How to Help Make Your Financial Legacy Recession-Resilient

You care about your family. And that means you’re never just thinking about today’s needs, but also about how you can set them up for success in the future. A booming economy with lots of jobs, rising salaries and strong financial markets can be really helpful in getting you closer to that goal.

But economic shifts are beyond our control. And the truth is, recessions aren’t a matter of if – they’re a matter of when. If you’re lucky, you might get through 10 years or so without one, historically speaking.

Here's the good news: Given that, pretty much everyone you know who’s financially successful has been through at least one recession, and probably more.

How did they do it? While there’s no such thing as a truly recession-proof plan, there are definitely ways to help make your planning more resilient.

WHAT DOES IT MEAN TO MAKE YOUR FAMILY’S WEALTH RECESSION-RESILIENT?

The more money you have, the easier it is to get through a recession, of course. But it’s not a guarantee. Just ask these folks who went bankrupt thanks to the 2008 global financial crisis:

• Björgólfur Gudmundsson, who held much of his money in a single Icelandic bank stock. His bankruptcy was the largest in Icelandic history.
• Patricia Kluge, ex-wife of one-time richest American John Kluge, who had invested heavily in a vineyard business.
• Sean Quinn, formerly the wealthiest person in Ireland, who also had huge investments in a single bank.

Recession-resiliency starts long before the economy hits the skids. And it continues during recessions, as you take the right actions for your circumstances (and just as importantly, don’t take the wrong ones) to help position yourself for any market recovery. And finally, it ends with strategies designed to help your money outlast you.

WHAT TO DO NOW: CORE STRATEGIES TO HELP PROTECT YOUR FAMILY’S WEALTH

These steps could be difficult, impossible or painful to take during an economic downturn. So, do them now – they can help you in both good times and bad.

BUILD AN EMERGENCY RESERVE

Recession or not, you should have money put aside for emergencies and unexpected expenses, whether it’s a hospital bill, a leaky roof or a job loss. Depending on a few factors, you should keep between six and 24 months of expenses in a liquid account. It sounds like a lot, but in a prolonged recession where everyone loses their jobs, it could help keep you above water.

DIVERSIFY

Not all kinds of investments perform equally badly during a recession, just like they don’t all do equally well when markets are booming (Side note – a recession is often paired with a market downturn, but they're not the same thing and they don’t usually follow the exact same timeline).

Because it’s impossible to predict when recessions will happen and what will happen to the markets – let alone each individual investment – when they do, we strongly believe in diversification. By spreading your investments out, you can help reduce your risk of large losses.

Remember our friends Björgólfur, Patricia and Sean? They would have fared better if they had been more diversified and, of course, managed their debt better (more on that later). Their stories tell a cautionary tale.

REBALANCE

So, you know you need to invest in many kinds of stuff, but in what proportions?

Your asset mix is the formula of asset classes – like stocks and bonds – you hold. The right asset mix for you depends on a few factors like your timeline, comfort with risk and goals for the money.

Once you implement a specific asset mix, the markets will do their darndest to mess it up. In strong markets, that usually means stocks grow faster than bonds and start to take over your portfolio.

When you hit an inevitable bad market, the oversized portion of stocks will expose you to more risk and generally means the value of your investments will fall more than it should, based on your original intended mix. Rebalancing is consistently returning your portfolio to its target mix so your portfolio can maintain the level of risk you’re willing to take on before that happens.

DITCH HIGH-INTEREST DEBT

If high-interest debt hurts when times are good, just imagine how painful it will be if you lose your income. If at all possible, limit your borrowing to “good debt” like a mortgage and student loans and be mindful not to overextend yourself. It’s fair to imagine Björgólfur, Patricia and Sean likely wish they had been more conscious of the amount of debt they took on. If your income or savings cannot cover the debt and the interest that comes with it, you might want to reconsider. Avoid credit cards, “buy now, pay later” programs and personal loans.

HAVE THE RIGHT INSURANCE

Insurance is there to help protect you from things that could otherwise crush you financially. Without the right insurance, your whole plan is at risk. While insurance isn’t going to kick in just because there’s a recession, it can help keep other recession-related financial pressures from compounding.

Besides basics like health, homeowner’s and car insurance, here are the types of insurance you should consider. And remember these important points: You also need to have enough insurance, and what is “enough” will probably grow as your wealth grows.

• Life insurance. This protects your family in case you die and your income needs to be replaced. You should have enough to cover your family’s expenses for the rest of the time you would have been working. You may get life insurance through work, but if you don’t or it’s not enough, consider a life insurance policy outside of your employee benefits.
• Disability insurance. This protects you in case you’re sick or injured and can’t work. You may also get this through your employer, but again, you can buy more if you need it. Remember that a disability could be permanent and end your ability to work for the rest of your life.

Heads up! If you lose your job because of a recession, you need to replace the critical coverage (health, life and disability) that your employer provided.

Here are other types of insurance to look into:

• Long-term care insurance. In the event that you lose the ability to care for yourself as you age, this coverage kicks in. Unless you have enough money saved to pay for everything out of pocket (and we strongly suggest you look into projected costs in your area before you decide that), you should think about buying a long-term care policy while you’re relatively young, because costs increase as you get older.
• Umbrella insurance. This gives you additional liability coverage over and above what your homeowner’s and auto insurance will pay. In a nutshell, it protects you if someone sues you for a large amount of money higher than your existing policy limits – in which case, should they win, your assets could be at risk. Policies generally start at $1M in coverage and kick in for things like a fatal car crash, a deck collapse at your home that injures people or your escaped dog attacking a child.

WHAT TO DO DURING RECESSION: INVESTMENT STRATEGIES

Now you know how to set yourself up to weather a recession. When you eventually go through one, your emergency fund will be in place to help keep you afloat if you need it.

Here’s the rest of your game plan to help preserve your wealth during downturns.

KEEP INVESTING

If at all possible, keep investing even if the market is falling. Remember, when the market is down, stocks are cheaper. And that means you can get more of them for your money, which can help better position you for when the market rebounds (which, although past performance is no guarantee of future results and there is no way of knowing how long a recession will last, historically speaking, it typically has). Think of it like hitting a clearance sale on stocks. Who doesn’t love a bargain?

DON’T SELL

If you can’t keep investing – say, if you lost your job – at the very least, don’t sell stocks when the market is down. Losses are only “on paper” until you make them real by selling. And if you have your emergency fund, you don’t need the money. So, why force a loss?

The exception to “don’t sell” is this – you should keep rebalancing. That may mean you sell bonds to buy more stocks, the opposite of what you might do in a bull market.

WHAT TO DO FOR THE FUTURE: ESTATE AND LEGACY PLANNING CONSIDERATIONS

The steps above can help set you up to become financially secure. But protecting generational wealth takes additional steps and strategies like the ones below.

SET UP AN ESTATE PLAN

This is how you can help make sure your money:

• Goes where you intend it
• Sees as little lost to taxes as possible
• Enjoys more certainty that it can benefit multiple generations

An estate plan can involve a will, trust, beneficiary designations, powers of attorney and other designations. It doesn’t have to be overly complex, but all the pieces need to be present and work together strategically.

Estate planning also should incorporate estate tax and gift tax planning and strategies. Your estate planning attorney, tax planner and financial advisor should all collaborate to make sure the plan is cohesive and complete.

INVEST FOR THE (REALLY) LONG TERM

You’ll need to look beyond your own timeline when deciding what to invest in and – eventually – how much you can withdraw every year in retirement. That can mean a totally different asset mix than other people your age.

TAKE ADVANTAGE OF DOWN MARKETS

Speaking of gifting strategies, down markets can continue to be an opportunity to help build your family’s overall wealth.

When you gift someone shares of stock, those shares retain any built-in capital gains. For example, if you bought stock at $50 and it’s now worth $150, the person receiving the gift will owe the capital gains tax due on the $100 increase when they sell.

But if the stock dips to $100 during a bear market, now your recipient only has to pay tax on $50 of capital gains if they sell it. Plus, you may be able to gift more stock and still stay under the annual reporting limit.

COMMON MISTAKES TO AVOID IN A RECESSION

Recessions can be scary. But if you’re prepared, you can ride them out and continue building financial security. Here are some big mistakes that could wipe away your progress:

• Panic selling and locking in losses
• Trying to guess where the market will go next and putting money on it
• Throwing your plans out the window because you feel pressured into making urgent financial decisions
• Refusing to rebalance because you don’t want to sell overperforming investments and buy underperforming ones
• Taking on debt so you can continue your lifestyle even if your income has changed
• Cutting insurance from your budget to save money
• Waiting to invest until the market recovers

CREATING A RECESSION-RESILIENT LEGACY

Recessions are just part of the deal, but financial setbacks don’t have to be. With the right outlook, preparation, discipline and the right strategies for your circumstances, you can help protect your family’s financial security and even find opportunities during tough times to help grow your wealth. Your family’s future deserves that kind of resilience.

Ready to take the next step? A financial advisor can help you build a plan that is designed to not only weather downturns but also adjust as circumstances evolve, keeping your goals in focus.