A Recession Survival Guide for Retirees

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 — the official recession scorekeeper — uses several indicators to determine when a recession starts and ends. GDP is just one of those indicators. The committee also weighs 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. A recession is not solely defined by the ups and downs of the stock market.

Since 1857, the U.S. has had 34 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.

What causes a recession?

A recession typically 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 mean businesses have to spend more to borrow money, which reduces corporate earnings. For retirees, higher mortgage rates make it 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 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 plummeted 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, an all-time high.

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, a consulting firm in Boulder, Colorado.

“With the housing collapse earlier this century, we coined the ‘Great Recession,’ ” Englund says. “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. But the U.S. economy is not currently in a recession.

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.

More recently, Jerome Powell, the current Fed chairman, spearheaded a series of rate hikes in 2022 and 2023 to rein in soaring prices. The tactic was successful in taming inflation. Now, with the job market softening and the economy slowing, Powell is widely expected to shift gears and start cutting the Fed’s benchmark rate in September.

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 can 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, an investment advisory firm. 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 three to 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. (If you’re not taking withdrawals, it’s generally best to wait it out.) 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 stocks are down 10 percent and you withdraw 5 percent, your stock portfolio 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 1.41 percent in interest, the Federal Deposit Insurance Corporation reports. 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. Sit tight. 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.

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