A Recession Survival Guide for Retirees

Economic downturns are inevitable. Here’s how to protect your retirement nest egg

Is the U.S. in a recession? The media was filled with speculation after the Bureau of Economic Analysis (BEA) announced that the nation’s economy had contracted in the first and second quarter of 2022. The official arbiter of recessions, the National Bureau of Economic Research (NBER), says it’s too soon to tell.

But sooner or later, the economy will fall into a recession, because that’s the nature of the economy: Busts follow booms. For many retirees, the biggest challenge is the investment volatility that typically accompanies a recession. For those who haven’t retired yet, the biggest worry tends to be job loss. If you know what to expect in a recession, however, you’ll know how to survive it. Let’s take a look at what recessions are and how to handle them.

What’s a recession?

Most retirees have lived through several recessions and know that it’s not pleasant. Typically, you’ll see a recession described as “two consecutive quarters of negative economic growth.” In other words, gross domestic product (GDP), adjusted for inflation, has to fall for at least six months. But that’s not a terribly accurate description.

The NBER is a private nonprofit made up of economic researchers. Its Business Cycle Dating Committee uses several different indicators to determine when a recession starts and ends. GDP is just one of those indicators. The committee also looks at employment trends, industrial production and retail sales, among other factors.

The NBER’s broad definition of a recession is that it is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” In practical terms, a recession is a period of increasing unemployment, business failures and general economic distress.

Since 1854, the U.S. has had 35 recessions, lasting an average of 17 months, according to NBER. Recessions have been fewer and shorter since 1945, lasting an average of 10.3 months. The recession of 1873 was the big daddy of misery: It lasted 65 months. Here’s how long the last 10 recessions lasted:

What causes a recession?

A classic recession is caused by an overheated economy. Rising demand for goods roars past industry’s ability to produce them; that, in turn, results in rising prices. Low unemployment means that workers can command higher wages, which results in further economic overheating.

How does that turn into a recession? High consumer demand in a ripsnorting economy usually translates into higher interest rates. Rising rates means businesses have to spend more to borrow, which reduces corporate earnings. For retirees, higher mortgage rates means it’s harder to sell a house, and the rates on credit cards and auto loans become more expensive. If businesses and consumers feel the economy is slowing, they reduce spending, and eventually, the economy stops expanding, inflation cools and sometimes the economy falls into recession, as it did in 1981, for example.

At times, an overheated economy leads to enormous run-ups in financial assets — stocks in 1929, tech stocks in 2000 and housing prices in 2006.

Other times, recessions are sparked by unexpected outside events, such as the onset of the COVID-19 pandemic in 2020, which triggered the shortest recession on record — and one of the sharpest. GDP contracted at the fastest quarterly rate ever in the United States. “We shut down,” says Mark Zandi, chief economist for Moody’s Analytics.

Most important for retirees and pre-retirees, a recession means that financial markets often crumble, forcing people to delay retirement — or return to work — in reaction to their shrinking nest eggs. During the Great Depression, stock prices fell 86 percent and didn’t recover until 1954. More than 9,000 banks failed, 4,000 in 1933 alone, because the federal government didn’t guarantee bank deposits as it does now.

Recession or depression?

The old joke among economists is that a recession is when somebody you know gets laid off; a depression is when you get laid off. (That’s why you find economists at the NBER and not at the Improv.)

In general, the difference is a matter of degree. A depression is the grizzly bear of the economic world. In the Great Depression, unemployment climbed to nearly 25 percent. The Great Recession of 2007–2009 saw unemployment rise to 10 percent and GDP fall 4.3 percent, adjusted for inflation. The most recent recession, sparked by the COVID-19 pandemic, has been the most severe since the Great Depression, although it was much shorter. In just two months, GDP plunged 19.2 percent and unemployment spiked to 14.7 percent.

One other thing: Because the Great Depression was so terrible, economists have basically stopped using the word “depression.” “We have come up with more targeted terms for the bigger events in history, and so I think the word ‘depression’ has been largely reserved, at least until now, for the Great Depression,” says Mike Englund, chief economist at Action Economics. “With the housing collapse earlier this century, we coined the ‘Great Recession.’ If we have another big adverse economic event, I think the incentive is high for the media to come up with a new clever name again.”

Will we have another recession?

Absolutely. Someday. Economists are divided as to whether we are in one now. “Recession risks are high,” Zandi says, “although the odds are that we will avoid one, with luck and deft policy from the Federal Reserve.”

In response to worrisome inflation levels, the Fed typically raises short-term interest rates to slow the economy and — at least officially — tries to keep the U.S. out of recession. Sometimes, however, a recession is the only way to tame inflation, as the nation learned in the 1981–1982 recession, when the Fed, under chairman Paul Volcker, raised short-term interest rates to 15 percent. Jerome Powell, the current Fed chairman, has warned that the Fed is ready to do what it takes to end inflation. That could mean recession. “He’s been channeling his inner Paul Volcker,” Zandi says.

Englund is less optimistic that the Fed can have the economy land on its feet. “The odds are low that the Fed can achieve a ‘soft landing’ given the tightness of the labor market, the elevated level of inflation and the remarkably late start for the tightening process in this business cycle,” he says. The Fed didn’t start raising rates until March, a full year after inflation began to climb. Englund does think, however, that some of the supply-chain problems sparked by the pandemic will ease in 2023, which will do a lot of the work of reducing inflation.

One thing is certain: Sooner or later, the economy will sink into recession, and if you’re retired — or planning to retire soon — you should be prepared for it.

How retirees and retirement savers should prepare for a recession

1. Save. “Avoid risk if you think a recession is around the corner,” says John Lonski, president of Thru the Cycle. The biggest risk for pre-retirees: losing your job. If you’re working, be sure you have an emergency fund you can tap if the paychecks stop. Financial planners often recommend that you have six months’ worth of expenses in your emergency fund.

2. Pay down debt. The money you save in interest can be used to build your emergency fund. And, all things being equal, paying off a credit card that charges 16 percent interest is the same as earning 16 percent on your money.

3. Keep a cash stash. Retirees who are taking withdrawals from their savings should keep about a year’s worth of expenses in cash in their retirement account. Bear markets in stocks typically last about a year. You don’t want to sell stocks when the market is falling unless there’s no other option. If your investments are down 10 percent and you withdraw 5 percent, your account is down 15 percent.

4. Stay safe. Most cash options pay little to nothing in interest. Money market mutual funds, a typical cash option in brokerage accounts, currently pay 1.71 percent in interest. That’s not much, but it’s better than a 20 to 30 percent loss from stocks in a bear market. If you take cash withdrawals from your retirement account during a bear market, you’ll give your other, riskier investments time to recover.

5. Stay on the sidelines. Sooner or later, you’ll be tempted to buy stocks while they appear to be cheap. Take your time going back in. Keep in mind that by the time the NBER has officially declared a recession has started, it’s probably near the end. After all, economic data usually lags, particularly GDP. The average recession lasts about 10 months, and the NBER typically needs about nine months to collect all the data it needs to declare that a recession has started.