Recessions are a normal part of our economic cycle, as difficult as they may be, but what if you're retired? Are there any changes that you should make in the event that we find ourselves in a recession?
Experts suggests holding one to two years of your annual expenses in cash if you're retired and this is because it can take years for the stock market to recover from a big drop, something like what we saw in a recent bear market.
A bear market is just when we see the stock market fall 20% or more from a recent high. When we look back in time, the last bear market that we had combined with the recession was in 2007. This was a result of the financial crisis, and this bear market took one and a half years for the stock market to fall from its high down to its lowest point.
If we jump back even further and we look at 2000, we had another bear market recession combination and that was a result of the tech bubble that burst and that bear market lasted even longer. It took two and a half years for the stock market to reach that bottom.
Now, in addition to the time it took for the stock market to fall, it also took multiple years in both of these situations for the stock market to recover back to the high point prior to that drop in the stock market. The reason why all this is important to keep in mind is that retirees need their savings to last pretty much as long as possible and when you have to sell investments when the stock market is falling, it can shorten the overall life of your savings.
So, this is why if you're a retiree, it's important to keep a portion of your retirement savings in cash to help you weather these difficult investing times.