Near Retirement? How to Prepare for the Recession

How investors near retirement should plan for the recession

For the past year, the Federal Reserve has been forecasting and warning of the possibility of a recession in 2023. Based on historical precedence, despite the aggressive seven rate hikes in 2022, it is looking like if we do have a recession it will be a “soft” recession. This is due to the unemployment rate remaining very low. It is also possible that we have a “rolling” recession that moves from industry to industry as the supply imbalances created by the global pandemic work their way through the economy. It is possible the forecasted recession by the Fed is worse, but based on the current conditions in the U.S. economy following seven aggressive rate hikes, the odds are very low that this will be a long and painful recession. So how should investors near retirement prepare for this?

And if you’re not near retirement but still want to know how to prepare, check out my other articles for young investors and investors in their 40s and 50s.

Soft Recession

I am not an economist but if we do slip into a recession, it should be a short and “soft” recession. Corporate profits will fall but so far that has not happened. The rate hikes have not completely filtered through the entire economy but based on the corporations that have reported this quarter so far it doesn’t appear they are too worried. 

In fact, J.P. Morgan is buying back $145M in shares until March 20, 2023. Large mega-caps do not do this if they see an ugly recession coming soon. This is a mega-cap company taking advantage of its depressed stock price. Even after the equity has rallied 35% from its 2022 lows. They’re buying. Not selling.

What Should Investors Near Retirement Do?

If J.P. Morgan is buying back stock, does that mean those near retirement or those over the age of 60 should do the same? It depends on your lifestyle and when you decide to officially retire.

For this scenario, I am going to operate as someone near retirement that does not have a lot of time to manage my retirement account and needs the income to maintain my current lifestyle through retirement. I am also going to assume that I am going to fully retire at age 67 when I can take full benefits. If I want to retire early at 62, I would be more conservative. The level of conservativeness will exponentially increase the closer you get to retirement. 

Dow Jones Industrial Average

If you are not of the official age yet to start receiving benefits, my recommendation is to continue to invest in the largest blue-chip mega-cap companies via the Dow Jones Industrial Average ($DIA). At this age, it is highly recommended to discard all momentum, speculative, high-risk, or growth investments. That means the S&P 500 ($SPY), Russell 2000 ($IWM), and NASDAQ 100 ($QQQ) should be shunned, and a 60/40 portfolio with 60% $DIA and 40% bonds should be used.

Investors near retirement should consider a 60/40 portfolio even though the portfolio got hammered in 2022.
BofA Global Research.

While the 60/40 portfolio is preferred, it got hammered in 2022 when both equities and bonds lost value and marked the worst annualized return for this mixed portfolio going back to 1931. The good news for those near retirement is that this is an anomaly in what is normally a very safe portfolio exposure.

Short-Term Treasuries

The good news for investors nearing retirement is that the yield for short-term treasuries is the highest we have seen since 2008. At the time of this article, the 6-month yield is at 4.81% and the 12-month yield is at 4.65%. The latest yields can be viewed on Bloomberg.

The current yields are not higher than the current inflation rate of 6.5% (December 2022), but if we continue to see inflation come down short-term treasuries should make for a relatively safe investment. The Fed has signaled plans to continue hiking rates, so yields should increase further before the next rate cut cycle begins. If there is anything that can be considered safe it is short-term treasuries.

Obviously, there is no guarantee on returns and there is never any guarantee a bond yield will beat inflation. However, if we combine all the variables to be considered when retirement is close by, the safest choice is always short-term dated treasures or TIPS (treasury inflation-protected securities).

What Should Investors In Retirement Do?

If I was retired and wanted as close to a guaranteed yield as possible, I would buy $BIL, $SHY, $IEF, $TIP, and $TLT in that order. This also depends on how long I want my money locked in the investment. I am a student of market history and know that if I have a five-year time horizon I should be okay investing some of my money in the Dow Jones Industrial Average ($DIA). That way I can plan for a better overall return than I would get from just the treasuries listed above. However, if I needed to draw into my retirement now I would minimize my investment in $DIA and continue to invest in the short-dated treasuries listed above.

How To Better Plan For Retirement

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The views expressed herein do not constitute research, investment advice, or trade recommendations. No two investors are the same. Everyone has different retirement timelines, goals, objectives, and conditions that should be discussed with a Registered Investment Advisor or Financial Planner. 

Professional Stock and Options trader. @BigWaveTrading

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