What changes, if any, should a retiree make before recession or stagflation becomes obvious?

[Onda]

A recession is easy to discuss after it arrives.

Stagflation is even easier to recognize once inflation is already elevated, growth weak, and markets have adjusted.

What interests me more is the period before that (We may be at that time) — when signs are mixed, inflation remains sticky, growth slows, and nobody yet agrees what is coming.

For a retiree already living off portfolio cash flow, should anything actually change at that stage?

Do you reduce cyclical exposure?
Raise cash?
Favor dividend reliability?
Extend bond duration later rather than sooner?
Or simply accept that trying to prepare too early often does more harm than good?

Historically, the difficult part seems to be that markets usually move before consensus forms.

By the time recession is officially recognized, portfolios have often already repriced.

 

[jazz4cash]

Making changes in anticipation of something that may never occur is akin to market timing. I’d like to think my portfolio can weather <almost> any economic condition for at least 3 years. The primary tool to achieve this is planning (laddering) and AA. I do accept slightly lower returns in exchange for this insurance. I try to pay attention to the warning signs and I might tweak things on the margin but that is really more of a feel good move than anything else. If the stagflation or recession actually occurs the response will primarily be on the spending side of the equation. That is only possible if you have a discretionary spending buffer.

 

[Al18]

I have more than 5 years of retirement expenses in fixed income. I don't care what the market does for a couple of years.

 

[marko]

I think by the time "it becomes obvious" it's way too late. I think most here would say that a well constructed portfolio, with some amount in a holding pattern, should weather any storm.

The mid 70's, '87, GFC, '20....none of them were any fun, but taking the long view helps. Some periods are just worse/better than others. "Over time" as they say.

Such is life, and investing.

 

[Trailwalker]

Stick to the plan. My crystal ball is cloudy.

 

[MichaelB]

Both terms, stagflation and recession, are too vague. How deep a recession and for how long? How high inflation and for how long?

 

[dobig]

About the best one can do is have at least 1 - 2 years cash. For ourselves having a reliable income stream from dividends to help buffer the blow is paramount.

If you have bonds you'll need to have different durations. Shorter term for inflation scenarios and intermediate to longer duration for recession scenarios. We've nixed the majority of bonds in our portfolio in favor of blue chip dividend etfs. As previously mentioned in 13 of the past 14 recessions since the 40's the average drawdown in S&P dividends is less then 1%. Exception being the GFC where dividends fell 22% and took less than 2 years to recover to previous highs trough to peak.

 

[ut2sua]

I have more than 5 years of retirement expenses in fixed income. I don't care what the market does for a couple of years.

The good thing about this ^^^ is an 80/20 AA portfolio does satisfy the 5 year fixed income requirement (assuming a 4% WR). An AA of 80/20 still has a lot of growth potential.

 

[dobig]

The good thing about this ^^^ is an 80/20 AA portfolio does satisfy the 5 year fixed income requirement (assuming a 4% WR). An AA of 80/20 still has a lot of growth potential.

The issue I personally had with this is if we were retiring in a situation similar to 1999. We'd easily go thru that 20 - 30% of our portfolio in bonds over the subsequent 10 years where you had a negative rate of return in the market. We'd also have had to dip into the equity portion of our holdings severely stressing our portfolio. S&P dividends on the other hand had a real rate of return of 2%/year during that lost decade.

The opposite side of this would be those who had a large enough bond holding during the GFC did very well. Especially if the dividends from their bond holdings provided the bulk of their income needs. If you believe inflation will be tame in the future this might be an approach to consider.

 

[Al18]

I think 80/20 is a pretty risky asset allocation for a retiree. Mine is 50/50.

 

[target2019]

Depends on how long we go for the inflation and recession. 1) We have sufficient cash buffer. 2) Dividend-tilt. 3) Lower dependency on withdrawals.

It seems to me that for a few years more we're committed to inflation over 3%. Keeps the articles coming

 

[SnowballCamper]

A recession is easy to discuss after it arrives.

Stagflation is even easier to recognize once inflation is already elevated, growth weak, and markets have adjusted.

What interests me more is the period before that (We may be at that time) — when signs are mixed, inflation remains sticky, growth slows, and nobody yet agrees what is coming.

For a retiree already living off portfolio cash flow, should anything actually change at that stage?

Do you reduce cyclical exposure?
Raise cash?
Favor dividend reliability?
Extend bond duration later rather than sooner?
Or simply accept that trying to prepare too early often does more harm than good?

Historically, the difficult part seems to be that markets usually move before consensus forms.

By the time recession is officially recognized, portfolios have often already repriced.

No.
No.
No.
No.
No, but reexamine my bond maturities so that some will mature earlier. Then I'll not have to sell bonds at depressed prices if rates rise.
Preparation is being ready to rebalance, e.g. buy more stocks when my AA is too far out of whack.

 

[Al18]

“Preparation is being ready to rebalance, e.g. buy more stocks when my AA is too far out of whack.”
Yes, I agree with this statement.

 

[marko]

OP, your question implies defensive measures, which is understandable.

Personally, having profited quite nicely from the most recent recessions, the only thing I'd be prepping for would be what juicy opportunities might surface.

 

[Koolau]

I have typically carried more cash/cash like funds in my AA to give extra time for inevitable financial disruptions such as recession/stagflation. It does cost money as does all kinds of insurance.

 

[FD1000]

I don’t rely on forecasts or so-called “expert” predictions when making investment decisions. I also don’t invest based on opinions about what might happen.

Instead, I focus on what the market is doing right now, using charts and price action. If something is real, it should already be reflected in the market in real time.

I keep only about 2–3 months of cash on hand, which means over 99% of my capital is consistently invested.

As for fund selection, I stick to a simple rule: I invest in funds that are in clear uptrend in leading categories. If a fund begins to lose momentum or trend downward, I sell it.

And if the risk is very high I sell to MM and waiting to enter back.

 

[target2019]

Key triggers of Stagflation include:
1) Energy price spikes, as during the 1973 OPEC oil embargo.
2) Supply chain disruptions like tariffs, conflicts, etc.
3) Currency weakness, which makes imports more expensive.

Jeez. We're on the precipice again!

I realize money market funds lose out during inflation, but our needs are pretty simple now. There will be some ballast. Same for shorter bonds. Will investigate TIPS.

Less air travel, and probably no overseas travel for me in the future. Reduced auto dependence by one car.

 

[pjigar]

I would not change portfolio for some future prediction/anticipation that may or may not happen. In a grand schema of things, the only risk for retiree is SORR. And to manage SORR risk, the time to adjust the portfolio is BEFORE you retire. Stick to AA which lets you ride out SORR window and stay the course. YMMV.

 

[foxfirev5]

Currently we have a 10 year TIPS ladder to help offset some of our inflation. We are also overweight dividend payers for our 50% equity allocation.

On the expense front I am growing disinterested in air travel. However to appease DW I have agreed to one bigger domestic trip next winter. The other 2-3 trips are nixed in favor of staying at our lake house. This alone will probably reduce expenses by 10k or so.

 

[Contrarian]

As others, the premise that one can predict when a recession or stagflation is about to occur may be erroneous. Market timing not a good strategy for most or virtually all. " It's tough to make predictions especially about the future", well known quote by Yogi Berra. BTW many who claim to be successful market timers are probably not.

 

[RetiredHappy]

Nothing. We are 100% invested in stock etfs except for a few hundred thousand dollars in MYGA.

 

[OK EE]

Proper AA. Rebalance once/quarter if the ratio is off far enough to capture regains on the upswing. Matching up to your withdrawal schedule probably makes some sense.

 

[rjsos5]

Great to see rational open discussions occuring overlapping on portfolio construction, rebalancing, income or bucket approach for spending needs during retirement.

I am retired, portfolio 50/50 equity to fixed. Most equity is index or broad based funds with great records. Some indiv. stocks and other miscellaneous holdings. Fixed mainly individual high grade bonds varying maturities. Moderate allocation funds. Individual preferreds those which I feel very safe, not all that volatile. Inherited a small annuity. Also cash equivalent holdings for my immediate spending bucket which is easily replenished from the above. Maybe speculation stuff about 3% for fun. And no principal nor value wasting away assets save for the small annuity.

So, what's in your portfolio?

 

[Chuckanut]

It’s all about balancing risk. We do that with diversification.

A total market stock index fund is enough risk for me. The rest is in a laddered bond portfolio mostly consisting of treasuries and FDIC CDs. That includes some TIPS and Ibonds.

I also took SS at 70. And I bought an extra five years of service on my COLA lite pension. That was a pretty penny. This was my way of acquiring old-age/LTC insurance.

Diversifiying is the key. I plan on naming my next dog Diversification. If things get really bad I’ll teach Diversification to hunt.

 

[surprising]

One wrinkle for many of us early retirees is having an AGI friendly portfolio to try to maximize ACA subsidies without going over the cliff. For me, this means staying away from any investment that forces income so I can control when and how I increase AGI. Even if I were to carefully construct a portfolio that throws off income below ACA cliff, I could be faced with a large unexpected expense that might be difficult to pay for and keep MAGI low. It would be good to hear from people who are trying to keep under MAGI limit and also construct a portfolio that can weather recessions and stagflation concerns.