Our job as Financial Planners is not to make economic predictions, but to help our clients adapt their Financial Plans to cope with the challenges that life throws up.
But one of the questions our clients are asking us is what action they should take if we do experience a recession or depression.
Our clients aren’t just worrying for themselves; they also worry about how their children might be affected too, no matter what age they are.
Our daily conversations with our retired clients often include consideration of whether they will be able to support their children, should it become necessary.
Regardless of what happens to the economy, there will still be three main stages of your financial life:
Accumulation. When you are building up funds to help you to take it easy later in life
Retirement. When you are spending the funds you built up in the accumulation stage.
Transition. When you are moving from accumulation to retirement.
When I first started helping people to plan for their retirements (back in the 1990s!), hardly anyone went through this stage. But now it’s become increasingly common – as a result of not only improved health but also of necessity, as longer life expectancy requires us to accumulate more before we can retire comfortably.
The impact of the recession depends on which stage of your financial life you are.
If you are in the accumulation stage, you’re more likely to be worrying about the micro-economic impact of the recession – are you going to have to take a pay cut or lose your job altogether as the impact of the coronavirus hits?
If you are in the retirement stage, you’re more likely to be worrying about the macro-economic impact – will you be able to generate enough income from your retirement resources?
If you’re in the transition stage, and you like worrying, you are in luck! You can worry about both the micro and macro-economic consequences of the recession.
But regardless of your life stage, your concerns will be, in essence, the same – will you have sufficient income and capital to cover your outgoings and liabilities?
We recommend the following steps for everyone:
Know your outgoings. In a recession, it becomes essential to have a detailed understanding of your outgoings. You need to be able to break down your outgoings into essential and discretionary items and make sure that you include the occasional items (like house maintenance and repairs for your car).
We’ve lived through some good times recently, and I’ve lost count of the number of clients who don’t budget.
For as long as they can remember, they have felt that there’s been no need – their income has always exceeded their outgoings and there’s been a healthy surplus to put to one side.
In a recession, a more planned approach becomes essential.
Understand your income sources. This is probably simple in the accumulation phase, when you may only need to consider your earned income.
However, you may be able to generate additional income from your investments too, if you need to, and, if you are over the age of 55, your pensions can be a potential source of income for you also.
When you are in retirement, it’s essential to understand what income is guaranteed and what income may vary.
Review your liabilities. In particular, you should ensure that you understand what your significant liabilities are and make decisions about how you will cover those liabilities.
Know when your current mortgage deal comes to an end, and find out what your options are; could you move to interest-only temporarily, if things become difficult, for example?
Understand your capital. It’s essential to make the distinction between liquid capital, which you can spend at any time, and illiquid capital (i.e. assets that it will take some time to convert to cash, like property).
Understanding that distinction will help you to know how quickly you can convert your assets into spendable cash, should you need to.
Recessions can also change the financial stage of life you are in, pushing you from “accumulation” to “transition” and, possibly from “transition” to “retirement”.
If you are to plan for a recession, that plan may need to include a contingency for an enforced change to your financial life stage.
Next time, we’ll look more carefully at how the “coronavirus recession” could affect the Financial Plans of people who have already retired.