Recession Planning

So what steps should you be taking in your finances if you think there is a recession coming? In this episode - I give you my steps to take if you are in the accumulation phase or distribution phase of investing (because they are different!). 

Wealthy people use recessions to increase their wealth - so why shouldn't you! 

Don't be scared going into the recession - be prepared! 

⭐️ Thanks for listening! We appreciate your support - please subscribe to the show & leave a 5 star review!

🫶🏼 Follow us on instagram: https://www.instagram.com/selah_portfolios_and_planning/

📧 Want to get in touch? Email me at lauren.gage@lpl.com

Connect with Me:

Website: www.selahportfoliosandplanning.com

LinkedIn: https://www.linkedin.com/in/lauren-gage-6451a9166/

YouTube: https://www.youtube.com/channel/UCmjumeCRIIAvexdKum005_w

Transcript

00:01 All right. Hey everyone, welcome back to the Confident Dollar podcast. For those of you that are listening in for the first time, my name is Lauren.
00:09 I am a financial advisor. I have a firm that I started four years ago called CELA Port for those in planning located in Costa Mesa, but serving clients across the nation.
00:20 And I started this podcast as a way to just help educate people when it comes to finances because unfortunately this is not something that we are taught in schools when we grow up.
00:31 And so we're kind of thrown to the wolves. When we get older to figure it out on our own and you know, so much of it is just finance jargon that we can't comprehend anyways.
00:40 And so this podcast is to help you become a better investor, become a better saver, budgeter all those things. Understanding what we're talking about.
00:50 So that is the goal of this podcast. Thanks for tuning in and welcome if you are new and for those listeners that have been around for the last little while thanks for coming back.
01:01 So today we are talking about recession planning. And I'm going to break it into two different categories. We're going to talk about recession planning as it pertains to young investors.
01:13 And today young investors are basically anybody from that is not a you know, pre-retiree or retiree So really, if you're in the accumulation phase of investing we're talking about those tips for recession planning for you first.
01:28 And then if you are in the distribution phase of investing so you're no longer accumulating, you actually need to take distributions from your account.
01:37 Or if you're just like right before kind of a pre distribution phase. So right at the end, you know, you're about to retire the next few years.
01:44 That part is for you recession planning for retirees or pre-retirees. So the reason is because there's just a lot of different, a few different tips that I have.
01:53 I have for those two categories. It looks differently for each. And so I wanted to separate them and talk about them individually.
02:00 And the point of this podcast really for today, specifically the recession planning is because one, two fold one, we have heard so So, much about a recession and this recession that is impending and coming and maybe it was going to come in 2023 and now it's going to come first quarter of 2024.
02:18 And, and who knows we will see if and when that recession actually hits because now there's some people who are saying this has been a rolling recession.
02:25 We actually just finished up an earnings recession and so maybe it's been a rolling recession and we felt it at different times.
02:29 We're not going to feel it all at once. Whatever, regardless, even if we do not hit a recession in 2024, even if this recession isn't a normal recession, like they had thought it might be, or even if it's worth worse than we even thought.
02:41 And it's something like 2008 or, or whatever, there's people on both sides, right? The reality is as an investor, you are going to face a recession, whether it's next year or in five years or 10 years or 15 years, you're going to face a recession and you're going to, you're going to face multiple.
02:57 Recessions throughout an investing lifetime. That's just the reality because that's a part of the economic cycle. It is a natural part of the economic cycle.
03:07 And so they will happen. So it's nothing to be afraid of. In fact, wealthy people actually use recessions to make a ton of money.
03:18 Rich people know exactly how to capitalize on a recession. And so I want to help you figure out how to capitalize on a recession as well.
03:24 So not only capitalize, but to take away the stress and anxiety around you know, incoming recession and how you can prepare yourself for it.
03:33 And then, you know, if you have a plan, anybody with a plan when something like that does arise, they, they know what their plan is.
03:39 They know how to stick to their plan. They know what they were, you know, they were okay. We're good. We knew this was coming.
03:45 Here's how we're set up for that. We don't have to panic. That's the main goal. It's just you not panicking when you hit that one, when as an investor, you had a recession.
03:54 So this isn't me saying that you know, there's going to be this giant nut, take none of this as there's going to be this giant 2008 recession coming next year.
04:03 From my belief system. But if that happens, like I said, next year or another time in your investment journey, because again, it's part of the economic cycle.
04:15 Here's things you can do to start preparing. Okay. So for, if you are in the accumulation phase, and what I mean by this is if you have started your investments and you are contributing to your investments consistently and you are trying to accumulate enough money for your retirement, you are the accumulation
04:32 phase. You are not taking money from your investment. You are trying to put money in here are the things I want you to do when you are planning for a recession.
04:41 So first and foremost, and I feel like I say this in every episode. You need to have an emergency fund.
04:49 This is the first step. In general, when it comes to getting your finances in order. So if you don't have an emergency fund, that is the first thing to do is get an emergency fund and you need an emergency fund of three to six months of living expenses saved and set aside in a cash like investment or
05:07 savings account or cash like investment, like a high yield savings account or money market. Okay. Preferably those, but if you like in savings account, that's fine.
05:14 This isn't technically an investment. This is an emergency fund. So, but if you can get it at a high yield savings account, take advantage of the yields that we have.
05:23 Of right now in our in the market, that would, that's great. It's even better. So three to six months is what's recommended from me.
05:31 In most cases, unless you are an entrepreneur or commission-based like a real estate agent, you might want to. You go on the nine months, six to nine months side, really with whatever you feel comfortable with, but that's kind of a recommendation just because, you know business owners and real estate
05:50 agents, you just can hit a harder time. You don't have that consistent paycheck necessarily. So. Have an emergency fund. Okay.
05:57 So if you have your emergency fund set, you've already hit that step. This is still kind of one B then of my first tip is still stash stash some cash for that recession.
06:08 So like I said in the beginning of this episode, recessions are where wealthy people actually make even more money. They become even more wealthy.
06:20 And the reason that this happens is because they have more resources to use to capitalize on recessions. And the things that are cheaper during recession.
06:29 So if you stash extra cash now and then a recession does come around and let's say you have a short term savings goal of a saving for a new car anyway.
06:40 So you're, that is on your to do list in the next couple of years. If you stash cash and then we hit a recession and they're not selling many cars, then you might get a pretty decent deal on a car.
06:49 It could be a great time to buy a car, possibly, right? So for, for short term savings goals like that, you may want to use cash in those situations to, you know, put more data into it. Down or whatever on, you know, capitalize on opportunity to purchase things because they can often go on sale during
07:05 recessions. The other opportunities that you could look for during a recession maybe possibly real estate, and we'll see because real estate's been a little wild, but that traditionally can be better during recessions.
07:21 Interest rates normally go down actually during recessions. So that could be a good time to, you know, be ready for your down payment on a home.
07:28 If that's on your short term savings goal. Or, Just opportunity in, you know, if you have extra cash saved and, and stock prices are really good, you know, so fun prices on the ETFs and then mutual funds that you invest in are really good and you can get a better price getting into the market.
07:45 It could be good times to throw a little bit chunk, you know, larger chunks of money. So there's opportunity and opportunity is going to come to people who have money and cash to capitalize on that opportunity.
07:57 So it's not a bad time if you think a recession is coming to stash cash. That's my tip number one.
08:04 Tip number one. Tip number two for your recession planning and the accumulation phase is to keep your investments automated and whatever you do, don't turn those off.
08:12 Okay. If for some reason during a recession, you you know, oh, I should, sorry, backtrack for one second. The reason you, have your emergency fund set is because if you do happen to possibly lose your job you want to have that obviously ready to go in case of that recession.
08:30 Now in that case, let's say worst case scenario, you do lose your job in the recession. My goal to you would be if, you know, you have some other, you can get another job or have enough income maybe by a spouse or whatever to do whatever you can to keep your investments automated and turned on because
08:49 share prices are going to be better. For you normally during recession, especially at the beginning part of a recession is when the market, the stock market is going to react, it's going to be towards that beginning.
09:02 And if you keep yourself automated and getting into the market during that time, like I said, you can get much better share prices and have a much higher.
09:09 It's going to return when that does come back around because we know a hundred percent of markets have recovered. So we don't have to be panicking about wanting to take our money out.
09:16 We actually want to be putting money in as best we can during that time. That is the time when things are on sale.
09:21 That is the time we want to invest when as much as we possibly can because we're going to have higher returns on that back end when that market comes out of that recession.
09:29 Keep in mind that stock markets are forward facing and so they actually will recover oftentimes before the recession is over.
09:37 So once the stock market thinks, you know, okay, we have hit this recession. We knew this recession was coming as well as volatility.
09:44 Then we hit that recession. You know, probably normally going to be around a low during that time. And then the stock market will normally start to recover before that recession is over.
09:53 But if you keep those investments automated, like I said, you're just dollar cost averaging and you're getting really good. Really good share prices.
09:58 That's my second tip. Tip number three going into recession is to maybe, especially if you think you have a job that could be on the chopping block for your company in that type of situation is to work on a side hustle.
10:13 Or have some side at least some side hustle options that you've researched or some job backup job options that you've researched in case you think like, Hey, I'm definitely getting wind that, you know, my job is on probably going to be affected by a recession.
10:29 Maybe have just a backup plan there. And then my tip number four to you is to, hopefully you get to a point where you kind of always know your budget, but to work on your budget and get to know where you spend so that if we hit a recession, you know, it's, you know, what you can cut.
10:49 If money just gets a little bit tight, like I said, you want to try to keep on your investments. So that's not what you want to cut, but if there's other things that you're like, okay, we know if we need to, we'll cut this, this and this to save, you know, free up an extra $500.
11:02 So just to know, I encourage you just to know your spending well and to know what things you'd be willing to part with first, if you had to when it comes to recession.
11:15 Okay. So, like I said, these are things you can use. Not just because one's coming maybe next year, but at any point throughout your investment journey as you hear, you know, that this, these things are on the horizon that you can kind of check these things, these four things like, okay, do I have cash
11:33 ? We'll see you next time. We're good there. Investments are automated. We're going to be able to keep that on. Okay.
11:38 Good there. My job is secure. So I'm not worried about it or my job is, or maybe it's not even your job.
11:44 Maybe you're like, okay, this, we hit a recession. My business is going to definitely struggle this. You know, the sector that I'm in, it definitely has a hard time in recessions.
11:53 People cut this kind of spending so they don't shop as much here at my type of business, whatever. If you know that you can prepare your business as well.
12:00 And I would suggest preparing a business emergency fund too. But also like if you personally, you know, especially if you're a solo entrepreneur, you have a side hustle, maybe another option of income or backup option of income in your mind just in case of that.
12:13 And then knowing your budget and what to cut. Okay. So those four things, if you are in the accumulation phase, now, if you are a retiree or pre-retiree, or if your parents are a retiree or pre-retiree and you're listening to this and they are not, you can send this to them or think of these to have 
12:31 the, you know, the next time you have a conversation with them, you could say like, Hey, do you have these checked off?
12:37 In case we do hit a recession. And where are you with these categories? Okay. The biggest thing, if you are in the distribution phase, if you are retiring, you are in the distribution phase of your investment journey.
12:51 The reason we saw so many headlines and the reason people talk to people all the time who are like, I just can't, I can't, I can't lose my money.
12:58 Like it happened in 2008. Like I saw, all I saw was headlines of people couldn't retire because they lost all their money in 2008.
13:04 Right? So you've heard that. If you were my age, you, you remember seeing that. If you're older, you definitely know that you felt that you, you know, that that is, people still have trauma and fear of that happening to them when they get to retirement.
13:19 Okay. But the good news is, is there is a way to make sure you are good and you're not going to be in that situation.
13:25 So those. People planned poorly for their retirement. If they were working with a financial advisor, their financial planned poorly for their retirement.
13:35 Okay. Because it is actually pretty simple when it comes to recession planning for retirees. And personally, I like to think of it in three buckets for your investments.
13:48 If you are in the distribution phase, this is how I do it with my clients. So this is how you can think about doing it for yourself.
13:57 You have income that you need from your investment. That's correct. Right. Okay. You have to take that income in order to live, right?
14:05 So you cannot afford your count dropping. Let's okay. In the financial crisis, it was 54%. The market went down roughly.
14:11 Okay. So if you're somewhat invested, decently aggressive, you probably lost 30%. You can't afford that if you're taking distributions from your account.
14:18 So what do you do? You're going to look at your account, your accounts, all your investment accounts and your emergency fund.
14:24 You're going to look at three or you're going to get buckets, three buckets. Okay. The first bucket that I look at is a zero to three year bucket.
14:30 Okay. So what you're doing actually, let me back up for a second. You are going to look at what your income needs are that you take from your accounts every year.
14:38 Okay. So you have your social security, you have a pension, that's guaranteed. That's not going to change. You have that coming out.
14:44 Okay. Well, what other income are you having to take from your investment accounts every year? Okay. So figure out what that number is.
14:52 Let's say that's 50,000 for you. You have to take 50,000 from across your investment accounts, along with your pension, your social security.
14:58 You have all that, but 50,000 is what you need for the rest of your bills. Okay. From there, first of all, you need to have an emergency.
15:03 50 fund as well. You need to have three to six months of emergency fund set aside. Okay. So that is the same stash cash.
15:14 Make sure you have your emergency fund for you retirees. Okay. Next is analyze what you need from your accounts. You need $50,000 a year from your accounts.
15:22 Okay. So we're going to first look at a zero to three year bucket, meaning you need to have three years worth of income for zero, for year zero.
15:31 So the year we're in, year one, okay, year two. So we're looking at three years worth of income. In cash like investments that you can pull from if the market goes down.
15:42 Okay. So if you are 50,000 a year, then I want you to have 150,000 in very conservative investments. Thank you.
15:52 Thanks. Or cash like investments for your income to pull from if you are going to go into a recession. So the reason I recommend three years is it is conservative.
16:03 So if you don't want to do that much, you don't have to. It is more of a conservative play. But it was because in 2008 during the financial crisis, it took three years for the market.
16:13 Here it was. It went down hit bottom and then recovery back to where it was before it went down was a three year period.
16:20 Okay. So if you had a draw on your retirement, during that time, which is what happened to a lot of people, they had a postpone because they didn't have the money there to draw.
16:29 I want to save you from that. So if you have three years worth set aside, you should be good to be able to draw your $50,000 for that three year period until the market recovers.
16:38 Now. You're in. You know, like I said, cash like investments are very conservative bond investments is where you can go with this money.
16:47 So you're still getting yield. You're still getting interest rate on it. You still have yield on it. So you're still making money.
16:52 It's not just sitting there. You're still is still an investment for you, but it is more conservative. The principal is more protected.
16:59 And you can draw from that during that time period. And again, three years, that was that longest recovery. So I do say three years.
17:06 You can do less if you want, but that financial crisis was the longest recovery. So this is a pretty conservative you point, but I feel like if you're in retirement, you might as well rather be safe and sorry.
17:17 So let's go this route unless you just don't have this longevity side of it. And, and then you might, you know, you might have to do a little bit less, but that's what that would be that first bucket.
17:25 Your second bucket is four to nine years. So really that 50. Week. We'll be back in the for the four to nine year savings.
17:31 So those basically five, six years how much is that? And you're just putting that in balanced like investments. Okay. And then your 10 plus years.
17:40 So anything beyond that, anything after that is in aggressive for some growth. Okay. So this is how I help clients work through these this strategy when it comes to being a retiree and if you're in the distribution phase.
17:55 So if you don't really quite understand that or you don't know what investments are which then you may need to get some professional help when it comes to pick Thank you.
18:02 But the reason you want to have you still need growth in your portfolio if you are retiree because if you're 65 and you want to last until you know, 90 or or 90 plus taking money out of your account, you need growth.
18:17 To, to get your account to last. So that's kind of the first thing I would have you look at is look at those buckets and make sure you have your income set aside.
18:26 In pretty conservative investment so that you can still draw safely draw your income during a recession in case you needed to.
18:33 We'll see you next week. We'll see you next week. Because you're in the distribution phase, you need that money. That is how I recommend setting up a session planning when it comes to retirees, okay?
18:41 Tip number two, I know that was a lot and that made, again, like you may need some help there and it's a lot of information, but that's a pretty big insight to just how I help my clients.
18:50 That are retirees, okay? Tip number two is to this, so it goes for you as it went for the, if you're in the accumulation phase is you need to know your budget and you need to know what areas that you can cut if you need to.
19:03 Okay, let's say that recession just goes a little bit longer. Then you thought you were pretty good about setting some emergency fund aside and some, you had your distribution set aside or pretty conservative but just lasts a little bit longer.
19:16 What areas can you cut to give you some longevity of that money? Okay, so you need to know your budget.
19:22 There, it's, it's okay to have to tighten the reins a little bit in a recession. That's okay. It's short term.
19:28 It's gonna be alright. You can travel after that. But if there's some certain things that you can cut during that time, just know what you could you can cut if you have to.
19:36 Doesn't mean you have to. But if you do have to, what can you cut? Okay. And then like I said before is to also stash cash because there's opportunity for you too.
19:44 So if you have some cash, shut aside hold on to that for a little while and see what opportunity is a rise for you.
19:50 Even if you're in retirement, it's a great time. You know, if you have some extra cash to put it more into investments if you, if you have that or, or, you know other things that may come up for you.
20:01 So that part is the same. Really when it comes to either if you're in the accumulation phase or the distribution phase, the main thing you can Thank you for watching!
20:10 Not do in a recession with your investments is panic and panic sell. Investing is so much emotional and honestly I actually find this is where I can help my clients more for those that just have a hard time in, in Mm.
20:26 That capacity when it comes to managing their own investments is they don't trust themselves to not sell. When they just see it go down and then down and then down further and then down further and we can all hold off for a little while.
20:37 Then everybody hits a point of like, okay, this is not fun anymore. I think I got to get out. Okay?
20:41 Okay. That is the worst thing you can do and that is the biggest tip for both of these is do not panic sell during a recession.
20:50 If you are managing your own and you don't know and you want to have that impulse to panic sell, seek professional help first and check with an advisor first of like, hey, is this a good idea and I'm, you know, more than likely they're going to say no.
21:05 Check with that first. Like just don't panic sell. Okay. Cause that will put you in such a worst position. You're going to sell towards the bottom.
21:11 I know you are if you panic sell cause that's just when it happens. We'll see you next time. That's when you hit that panic.
21:16 It's going to be towards the bottom. And then it's so much harder to get your money back into the market and recover from selling at the bottom.
21:22 So just don't do that when it comes to a recession. Hopefully these are helpful. If at ever, any point ever, Yeah.
21:31 As you're listening to these podcasts, you ever have questions more specifically of how this may apply to you. Please don't hesitate to reach out.
21:38 There is contact information on here for you to get ahold of me and I'm happy to kind of help walk you through those or answer some questions that you may have.
21:45 So Thanks for watching! Good luck because you're working through these on your own and hope you guys have a great day and we'll see you next episode.