Will Your Retirement Plan Work During a Recession?

Will Your Retirement Plan Work During a Recession?

The following is a transcript of Episode #55 of the Retire Happy podcast with Roger Gainer.

All episodes of the podcast can be found at Apple PodcastsGoogle Podcast, and Spotify.

Roger: These are the times when great wealth is made, is during these types of economic changes and upheaval. So, just think of it as an adjustment, not the end of the world. The sky is not falling, but we have to adapt our thinking to this new environment that we haven’t had to deal with for 50 years. If you do that, not only can you survive periods like this, you can really prosper.

Clark: You’re listening to “Retire Happy with Roger Gainer,” president of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner.

With so much uncertainty in the world today, it’s more difficult than ever to make decisions that can help you progress toward your financial goals. In this episode, Roger helps us think through, how will your retirement plan work if we enter a recession. Roger has shared before nothing goes up forever. So, what does that mean to you right now? You likely have questions like, what are the risks in a recession? What if you lose your job? Things change, but Roger shares an optimistic look, recognizing there are always opportunities as it relates to preparing to retire happy.

There’s a lot to cover, so we’re gonna dive right in. And don’t forget to head on over to gainerfinancial.com for more content like this. Enjoy the show.

Roger Gainer, welcome back. How are you doing, my friend?

Roger: Doing well. Doing well.

Clark: We’ve got a big topic today.

Roger: We do.

Clark: This is like, this is the big question. I think the biggest question we’ve been hearing this year, and I just wanna jump right into this, it’s how will your retirement plan work if we enter a recession? How often are you getting this on a daily, on a weekly, on a monthly basis right now?

Roger: I’m getting this, you know, clients call from time to time, and the majority of calls and emails of people who are concerned are worried about recession, and by extension, inflation, okay, because we’ve really got a series of economic conditions right now that we haven’t seen in really 50 years. And, you know, when you stop and think about it, 50 years, you know, obviously that makes…

Clark: It’s a lifetime for…most of your lifetime for most people.

Roger: It sure is. And, you know…

Clark: A working life. It’s probably the entirety of a working lifetime.

Roger: Well, I’m still working.

Clark: Okay. You’re right. You’re always working. You love this. It’s your passion. You don’t have to be working, but you choose to just work.

Roger: I don’t have to be, but I choose to be working, and I want to be sharing with our listeners because most of the people in the financial services world have no idea how this works, right? Most of them.

I find, you know, I’m a geeky student of markets, and economies, and cycles, and all of that kind of stuff, but I lived through this stuff. I mean, I financed a car. My car was parked in a parking lot, and some person lost control and totaled my car. I had to go out and buy a new car in 1981, and I bought a nice new Volvo. And the dealer, you know, as dealers want to do, they told me to take the car home, and I did. And then they called me the next day and said, “We’re having a little trouble getting you financed because there’s just no financing, right?” Credit crunch, credit dries up, but then they finally found me a 14.5% loan, which was actually very low for the time, for four years.

And at that same time, I had a 14% double tax-free, excuse me. AAA-rated Ukiah school bond here in California. So, you know, that’s the first lesson to learn, is that interest rates tend to be relative. So, what you pay on debt gets greater, and what you earn on savings also gets greater.

You know, we had money market funds in 1980, paying as much as 17%, 18%, and let’s just say that retirement planning was a lot easier back then but inflation was taking a big bite. And so, you make adjustments in your thinking and in your behaviors so you don’t get swallowed up by that. Because what is inflation? Inflation means that what cost X last week now costs X plus Y this week. And, you know, depending on how fast that Y is growing, your money doesn’t go as far. You don’t buy as much stuff.

Clark: Yeah. The gas doesn’t take you as far. You know, the fuel base. I mean the, yeah, I hear you on that.

Roger: And money is fuel. That’s a great, great analogy, Clark. Money is fuel for our lifestyle, especially in retirement.

Clark: And what you don’t wanna do is get retirement, yeah, and you don’t wanna run outta gas. You’re definitely not retiring happy if that’s the point.

Roger: Well, there you go.

Clark: Now, let me ask you this, can we go one level deeper? I’ve heard you talk about hyperinflation and there’s, I mean, that’s a…we’re hearing a lot of this stuff in the news and headlines. So, what does that mean? And then let’s start transitioning that to what these risks might be in a recession.

Roger: Well, first of all, I don’t know that true hyperinflation will get here. You know, I experienced hyperinflation back in the ’80s. I went on a trip to Rio de Janeiro in 1984, and in Brazil, they had 2,200% annualized inflation then, and literally, prices changed every day. You’d go to a store and you’d see, you know, X, I forget what their…the real, I believe is their money, and next day it’d be up by 5%, 10%, the same item. So, when you have hyperinflation, you buy stuff as soon as you can because it’s gonna cost more later, right?

Clark: And that’s gotta be so unpredictable for an economy. I can’t even imagine going to the store one day for this and it’s a completely different price the next day. So, that’s unstable. So, you’re basically saying we’re not gonna get to that point is your thought?

Roger: Until the dollar is no longer…

Clark: The world’s.

Roger: The world’s standard. You know, I mean, I always people…we’ve talked about this before. People come to me about gold, and Bitcoin, and alternative things, and, you know, until they stop pricing all that stuff in dollars, dollars are what everything is pegged to.

And so, you know, we’ve talked before about the conversion risk. You can only spend dollars, right? So, whatever you put your money into, one of the risks you take is not just of that asset going down, but what can I convert that asset back into dollars in order to spend?

And I’ve often used the analogy, you know, my house is worth seven figures. I can’t knock a couple of bricks off the porch, and run down to the store and say, you know, “Here’s 150 bucks worth of my house, I wanna buy dinner.” That doesn’t work, right? I need cash.

So, that means that, you know, having money, but on the other side of that, having prices go up, I have to have some way of keeping pace with inflation too. So, if I just keep everything in a box under the bed in cash, my buying power’s gonna go down. That’s also losing lifestyle and financial security, right?

Clark: Right. Well, I think as you’re talking about asset prices or heading down, I think something I’ve heard a question also come up before is if asset prices are headed down, will everything be losing value? Is that a good transition point to talk a little about that? Like, with how do you because that’s kind of a scary moment.

Roger: Well, the great concern at this point in time, even though people are very focused on inflation, and we’re hearing the Fed’s raising interest rates at a very rapid rate head off inflation, and we could have a lovely mental exercise about whether what the Fed’s doing will work or not, or how do we tame inflation and will inflation ever get back to that 2% range?

And to me, that’s not what’s important. Remember, I always keep my eye on what are we trying to accomplish here, and my specialty is retirement, okay? And in retirement, it’s not whether my assets are going up or down in value, it’s about my income stability, and will I run outta money.

You know, we were chatting before we got on here and you were talking about fuel and making that fuel last, and how inflation eats away at that. And that is a real thing, and a great analogy I might add. You know, if we run outta gas and we’re trying to get somewhere, we’re not gonna get there. And in retirement, that gas is income and dollar-based income, right? Because, well, we live here in a dollar-based economy. So, having money to spend.

So, the big risk right now, as I started to say a minute ago, is that the Fed is gonna raise interest rates so far, so fast, that it’s gonna knock consumer demand off at the knees. That people will stop buying things. And if people stop buying things, then supplies of things go up, and the value of things goes down, and economic activity gets cut back. People get laid off because there’s not profits in companies because they’re paying more in interest rates. And we end up with a thing that I experienced back in the ’70s, and I’m starting to see the word come out of the woodwork, stagflation.

Clark: Stagflation. S-T-A-G…

Roger: F-L-A-T-I-O-N.

Clark: There we go.

Roger: Stagflation. Look it up.

Clark: Yeah, yeah, yeah.

Roger: It’s when prices are going up, but the economy is shrinking. And that’s usually a transition period to a more normal economy but, you know, it is the possible consequence of what the Federal Reserve is doing and what’s happening, frankly, around the world.

I mean, you know, everybody wants the Fed to fix it, but at the end of the day, inflation is everywhere. Interest rates are rising in much of the world. And, you know, there’s the war in Ukraine, and energy supplies, food supplies, and distribution, shutdowns in China and major cities because of COVID.

And so, they shut down factories, supplies go down, that pushes up prices. You know, and you may not feel it when you’re listening to this because, you know, we’re gonna see a lot of sales coming up, for example, seeing a lot of things. Yesterday on the “TODAY Show,” they were talking about all the Christmas sales are gonna be very early this year because stores don’t want to keep inventory because with higher interest rates, it’s more expensive for them to hold on to that inventory.

And if we are having inflation, the value of that inventory goes down. And so, they wanna sell out of stuff early this year, so there’s gonna be lots and lots of sales.

I read an article probably six weeks ago that in Texas because of the drought and the high cost of fuel and other things, cow ranchers and dairy farmers are thinning the herd. So, they can’t afford to fatten the cows. There’s not a lot of grazing land and hay is getting expensive, so they’re taking those cows to slaughter and thinning the herd just because they can’t afford to keep feeding them.

So, there’s gonna be a short-term oversupply of beef, this is just one example, and then there’ll be an undersupply because they’re not gonna replenish the herds at these costs. So, now steaks and things like that will get more and more expensive. And this is gonna happen not just with meat but with all kinds of different things.

Clark: Yeah. It sounds like it’s almost like when you have like rope, and you have like slack that builds up and then it suddenly gets tugged out really quickly again. It kind of, there’s an unpredictability almost with that. So, that being said, what would you say this means for someone when we’re thinking about the risks that we’re going in? What are some people? What are some opportunities? I know you’re always…

Roger: There’s always opportunities.

Clark: There’s always opportunities.

Roger: Sure.

Clark: So, how do you take this uncertainty and start to think about, okay, what does this mean for me?

Roger: Well, you know, and in our conversations over the last couple of years, I’ve brought up numerous occasions that this was coming. We just didn’t know when and to prepare. And one of the preparations I was recommending for folks is raise cash. Raise cash. Now, that may seem counterintuitive with the inflation numbers, but cash, like we said, many assets are priced in cash.

And if in fact we do go into a recession, and that means that a lot of things are gonna go down in value. And inevitably that snowballs upon itself, and some of those things are assets that people invest in. Assets like real estate, assets like stocks, even bonds are going down in value. People are selling things, you know, sell things to raise cash, and that becomes its own little snowball effect that accelerates the price depreciation because people, you know, they start losing their jobs, they gotta sell stuff to raise money to buy food and keep shelter going and all of that stuff.

So, inevitably when those prices on things like stocks and real estate go down, people with cash are gonna get to benefit because they can buy stuff on the cheap.

And we always talk about buy low, sell high, right? And it’s always funny how investors are. A year ago everybody wanted to buy stocks. Oh, my god. Stocks, stocks, stocks. And, you know, we’re starting to buy here, but we’re buying with protection.

So, one of the strategies I just put a client in, we opened an account, it’ll be funded probably next week or the week after because funds have to transfer. And he’s going, “Well, it might go down more.” I said, “Do you know? Do you know if it’ll go down more? I just know it’s gone down a lot, and you’re buying at a big discount. And last year you were all anxious to buy, and now that you’re buying at 25% below that, you should be excited. So, what if it goes down another 15%? That’s still a lot less, and then you’re there for the recovery.” And by the way, in the strategy I’m putting him in, if it goes down by 15%, he doesn’t lose a dime.

Clark: Really?

Roger: Yeah. So, you know, these are the kinds of things, ways to protect because we know when this changes back, history, you know, well, past performance is no guarantee of future results, we do find that after bear markets, we get some of the best percentage gains in things like stocks and real estate coming off of those bottoms. And so, I like to put my clients in strategies that will benefit on that rebound but not get beat up on the way down.

Clark: I mean, that’s the best of both worlds. You’re kind of getting a little bit of, you know, right?

Roger: Well, you don’t get the grand slam home run. You just get a home run.

Clark: I mean, I’ll take a home run over a…

Roger: There you go.

Clark: …a strikeout.

Roger: You just get a home run, you don’t get a grand slam. And, you know, because, and we’ve talked about this before, the math is very clear. Don’t lose money. Don’t lose money. I was at an event….

Clark: Yeah. What does that…yeah, tell me about the event. Tell me what that really means because that might…people might interpret that differently.

Roger: Okay. [crosstalk 00:17:02] over the weekend at a friend’s backyard, and there was a bunch of folks there that I…this is an annual party, and I see some of the same people every year at this party. And I was talking to a gentleman and his wife who retired since I’d seen them last. And he was, you know, very happy, and excited, and, you know, he’s telling me about that he gets a great pension from the state and retirement’s just working out just great.

His wife goes, “Yeah, I don’t get that pension. I was in the private sector. I had to save and all this other stuff.” And so, she’s getting Social Security, and he was like, yeah, we got good income. And I know our investments, you know, kind of taking a hit right now but I’m a great believer. I’ve been doing this a long time. I know that the markets do come back over time.

I said, “Well, now that you’re retired, do you have time to wait for it to come back?” He goes, “What do you mean? You know, I know it’ll come back.” I said, “Well, do you have 13 years?” And he said, “I don’t understand.You know, the market comes back.”

And I said, “Well, the S&P 500 went over 1500 for the first time in September of 2000. It got back to 1500 in the fourth quarter of 2007, got into the low 1500s. Did not go into the 1600s, went back down, if you remember, 2008. I know most of our listeners do, and it took until 2013 before the S&P 500 got above that low 1500s and went into 1600s and above. So, that’s 13 years. And if you’re retired, say you’re 70 years old and you’re retired, well, you’re gonna be 83 before you get back to where you were. And, of course, with all that inflation, you really aren’t back to where you were, right?

Clark: Yeah. Yeah.

Roger: Because you’re out the inflation amount over all of those years, okay? So, the job, the risk, yes, it’s most likely to come back, and then we’re not gonna get in another discussion about Japan where we’re still waiting for it to come back 40 years later because it hasn’t, and at some point, it won’t even here, but do you have time to wait for that recovery? And he goes, “Well, I don’t need the money today.” I said, “Do you think in the next 13 years you might have an opportunity for a trip or an event or something in your life that you might wanna spend money on? And you’ll be forced to sell at a low point because of the strategy you’re following.”

Clark: So, not only would you sell at a lower point, there might, I mean, sometimes there’s penalties with this stuff.

Roger: Sometimes.

Clark: Right? With some investments.

Roger: Sometimes there’s penalties [crosstalk 00:20:12]

Clark: How about options?

Roger: So, yeah, you kind of paint yourself into a corner because you’re forcing yourself. The one thing we know, and, you know, and let everybody stop and just think about this for a minute. Life is a random pathway. You know, we can make all the plans we want, but if we’re asking for a plan to…if in order for a plan to work, it’s got to…everything’s gotta go perfectly, you know, to me, that’s high risk because life does not travel in a straight line, you know what I mean? There’s always surprises and challenges along the way, and we need capital for those things.

So, first and foremost, I encourage people to make sure you have enough cash available, and there’s two types of cash. There’s cash, you know, that’s highly liquid. Maybe it’s sitting in a bank or at a brokerage firm or something like that, and the other kind of cash is cash in a drawer.

You know, here in California we’ve had several warnings about brownouts, and power outages, and the potential for that sort of stuff. You know, the folks in Florida here are about to get hit by a big old hurricane.

Clark: Yeah. And, of course, the timing of this, you know, we don’t want time box us in like all the principles you’re sharing, it’s timeless but, yeah, at the moment [inaudible 00:21:33].

Roger: Well, it’s the principle is that those people can count on being out of power for possibly weeks. So, they better have some cash around because ATMs aren’t gonna work, credit cards aren’t gonna be able to be processed. I mean, that’s…

Clark: A dose of reality.

Roger: …that’s the other kind of cash that I always talk about.

Clark: I see what you mean.

Roger: You wanna have money under the mattress.

Clark: A little go bag.

Roger: In the sock drawer, right, just to make sure. And it should be hundreds if not thousands of dollars enough for you to live for several weeks without power because, you know, the prepared are gonna have a much easier time than the not prepared.

Clark: This has all been really helpful to think through. I mean, it is important to take a look at what might happen. You know, there’s a hurricane happening in what seems like the economy at times. So, having a plan, right?

Roger: Well, that’s it. That’s a great way to think of it. This is a hurricane. We don’t know exactly what path the hurricane is gonna travel, we just know it’s building, you know, in power and intensity, the economic hurricane.

And so, you know, it’s time to be very, very selective. You know, for a number of years, you could buy darn near anything, buy an index fund, and you don’t have to worry about whether, you know, 500…if you buy an S&P 500 fund if those 500 companies are good spirits or bad spirits. You just rode the wave, right, and it went up and you felt like you were a genius. It wasn’t you that did it, it’s just, you know, it’s the crowd. And so, now you can’t just ride that wave.

A lot of companies that saw their stock go way, way up, well, first of all, some of these companies aren’t gonna survive. It’s just that simple. You know, we’ve talked before that when the S&P 500 came out in the 1950s, only 93 stocks in that initial 500 are still in the index and only 130 of those companies still exist.

Clark: That’s an important context. Yeah.

Roger: Yeah. Companies come and go. And so, if companies are going, they usually go during recessions. Recessions are ways to clean out an economy. You’ve had excesses, and most economists are making pretty good arguments that we have a lot of excess in our situation, in our markets, you know, a lot of overvalued assets because all the cheap money that’s been around, you know, which encouraged that type of speculation.

So, now is the time when advisors really earn their money. You know, when things go bad, it doesn’t mean it’s bad for everything and everyone. We’re finding some significant values and things with extremely minimal risk. You could say that nothing comes without risk, but like I said before, if the dollar is our standard and we go into a recession, and things are going to become less valuable than our dollar by extension becomes more valuable, where do I keep those dollars?

And there’s only four places, well, five places where you can keep dollars. One, of course, is a box in the backyard or under the mattress, but two of them are with banks. Those are savings accounts, not to be confused with money markets, savings accounts, and CDs. That’s it.

And with insurance companies, life insurance companies specifically, you can use fixed annuities and fixed life insurance. And outside of a box in the backyard or underneath your mattress, there’s no other place to put cash. So, if you’re gonna raise cash, you gotta pick one of those.

Now, the deposit accounts with insurance companies tend to pay a little higher and in some cases significantly higher interest while not exchanging out of dollars, and most of the insurance options, the annuities in the life insurance have tax advantages where the CDs and savings accounts do not. But if you’re interested in finding out about how those options all compare, hey, give us a call at the office, or go to our website at www.gainerfinancial.com, and send in a request, and we’ll be happy to set up to any of our listeners a 30-minute call at no charge to talk about how those options could be incorporated in what you’re doing.

Clark: Yes. And you’ve got the helpful free thought organizer.

Roger: There you go.

Clark: You have the thought organizer, which is a great resource as you’re thinking through all of this. It’s great to do it with your partner. Think through, you know, what are you mapping out for the future? So, yes, thank you so much for sharing that other resource as well to connect with you or with your team.

Roger: Absolutely. And if you’ve done a thought organizer 3, 4, 5, 10 years ago, it might be a good time to do another one because your thoughts might be very different now. And if you have a spouse or a partner, it’s a great exercise to do separately together and then compare your answers, so that you guys can really work together to get through what’s gonna be probably a rough part but just remember that the economy adjusts.

We have a very resilient economy, and these are the times when great wealth is made, is during these types of economic changes in upheaval. So, just think of it as an adjustment, not the end of the world. The sky is not falling, but we have to adapt our thinking to this new environment that we haven’t had a deal with for 50 years. If you do that, not only can you survive periods like this, you can really prosper.

Clark: Boom. That is what it’s all about. Roger, thank you so much for taking the time to share this in the midst of so much uncertainty. We always appreciate your time.

Roger: All right. Well, it’s my pleasure. Talk to you soon.

Clark: Roger L. Gainer, RICP, ChFC, California Insurance License Number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial and Insurance Services, Inc. is not owned or affiliated with HFIS, Inc., and operates independently. The contents herein are the opinion of the speaker and should not be considered as tax or legal advice. This podcast should not be considered a solicitation for investing or advisory services. Strategies mentioned are not a recommendation to implement or purchase those products or strategies. You should contact your own advisors as to the appropriateness for your specific situation.