by Jessica Zoroastrian
Many Americans work hard for decades to save money for retirement. They deduct funds from paychecks and keep strict budgets so that money can be stored away, invested and grown into a security net for their elder years.But what happens when a recession hits?
That is a crucial question for workers, as the International Monetary Fund officially forecasted a global recession. Official numbers from the end of July 2022 confirmed that the American economy shrunk by two quarters. The U.S. Bureau of Labor Statistics reported that inflation is at a 40-year peak and the Federal Reserve raised interest rates for the second time in late July this year. As the economy slows, securities markets also slow, affecting hard-earned and long-held retirement accounts.
Whether someone should react to the recession or take action to protect their retirement savings depends largely on how close they are to retiring and many other factors. If retirement is coming up soon, it is best to speak to a financial adviser about reducing risky investments or pulling back from volatile securities. Those changes could minimize devastating losses if the market takes a tumble during the recession.
However, many financial advisors give completely different advice to investors whose retirement is still years down the road: DO NOT PANIC during a recession. The U.S. National Bureau of Economic Research found that most modern recessions last about ten months. If retirement savings are not needed during that time, then long-term accounts can handle a short-term dip in capital proceeds. Panicking, selling investments or pulling back from the market during a recession means that the investor may not profit from the securities they sell. So the best advice—usually—when it comes to young savers in a downturn is to ignore it.
However, recessions can also be amazing opportunities for savers. Baron Rothschild, a famous economist, is believed to have said, “The time to buy is when there’s blood in the streets, even if the blood is your own.” In a bear market with plunging market values, investors can purchase low-cost securities, which are expected to gain value as the market recovers.
That advice is easier said than done. Spare money for savings is tough to find when the cost of basic living essentials is skyrocketing. Still, recessions provide chances to purchase securities at a temporarily lower value if an investor can afford to do so. Choosing to buy or sell against the overall trends, called contrarian investing, is easiest during a recession because most people retreat from the market. As a result, securities may be undervalued compared to the economy’s likelihood of eventually recovering.
Even though Boeing’s stock value crashed after the post-9/11 recession in 2002, its purchase price more than quadrupled over the next five years. Those who bought Boeing stock during the slump saw huge capital gains if they stayed patient. Similarly, Warren Buffet purchased an interest in the Washington Post Company during the 1973-74 recession, and his investment has increased 100-fold since that downturn. If he’d purchased that same investment at a higher price in a strong economy, his investment certainly would not have grown over 100 times its original amount.
A recession may be a wise time for retirees or those close to retirement to reconsider their riskiest investments. Even though young savers may be tempted to withdraw their investments; it is better to wait until stock values recover before selling them. Instead, investors should remember that the low cost of buying securities during a recession is a great opportunity if they have the cash and bravery to lean into a struggling marke
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