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16 Aug 2022

Retirement in a Recession

M329121-Evergreen-Email Chelsea Centred-v1.jpg By Chelsea Traver at Evergreen Advice


Recession has been the recent buzzword in the media. While a recession hasn’t been officially announced, and may not happen, many people are feeling the tightening in their wallets with costs rising quickly, and the value of their investments down. The current economic situation is hard for many people but for those in retirement or with retirement on the horizon, it can be an especially worrying prospect. In this article, we provide some ways for retirees to cope and even thrive in this current environment. Retirement is a time to be enjoyed and we want to give you the tools to feel confident even during trying economic conditions.

What’s going on?

If you’re wondering why recession has been in the news, our previous article on 'Is a recession is coming' provides a deep dive into this topic.

The drivers of the current situation are primarily inflation pressures from a variety of sources including:

  1. Central banks printing money and lowering interest rates to record lows to avoid a recession from the Covid-19 lockdowns.
  2. Supply shortages driving up prices
  3. The war in Ukraine causing scarcities in key commodities including oil.

This has led to inflation of 7.3% in NZ and 9.1% in the US which has driven the recent downturn in other economic indicators such as lower retail and manufacturing spending. It can be concerning for retirees on a fixed income to see high inflation and investment markets fall, and might cause some people to worry if they will have enough.

Make sure your financial house is in order

For people concerned about the current situation and wondering what they can do to help improve their finances, the first thing to do is make sure your whole financial world is in the best place possible. This means:

  1. Keeping an appropriate emergency fund (more on this in the section below)
  2.  Review your investments to ensure you have the appropriate exposure to assets that provide some inflation protection.
  3. Pay down debt, particularly high-interest debt like credit cards
  4. See if you can find ways to change your spending to mitigate inflation in your expenses.
  5. If you have other income opportunities (consulting, Airbnb) consider if those will help you feel more secure.
  6. Consider if your insurances are appropriate. Do you have too much or too little?
  7.  Check your estate planning documents to ensure they are up to date including Wills and Enduring Powers of Attorney.

While not all of these items will have a direct impact in case of a recession, they will help you feel more confident about your finances and give you a firm understanding of where you stand.

Additionally, it helps to have a clear idea of how much you can sustainably spend without exhausting your assets. A financial adviser can help with this, but you can also use tools such as Sorted to get an idea if your current spending habits are sustainable.

Finally, many retirees don’t know how much they actually spend and where. Spending habits will change throughout retirement but if you’d like a no-fuss option to track your spending you can use tools such as PocketSmith, or see if your bank offers a way to track your spending. These types of tools are helpful because if you know where your money is going, then you can adjust if necessary.

Cash is king

Nothing will make you feel as confident in your finances as having some money in cash. While it’s important to make sure the majority of your funds are invested in a way to hedge against inflation, it can also be worrying to see the volatility that investing in shares brings. Having cash on hand provides reassurance that no matter what is going on in investment markets you will be able to pay for your daily expenses, and still have enough to enjoy your retirement.

Generally, we recommend three to six months’ worth of expenses outside the portfolio. This is also why it’s helpful to know how much you spend. Additionally consider if you’ll have any large purchases over the coming months and make sure those funds are in cash as well.

That’s not to say that you should just leave your funds sitting in the bank earning nothing. Now is the time to look into higher interest savings accounts – rates on these accounts are still relatively low but every little bit counts. For an emergency fund you want to make sure you can access it but there are still liquid options that earn a higher interest. Check your bank or see if an alternative bank offers better rates.

Your portfolio should be built to last

It can be difficult for anyone to see the doom and gloom of a potential recession in the news but especially for those who can’t top up their savings. Shares and bonds are down significantly so if you are invested your overall portfolio value will likely be down significantly. However, an appropriate portfolio should also have exposure to cash and short-term bonds which haven’t fallen in value. This is where you will generally be drawing your retirement income.

You worked hard for many years to build your assets so it’s important to note that this is just one period in your long retirement. You won’t be spending all your savings on day one so there is time to weather the ups and downs of the market. At any given time you will just be drawing a small percentage of your portfolio to fund your daily expenses which can be taken from your more stable investments.

Over time inflation will ease and the market will recover. Unfortunately, we can’t predict the exact day this will happen, but we can say with confidence that it will come.

Enjoy your retirement

In the meantime, enjoy your retirement. Think about what you most want to do, and if you are worried about money consider things that don’t have large costs. What do you value most in your life? During which activities do you feel the most joy? You might find that you don’t need to spend as much as you thought to have a fulfilling life.


Disclaimer: This article is general in nature and does not constitute financial, tax or legal advice in any way. Should you require such advice, please contact Evergreen Advice or a suitably qualified professional.

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