Many people vividly recall the Great Recession. There were numerous foreclosed homes, financial institutions shuttered and businesses closed. Many Americans found themselves suddenly looking at living on much less income than before. It took some time for the economy to pick up and the country to recover. Looking back at those years can help us glean takeaways to avoid mistakes and stay protected.
Some retirement planning lessons from the Great Recession include:
How to protect your savings during a recession.
The safest place to put your retirement money.
The best strategies to avoid too much risk.
How to keep the long-term view in mind.
How to purchase a house that is within your means.
Read on to learn more about these takeaways and set up a path you can follow toward retirement.
How to Protect Your Savings During a Recession
If you have money invested in the stock market, a market downturn will often cause its value to decrease. “When a stock’s value plummets, it’s the worst time to sell,” says Leslie Tayne, a financial attorney and managing director of Tayne Law Group in New York. “If you hold on to your investment long enough, it will eventually recover and possibly hit its highest level ever.”
In addition, if you have the resources, you might continue investing. “A market downturn is a perfect time to buy investments at a steep discount,” Tayne says. “Once prices rebound, you’ll see a tidy profit as a reward for your diligent savings efforts.”
Keep a stash of cash on hand for emergencies and daily expenses if needed. “Maintain a significant cash cushion outside of your portfolio,” Tayne says. “That way, you can live off those funds instead of selling your investments.”
The Safest Place to Put Your Retirement Money
Allocating funds in low risk investments may seem like a good approach to keep your money secure. However, sometimes even long-standing institutions can falter. “Very few people would have predicted that Lehman Brothers would not be a safe investment prior to 2008, but it did not survive the Great Recession,” says Josh Simpson, vice president of operations for Lake Advisory Group in Lady Lake, Florida.
Putting all your funds into one type of investment is not a low risk strategy. “It is important to diversify your investment choices,” Simpson says. You might choose a mix of stocks, bonds, IRAs, a 401(k) and real estate or insurance products.
The Best Strategies to Avoid Too Much Risk
Many households became overextended during the years leading up to the Great Recession. Some took out substantial loans compared to their income. Eventually they couldn’t pay their living expenses and cover their debt payments too.
To avoid being overleveraged, evaluate your current debts before taking out more loans. “There is a level of risk and reward that is acceptable when it comes to your finances, regardless of your socioeconomic status,” Simpson says. If possible, work to pay off your debts so you won’t have extra payments to make during a recession.
Also, steer clear of investments that promise a high return but carry great risk. “We just need to be aware of how much we are willing to risk and not allow ourselves to become overextended because we get caught up in the potential payoff in the end,” Simpson says.
How to Keep the Long-Term View in Mind
Holding money in cash will not give it the chance to grow as much as many other types of investments. Saving only a little can also make it hard to accumulate a nest egg. “Many people had to postpone their retirement due to the decisions they made during the great recession,” says Doug Carey, the owner and president of WealthTrace, a financial planning and retirement planning software company in Zionsville, Indiana.
If you have years ahead of you before retirement, following a savings plan can help you stay on track. “When an investor has a long time horizon with a retirement account, the best strategy is to max out contributions to it, invest the majority in stocks and don’t look at the account balance too often,” Carey says. The market may go down, but if you keep investing your funds you will have a chance to gain value if it goes up again.
How to Purchase a House That Is Within Your Means
Prior to the Great Recession, some home shoppers purchased properties that were very difficult to maintain financially. “When we heard stories of people making $50,000 a year buying houses that cost north of $500,000 with loans that only required them to pay the interest for the first few years, we all should have stopped and thought, ‘Wait, that sounds way too good to be true,’” Simpson says.
Reflecting on the housing market downfall can help us make smart choices today. “We need to do our research on everything we invest in, and pay attention to that voice in our head that tells us something is too good to be true,” Simpson says. Making sure you have enough for a down payment and monthly mortgage bills is a good start. Putting in some extra financial cushion is a solid next step. You don’t want to get in a situation where it is hard to pay off the mortgage.
