THE overlapping crises of the novel coronavirus pandemic and the war in Ukraine have created an emotional roller coaster for some investors and some retirees are experiencing a bumpy ride. Increasingly there are retirees and pre-retirees who fear a recession and are contemplating the best-suited path to weather the economic challenges.

At this time, the concern of many investors is how best to protect their investments so that they don’t run out of money in retirement. Some investors have responded to the economic downturn by withdrawing funds from the stock market and seeking more conservative investments. But the tendency to sell shares during market decline can prove costly in the future as inflation continues to be a real threat to the purchasing power of money. Don’t fear the stock market, fear inflation. Today I will share tips on how to have recession-proof income in retirement.

Stock market risks

Retirees are often told not to invest in stocks because it’s too risky. But stocks are only risky during the short term. A retiree is likely to spend an average of 30 years in retirement. The longer funds are invested in stocks, the greater the returns on investment. The stock market rewards the investor who is patient. Investors who worry about a recession don’t realise that a recession doesn’t equate to a decline in the stock market. Historically, it has been proven that the stock market experiences declines and growth during recessions. When one invests in stocks, the funds are used to purchase shares in real businesses. These businesses are not going to close their doors because of a recession, but they will adjust their strategies and find new ways to be profitable. The longer funds are invested in stocks, the less risky the investment becomes. Risks in the stock market get less with time. The stock market consists of declines and gains. The declines are temporary and only become permanent when the investor decides to withdraw from the market by selling shares during the market downturn. The permanent loss is on the shares sold.

It is said that “experience is the best teacher”. The story of two elderly retirees has valuable lessons for retirees and pre-retirees who are scared of investing in stocks.

A male retiree in his 80s recently expressed fear that his money is running out. He invested in bonds since retiring over 20 years ago. Retiring in his 60s he avoided investing in stocks and made the decision to invest conservatively. He thought being conservative was the best way to protect his investment in order for his money to last throughout retirement. Returns on bonds have fallen, so he is not earning high returns as he did years ago. He now ponders his next move.

The second example of a retiree who decides to play it safe is an 82-year-old woman who called to say her funds are running low. She, too, made the decision not to invest any of her pension lump sum in stocks. Retiring more than 20 years ago, she thought investing all her funds in bonds would provide adequate income to supplement her pension throughout retirement. At 82 she wants to invest some funds in the stock market, a decision she said should have been made at least 20 years ago. It is important for investors to understand that the very wealthy can afford to be conservative in their investment strategy because they have already created a fortune and can, therefore, afford to have significant investments in low-risk, low-interest instruments.

The bucket strategy

Let’s examine the bucket strategy. We often hear the expression, “Don’t put all your eggs in one basket.” The bucket strategy is a diversification approach to investing. It’s a method that involves dividing retirement income into three buckets — short-term goals, medium-term needs, and long-term goals. The retiree is better able to manage competing needs. When there is a decline in the stock market, the investor who needs funds makes withdrawals from the conservative investment while allowing funds in the stock market to recover from short-term losses. It’s recommended that funds equivalent to two years of income should be invested in cash and near-cash instruments such as CDs, high-yielding saving accounts, and treasury bills, so the retirees can meet living expenses and emergency needs. For intermediate or medium-term goals, funds covering up to 10 years of living expenses should be invested in long-term bonds or other low-risk instruments at interest rates that keep pace with inflation. For long-term needs, 10 years and beyond, the investment strategy is to grow investments aggressively to beat inflation with high returns over 10 years or more. The long-term bucket strategy consists of growth stocks that will absorb and withstand stock market shocks and give the best returns. The bucket strategy is key to having recession-proof retirement income.