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What Personal Finance Lessons Can Retirees Learn From the Great Depression and Great Recession to Apply to the COVID-19 Pandemic

This article is part of a series on personal finance during the coronavirus pandemic. Please check out the Coronavirus and Your Finances Series (link will open in a new window).

In fact nothing is said that has not been said before.
–Terence

History repeats itself, first as tragedy, second as farce.
–Karl Marx (no, I’m not advocating socialism or Communism, here)

On April 2, 2020, the United States set an unwanted (and I’d bet short standing) record of 6.65 million new jobless claims.

The Federal Reserve Bank in St. Louis predicted a 32.1% unemployment rate in the second quarter of 2020.

The highest unemployment rate in the Great Depression was 24.9%, in 1933.

Other high unemployment peaks included 10.1% in 1982 and 10% during the Great Recession, in October 2009.

While we are potentially charting new territory for how our economy reacts to the coronavirus pandemic, we can still learn lessons on how retirees were affected and adjusted during the Great Depression and the Great Recession.

How Were Retirees Affected During the Great Depression?

Typically, when we think of the Great Depression, we think of the Joad family in John Steinbeck’s The Grapes of Wrath (#aff).

Dust bowls, migrations, long lines at the soup kitchens. Those are the images that we conjure when we think about the Great Depression.

However, as research from the University of Mississippi’s Jon Moen and Brian Gratton shows, retirement amongst people 65 and older still happened, even before the advent of Social Security.

Historically, there was a familial bargain. Parents would raise children, and, then, when the children grew up, they would pay a part of their income to their parents. In 1890, the average contribution of households run by men aged 40-44 to their parents was 17% of the household’s income; for households run by men aged 60-64, it was 31% (yes, not an equal opportunity head of household situation, I understand). By 1918, the number for the 40-44 age set had dropped to 6%, and by 1939, it was 5%.

Still, given the precipitous drop in the economy, one would expect older workers to remain engaged in the workforce; however, men aged 65 and older slowly pulled out of the workforce in the 1930s. In 1930, 58.3% of all men that age were engaged in the workforce. In 1937, the rate was 49.1%, and in 1940, the rate was 43.5%.

In a survey conducted in 1936 (before Social Security went into full force), men aged 65-74 who were in the labor force reported $70 in earnings from pensions, capital sources, and rental income, and those not in the labor force reported $333.40 in earnings from pensions, capital sources, and rental income.

If you exclude pensions, since approximately 22% of United States workers qualify for pensions, then the numbers are $55.20 for men in the labor force and $170.80 for men not in the labor force. In other words, retirees had approximately 309.4% more non-pension income than workers of the same age bracket.

Simply put, those who had accumulated assets were able to retire. Those who had not stayed in the labor force, or, at least, attempted to stay in the labor force.

How Were Retirees Affected During the Great Recession?

The Population Reference Bureau conducted research on older Americans during the Great Recession.

The Great Recession was very different from the Great Depression in that older Americans were much more reliant on their savings, in general, than previous generations were. As such, because they had accumulated the largest share of assets, they had their retirement savings hit the hardest by the Great Recession.

As we saw in “Will Annuities Make You Happier,” retirees who had their net worth invested in the stock market were less happy than those who had the same amount of net worth invested in annuities or pensions.

Thus, when older Americans saw their net worths plunge, they also experienced higher levels of depression. This was particularly so in neighborhoods where foreclosures were higher.

While this group was more insulated from job loss and from foreclosures, as many of them had paid for homes, they were still psychologically affected. Additionally, younger adults aged 25-49 who lost jobs in recessions experienced higher levels of cognitive decline between ages 50 through 74.

An additional stressor was that near retirees had less time for their market declines to catch back up before retirement set in.

Additionally, many older Americans kept their jobs during the Great Recession, due to those stock market declines, affecting adults in their 20s, and, in extrapolation of retirement savings for adults in their 20s during the Great Recession, adding a year to the amount of time they would need to work to be able to retire.

Overall, the total impact on net worth of older Americans was minimal. Decreased retirement savings were balanced by working longer, thereby increasing expected Social Security payouts.

Furthermore, by 2012, 5 years after the start of the Great Recession, households headed by older adults had regained most of their wealth.

But, it wasn’t just the personal accounts and work extension of older adults that were affected. They were also affected, as research from Jennifer Ailshire, Sarah Burgard, and Lucie Kalousova shows that some older families felt the obligation to provide financial aid to younger generations to help them out in times of need.

Financial Lessons for Older Americans During the COVID-19 Pandemic

Given that it’s too late to go back in time to February, 2020 and sell all of your stock, many older Americans who had their retirement savings invested in the markets have already taken a hit, and have to adapt from there.

The advice from “Is the Coronavirus Pandemic Causing You to Rethink Your Early Retirement Plans?” applies not only to early retirees, but also to pending retirees.

There are three main takeaways from the lessons that the Great Depression and the Great Recession provide us:

  1. The more you can save, the better insulated from further market shocks you will be. As we saw in the Great Depression, retirees had 3.1 times the income generated from non-pension assets than those who were still in the workforce at the same age.
  2. Time should heal market wounds. It is too late to look in hindsight and panic sell. Sell now at your own risk. However, if you can stomach a few years, historically speaking, the markets should recover. Warning: past performance is no indicator of future returns. However, both the Congressional Research Service and the Brookings Institute view the economic conditions as temporary. So do Goldman Sachs economists.
  3. Prepare to help out other family members financially. This could be monetary support (which I recommend making a gift and not a loan), and it could also be taking them back into your house (and quarantining them for 14 days) if they cannot make rent or their mortgages.

Retirement will slow, but it will not stop during the COVID-19 economic downturn. Negative impacts will be buttressed by those who can work longer, and, those, increase their future Social Security payments. Plus, with time, we will adjust to a new normal, and markets should recover.

For some, retirement will be delayed, but if you were on the right track before COVID-19 struck, you should still be on the right track, even if the track just got a little bit longer.

How do you think the coronavirus outbreak will affect your retirement? Let’s talk about it in the comments below.

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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