5 Retirement Lessons Learned From the Great Recession

Lesson 1: Don't Time the Market

The long-term impact on retirement portfolios depended in part on investors’ reactions to the crash. In 2018, when he talked with Kiplinger's Retirement Report, Jeffrey Smith was still living with the consequences of his portfolio moves a decade earlier. During the financial crisis, Smith’s IRA dropped 75%, as individual stock holdings, such as the troubled insurer American International Group, got crushed.

Even more devastating, Smith missed the market rebound that began in March 2009. He tried various trading strategies to recover his losses, but nothing worked. Then in 2012, he shifted into cash—where he stayed until 2017. “I lost confidence in my broker and lost confidence in myself,” Smith recalled to us. “So there was no recovery.”

That moved the goalposts for his retirement. “After the crash, it was apparent to me I could not retire at 60, which had been my goal,” said Smith, who also conceded he and his wife “are not going to be able to live in a big house and travel the world.”

Lesson 2: Turn Chaos Into Opportunity

Paul Franceus saw the financial crisis as the best thing that ever happened to him financially. But it didn’t start out well at all. In October 2007, he invested the $150,000 proceeds from the sale of his Baltimore home—right at the stock market’s peak. That money “went through the whole bloodbath,” Franceus told us. But he kept his cool. “I figured it would come back at some point,” he said. “I ignored the news and ignored the 60 Minutes stories of people crying about losing their retirement and kept putting money into my investments the whole time.”

• The steady-eddie approach allowed Franceus to pick up stocks at bargain prices near the market’s lows, putting the software engineer from San Francisco on track to retire early, and squelching his fear of market crashes. “I feel like I have enough now that I can afford the volatility,” he said.

Lesson 3: Build a Strong Defense

Bill Ahlstrom, who retired from his accounting career in 2015, favored defensive, dividend-paying stocks such as food and pharmaceutical companies. Those types of holdings served him well during the financial crisis, when his portfolio lost only about 25%, while Standard & Poor’s 500-stock index dropped 57% from its 2007 peak to its 2009 low.

“You can’t wait until you retire to get defensive” with your investments, Ahlstrom told us. “You have to do it in advance.”

Ahlstrom has remained “a little nervous” about market crashes, but told us his investment income is sufficient to cover his living expenses. “As long as I can live off the dividends,” he said, “market fluctuations don’t affect me.”

Lesson 4: In a Crisis, Cash Is King

G.W. Potter retired in 1995, with a strategy of keeping 18 to 24 months’ worth of spending money in the bank. That became a portfolio-saver during the market downturn, because he didn’t need to sell any of his beaten-down investments to cover his living expenses. Instead, he pulled money from his cash hoard to pay the bills.

“My mantra is simple,” Potter, a former chemistry teacher in Georgia, told us. “Avoid at all costs selling low.”

Lesson 5: Create Checks and Balances

When Smith, the telecom worker who lost most of his IRA in the crash, finally reinvested -- in “very aggressive stocks,” he said -- he asked his wife to help keep watch over the portfolio. He gave her full access to the IRA account, he told us, with instructions to “sell it instantly” if she saw a stock she didn't like.