfortably, whether or not a recession occurs.

The “Safety First” Retirement Plan is a Wise Strategy

A smart strategy when a recession is looming is a “Safety First” Retirement Plan, something we assist our clients with at the Farr Law Firm. With the “Safety First” Retirement Plan, we help clients invest and withdraw enough money from their portfolio to maintain their standard of living during retirement. With this strategy, clients can concentrate on maintaining their lifestyle, and build a buffer against bad times.

With the “Safety First” Retirement Plan, rather than worrying about historic and prospective rates of return, we focus on your needs, and match your financial resources to your necessary expenses. This way, you’ll be minimizing your downside risk, creating a money cushion to cover expenses without having to worry whether stocks or bonds have fallen into one of their periodic bear markets.

Investments for “Safety First” Withdrawals

The basic idea of the “Safety First” Retirement approach is to lock in the ability to tap a stream of income that guarantees you a minimum standard of living. Social Security is a key plank in this type of safety-first portfolio since the retirement benefits are guaranteed and predictable.

Once you’ve created your margin-of-safety withdrawal program, you can then afford to take greater risks with any remaining savings. Ideally, you’ll earn a higher return on riskier assets you can then spend on “aspirational” wants, such as enjoying fine restaurants and traveling.

The “Safety First” mindset, with its emphasis on building a lifestyle floor, is a wise approach to avoid running out of money in retirement.

Call us to Plan for Retirement

Whether your retirement is coming up soon or many years away, it is important to protect your hard work and your golden years with effective retirement planning and long-term care financial planning, especially with a recession possible in the next year or two. Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my company Lifecare Financial Services, LLC (in business since 2006) and I am highly knowledgeable about using fixed indexed annuities to provide safe retirement income, while also helping to pay for long-term care using hybrid insurance policies and asset-based policies that combine life insurance or an annuity product with a long-term care benefit, and using tax-free money (money in your IRA, 401(k), 403(b), or Thrift Savings Plan) to help pay for long-term care.

Here at the Farr Law Firm and Lifecare Financial Services, we stay on top of the strategies you need to put in place to keep yourself and your family protected. If you’ve not done Retirement Planning, Estate Planning, or Long-Term Care Planning (or had your plan reviewed in the past 5 years – or last 3 years if you’re over 65), please call us to make an appointment for a no-cost consultation:

Fairfax Retirement Planning: 703-691-1888
Fredericksburg Retirement Planning: 540-479-1435
Rockville Retirement Planning: 301-519-8041
DC Retirement Planning: 202-587-2797

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