Investments and recessions - how to plan?
September 24, 2018 8:40 AM   Subscribe

Imagining a scenario with income drying up and wondering if there's an ideal way to plan for that. There might not be a way to plan for a situation with no options, but I have very little familiarity with financial planning.

Or more specifically - in the event of a recession, is it better to have your currently invested money in a:
a) fixed annuity b) IRA c) savings account d) house e) converted into a priceless postage stamp you hide among your possessions for Audrey Hepburn to find?

posted by Geameade to Work & Money (14 answers total) 8 users marked this as a favorite
It depends on when you need the money and how much money you have. If you have enough to live on then sure buy a rare stamp.
If you need it within the next 10 years, then a mutual fund is probably a bad idea to start as your main source of income.

Annuities are almost always terrible, so that's the only one I'd blankly advise against. Do you need to live in the house or can you sell it? Do you have the income to service home equity loans?

Recession or not, your investing strategy should not change. Identifying recessions is timing the market and it's almost impossible to do.
posted by The_Vegetables at 8:45 AM on September 24, 2018 [1 favorite]

Since you mention income, do you mean where to invest once retired and needing the investment for income? Or are you concerned about a recession while still in the accumulation phase of your financial life? The answers will be different. You could do worse than visiting, who live to answer questions like this in excruciating detail. Prepare to be educated.
posted by Atrahasis at 8:48 AM on September 24, 2018 [3 favorites]

Savings account - any assets are likely to lose value or at least be illiquid in the case of a recession. You need to think what the longest you could be without income for is and then have that amount in a fairly easy access bank account - rainy day fund which you don't touch. Any further savings you can invest in pension, property, stamps etc.
posted by JonB at 9:19 AM on September 24, 2018 [1 favorite]

One word: Diversification.

It's hard and your balance will be different that anyone else. So not one but all of the above and more. But quite a small percentage (1%) in gold or rare stamps. Half stock indexed fund, half bond index fund is simplest and not stupid. What does diversification mean: not all eggs in one basket but one fund may own a big chunk of another instrument so not fully diverse.
posted by sammyo at 9:36 AM on September 24, 2018 [2 favorites]

Remember that a recession will last for some limited period of time, and you have to continue living after it's over. Therefore, your entire planning can't be dominated by fear of recession, because then you would stay entirely out of, e.g., the stock market, and your retirement savings would be crippled.

A simple fixed annuity is not always the worst deal in the world for a senior (they probably won't sell you one that's actually paying out before you reach retirement age), depending on the rates being offered, though one will have to pay for an inflation adjustment or accept that there won't be one, but anything else (say, a "variable" annuity) is about two inches away from a scam at any given moment. Also, fixed annuities are only insured up to a relatively small amount, so in theory in a recession you might be subject to the collapse of the insurer.

So, you will lose the least money during a savings account in a recession, and to the extent you need that money to live on right then, it is sensible to have that money saved, but you will be limiting yourself with respect to life post-recession, so you really must think about how long you are likely to be living after the recession. Don't think that you can miraculously guess what time it will be to move back into the market. People constantly get this wrong. Unless the financial system blows up completely (not impossible), the market's going to recover, and you want to be positioned to take advantage of that.
posted by praemunire at 9:42 AM on September 24, 2018 [1 favorite]

(Note: if you actually own your house free and clear, that offers some protection in a recession because it significantly cuts housing costs, in most cases. So it reduces expenses rather than increases income. In a recession, though, a mortgage can be a millstone, cutting off your flexibility to reduce housing costs by moving, and potentially tying up your money in an illiquid asset plummeting in value.)
posted by praemunire at 9:45 AM on September 24, 2018 [2 favorites]

Response by poster: Thank you for all this advice! Sorry to threadsit, but realized I should clarify that I'm in my 30s and don't currently own a house.
posted by Geameade at 9:56 AM on September 24, 2018

Savings account - any assets are likely to lose value or at least be illiquid in the case of a recession.

Yes, but the rest of the time (non recession) you will lose money holding it in a savings account to inflation. I have $10k in my savings account (for some home repairs). I earned $.09 in interest on that last month. If you really want to save money (but not 'invest' it), then a money market account is better than a savings account.

In your 30s? You have plenty of time to follow the list posted by moiraine and don't worry about recessions.
posted by The_Vegetables at 11:17 AM on September 24, 2018

Yes, but the rest of the time (non recession) you will lose money holding it in a savings account to inflation.

Nobody said put all your money in a savings account. The recommendation is to hold an emergency fund in a savings account to tide you over if you lose your job.

The fact that you lose money to inflation on a savings account is irrelevant. You lose money on your fire insurance as well, but should you refuse to buy it?

A cash emergency fund is like an insurance policy against being throw out on the street if you lose your job unexpectedly. Insurance in never free. Insurance always has a cost. You shouldn't expect to make a profit on your insurance
posted by JackFlash at 11:44 AM on September 24, 2018

The fact that you lose money to inflation on a savings account is irrelevant.

Costs are never irrelevant. People often have a very poor intuitive grasp of the costs of keeping money in a savings account. If one is comparing it to other investments, one needs to understand the cost involved. An emergency savings account can reasonably be treated as "not an investment," but then people need to understand why, because of the costs, you cannot tie a huge chunk of your net worth up in an instrument being held at a loss and expect to save successfully for retirement.
posted by praemunire at 12:49 PM on September 24, 2018

The most important thing you can do is keep your spending low as a percent of your income. This not only give you more money in your savings in case you lose your job but also means that the amount of money that you need to live during that time will be less too.

Then do the math. How long do you think you might be out of work? Months? A year or more? What else could you do to generate income in the meantime? How could you adjust your budget? Think ahead about other sources of income. Can you rent out a spare room? Do free-lance work? Sell things (that you bought to use, not just stockpiling to sell later)? Do you have skills that translate into a side income? Admittedly, the number of people looking for jobs goes up in a recession but knowing what you can do might help you be prepared to take on some side gigs while looking for a job instead of just spending down your savings until the right offer comes along. Similarly, think about what expenses you can jettison if you need to.

What's the magic number in savings that would make this do-able. Remember, it doesn't all have to be liquidated savings - assume anything in the stock market will be go down by 35% (most recessions are more like 7%-20% declines). Make a commitment to get your total savings over that amount and you will be breathe easier.
posted by metahawk at 1:13 PM on September 24, 2018

I'm 60+. In my 20s and 30s I prioritized education so my earnings would be higher, then a house, which was a pretty good investment at that time, then saving. I'm frugal and mortgage rates were much higher, so all extra money went into paying down the mortgage and then refinancing. I remember the inflationary times of 1979 - 81. If you have savings, inflation can be devastating. If you have stocks in some form, a recession can hurt you, High mortgage rates can be a problem, high housing costs can be a problem.

Annuities tend to have significant profit and sales commission built in so are generally a bad deal.

Invest in yourself by getting whatever education will boost your earnings and enhance your life. Be versatile, so if your industry hits a bad patch, you can be employed elsewhere. If you marry, it should be someone who is financially stable (I screwed this up sooo bad). Don't spend stupid money - be frugal in ways that are doable for you, but don't pass up everything fun. It's a balance. Diversify.

I try to have my savings invested in socially responsible funds, and they did fine in the Big Recession.
posted by theora55 at 2:06 PM on September 24, 2018 [1 favorite]

Response by poster: Thank you, not just for the details, but also for a better picture on how to think about the situation.
Here's a picture as pup-thanks.
posted by Geameade at 7:07 AM on September 25, 2018 [3 favorites]

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