Category: Financial Planning

Economists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.

The thing is, predicting a recession is a little like predicting a tornado. Experts are never exactly sure if or when one will occur, but they can cite when conditions a ripe for one based past experience. The good news for predictors is that the economy follows a similar pattern of indicators in the months leading up to a recession.

The bad news is that many those indicators have recently emerged. For example:

• Inverted Yield Curve – This is when the yield on longer-term Treasury bonds is lower than the yield on shorter-term Treasury bonds, which happened recently for the first time since 2007. On average, an inverted yield curve has occurred 14 months in advance of every recession in the past 50 years.
• Corporate Profits – Estimates for corporate earnings growth have dropped substantially since last year, from 7.6 percent to 2.3 percent.
• Global Trade – The ongoing U.S. trade war with China has resulted in weakness in the manufacturing and farming industries. Moreover, global trade volume is also down, which further reduces the market for U.S.-manufactured goods.

What to Expect in a Recession

The worst recession in U.S. history was the most recent one, between 2007 and 2009. Dubbed the Great Recession, it was short (compared to the Great Depression of 1929-1939) but it took a powerful toll on a large chunk of the population. For example, close to half of U.S. households lost at least 25 percent of their net worth; one out of every four households lost at least 75 percent of their net worth.

About one-third of households experienced one or more of the following:

• Fell more than two months behind on their mortgage
• Had their home foreclosed
• Had their home equity drop into negative territory
• Lost a job

That was a bad recession. Fortunately, while economists are seeing signs of another one on the horizon, as of now (absent any significant shocks) they do not expect it to be as severe.

Tips to Prepare for a Recession

With multiple warning signs evident, it appears we do have some time before a recession potentially hits. It’s a good idea to use this time to protect your financial situation to help minimize any impact that a recession can have on you personally. The following are some tips to consider.

Shore Up Your Finances

Start by reducing your debt as much as possible, particularly any accounts exposed to a variable interest rate. The interest on credit cards and home equity lines of credit have a habit of increasing when you can least afford it. If you have a variable rate mortgage you might want to refinance at today’s low fixed mortgage rates so your monthly payments do not increase. One way to generate a robust savings fund is to temporarily suspend contributions to a retirement plan and save that money in a readily available account.

Minimize Household Expenses

Most people have to cut back on household expenses during a recession, so you might as well start now to help you prepare. For example, consider trading in a gas-guzzling car for one with better gas mileage and lower monthly payments, or pull the plug on cable TV and switch to a streaming service. Deploying these cost-reduction strategies now not only reduces your expenses during a recession but will also help contribute to your savings fund.

In many areas of the country, real estate prices are at the top of the market. It might be worth considering selling your house now while you can get a good price. This will give you a pot of cash to sit on during the recession, which is especially helpful if you lose your job. In fact, after the sale you may consider renting until real estate prices drop and you can purchase another home at a good price – and maintain a healthy cache of savings. This strategy could also save you from raiding your investment portfolio for money – helping protect your future financial security.

Protect Your Investment Portfolio

Take a good look at your portfolio and give it a recession stress test. Consider reallocating some funds to options that tend to perform reliably during an economic decline, such as:

• Government bonds
• Treasury Inflation-Protected Securities (TIPS)
• Corporate Inflation-Protected Securities (CIPS)
• Consumer staples stocks
• Well-established dividend stocks
• Fixed Income Annuity (FIA)

Recognize that it is generally not a good idea to completely cash out of the market. The best way to accumulate wealth over time is to stay invested regardless of temporary economic declines. In fact, investors who maintained their market positions between 2007 and 2017 experienced an average 240 percent growth rate.

Once the recession has ended, think about rebalancing your portfolio to realign its strategic asset allocation with your investment objectives and timeline. This allows you to cash in on outperforming assets and buy into depressed securities that could be poised for post-recession growth.

Statistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.

While we’ve not experienced annual inflation rates this century as high as the latter part of the 20th century, inflation can balloon at any time. But what can be even more devastating to a retiree on a fixed income is cumulative inflation over time. It’s also important to recognize that specific consumer product inflation rates can differ substantially from the averages.

For example, according to the Bureau of Labor Statistics, the cost (not always the price a consumer pays) of an oil change in 2000 was about $20. However, motor oil, coolant and fluids have experienced an average inflation rate of 5.66 percent per year – so in 2019 the cost of providing an oil change was about $56.89. That’s a 184.45 percent increase in less than 20 years for a common household expense during a normal retirement timeframe.

To build a portfolio designed to provide inflation-adjusted income throughout a long retirement, consider the following tactics.

Optimize Your Social Security Benefits

Social Security benefits receive periodic cost of living adjustments (COLA) based on the Consumer Price Index (CPI), which is a weighted average of prices of common goods and services purchased by all urban consumers. However, retirees spend more of their household income on goods and services that experience higher levels of inflation, such as medical services. Therefore, Social Security benefit increases might not keep up with a retiree’s actual cost of living – especially over time.

That’s why it’s important to consider inflation in order to optimize your Social Security benefits. In other words, except for people in exceedingly poor health (expected to die within a few years) or in dire circumstances, it’s a good idea to delay starting Social Security benefits as long as you can. If you can wait until age 70, benefits will increase by as much as 8 percent each 12-month period past your full retirement age. Delaying not only increases the level of income you’ll receive each month, but it also gives you more time to save money for retirement and allows your investments more time to grow.

Inflation-Aligned Investments

Another way to inflation-proof your retirement portfolio is to allocate a portion of assets to investments that tend to increase at the same pace as inflation. The following are some options you might want to consider.

• Series I Savings Bond – The I-Bond, guaranteed by the federal ­government, helps protect an investor from creeping inflation in a couple of ways. First, the I-Bond credits the holder’s account with a fixed interest rate plus the annualized inflation rate from the preceding six months. Second, the account value does not drop when prices fall.
• TIPS – Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal increases and decreases in tandem with the inflation rate (adjusted every six months). However, the coupon rate is fixed, so payouts vary based only on the inflation-adjusted principal. Upon maturity, the investor receives the greater of the adjusted principal or the original principal.
• CIPS – Corporate Inflation Protected Securities (CIPS) are similar to TIPS, but they invest in corporate bonds and typically pay a higher yield that combines a fixed payout plus the variable CPI rate. Unlike TIPS, they are not guaranteed by the U.S. government but are backed by the financial strength of the issuing company.
• REITS – A Real Estate Investment Trust (REIT) pays out reliable dividend income that tends to rise with inflation. REITS own or finance a diversified portfolio of income-producing real estate, such as office buildings, apartment buildings, warehouses, retail centers or hotels. REIT dividends have outpaced inflation in all but two of the past 20 years, according to the National Association of Real Estate Investment Trusts.
• IPA – With an inflation-protected annuity (IPA), initial income payouts are low but rise over time to align with long-term inflation, based on a formula linked to the CPI. A differentiating benefit of an IPA is that it offers issuer-guaranteed income for life, so the retiree doesn’t have to worry about reinvesting assets during later stages of retirement.

It is a good idea to work with a financial advisor to incorporate inflation-resistant investments for your retirement portfolio based on your individual objectives, tolerance for risk and timeline.

If you have a relative who recently died and left you in charge of his or her finances, you are not alone. You probably have colleagues at work in the same boat. A neighbor or two (or 10) and even your millennial yoga teacher might very well be working through a quagmire of wills, probates and assets nobody can find. You are definitely not the only one.

The internet has made it much easier to keep track of our checking, savings and investment accounts. But the elder generation generally missed out on the convenience of dashboard consolidation and app trackers. What most of them leave behind are file cabinets full of bank statements and old bills, bookshelves of file folders and prospectuses – perhaps once carefully catalogued. You may start rummaging through papers and not find anything more recent than five years ago.

How do you wrap your hands around investments and assets you know your dad owned but have no idea where they are?

Bear in mind that when there is no activity in an account for a year or more, assets may be deemed dormant or abandoned. They could eventually become property of the domicile state through a process called escheat, so it is important that you do not wait too long before finding lost assets.

Start at Home

If your parent used a computer, you should get access to his file folders and dig into his email account to see if he received any electronic communications from financial companies. If he wasn’t computer literate, then start with the mail. It may take six months to a year to get your hands on all of the paperwork, but if your relative did not sign up for electronic delivery then companies are required to send him statements through the U.S. mail.

If no one continues to live at his home, the easiest way to do this is to notify the post office to route all of his mail to your address. To do this, you will need to complete a Forwarding Change of Address order at the post office and provide proof that you are authorized to manage the deceased’s mail.

As you’re rummaging through Dad’s paperwork, here are some tips on what to do:

• Look for bills and check if those entities are holding a utility deposit;
• Look for statements for bank accounts, bonds, stocks, mutual funds, CDs, dividend or payroll checks, life insurance policies and retirement accounts;
• Look for any record of a safe deposit box, such as a bill for the rental or a key; if he has one it is most likely located at his bank branch;
• Contact his past employers to ask if they have any record of pensions, retirement plans or employer-purchased life insurance for your parent.

Once you get your hands on any statements, call the company or broker listed. You will need to send them certain documents to verify your parent is deceased (or a durable power of attorney document if he is incapacitated). Different firms and circumstances might have different requirements, but you’ll definitely need to send a copy of the death certificate. You may also be asked to provide a Court Letter of Appointment naming you as executor, a “stock power” of attorney that enables you to transfer ownership of stock, a state tax inheritance waiver, affidavit of domicile, trustee certification showing successor trustee, and/or a letter of authorization for joint accounts.

You’ll need to call and provide these or similar documents for each institution where your parent holds assets. Don’t worry, these companies have trained staff to help guide you through the legal process of how to manage the assets of deceased account owners.

Move to the Internet

Check unclaimed property lists at every state where your father lived. Get started at Unclaimed.org, a free website that allows you to search for unclaimed property held by each state. Also search at MissingMoney.com to conduct a national search.

Go to the Pros

If you’re sure your relative had more assets than you’re able to find, consider hiring a forensic accountant. These professionals have the tools and expertise to find offshore accounts, shell companies and other types of financial accounting practices. For example, a forensic accountant may request an IRS transcript that reports past 1099-DIV and 1099-INT distributions. Note that banks are required to issue such forms for account activity involving $10 or more.

You also may want to share your task with your own financial advisors. They might be able to recommend ways to help you track down, transfer and manage your parents’ assets, particularly if you need to set up income sources for another parent or relative. The point is, you don’t have to go it alone. This is a common problem and there are experts to help you work through it – but it will likely take time, patience and a lot of paperwork.