How to recession-proof your retirement

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(MoneyWatch) My wife and I recently had dinner with my 91-year-old mother, who has now been retired for 31 years (more than one-third of her life!). She retired from her teaching job in 1981 when my father also retired from his career as a professor at the University of Southern California (he passed away in 2005). Since my mother retired, she has lived through four major blowups in the U.S. economy: the stock market crash in 1987; the saving and loan meltdowns in the early 1990s; the tech bubble that burst at the beginning of this century; and the 2008 - 2009 stock market crash and ensuing Great Recession.

At dinner, we discussed the latest economic headlines and wondered if my mother just might experience her fifth economic meltdown. We also reviewed her finances to make sure they would weather another storm. I'm confident she'll do just fine, but there's plenty we can all learn from her experience.

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My father increased his Social Security benefits by delaying them until age 65, which at the time was considered the normal retirement age. Maxing out your Social Security benefits is a smart way to protect yourself against recessions and inflation. You receive a monthly income that's paid for the rest of your life, no matter how long you live and no matter what happens in the economy, so it's a good idea to make the most of it. And the benefits are increased for inflation.

My mother has a monthly pension from my father's employment that, like Social Security, is paid for life and doesn't decline if the stock market tanks. If you have a pension from work, resist the temptation to take a lump sum, assuming that's an option. Instead, take the monthly annuity -- you'll benefit from it more in the long run. If you don't have an employer-sponsored pension plan, you can create a "do it yourself" pension by buying an immediate annuity from an insurance company.

My mother supplements her pension and Social Security benefits with interest and dividend income on a portfolio of stocks, bonds, and mutual funds; she doesn't touch the principal. While the value of her stock investments has fluctuated significantly over the years, the dollar amount of her dividend income has fluctuated by very tolerable amounts. And in spite of the ups and downs in her stock portfolio, the overall trend has been significantly "up" over the course of her retirement.

My mother's pension and Social Security income cover her basic living expenses, while the interest and dividends on her retirement portfolio cover her discretionary expenses, such as gifts and entertainment. Contemporary financial planners, such as those trained by the Retirement Income Industry Association (RIIA), sum up this strategy as follows: "Build a floor, and then expose to the upside."

This means you need to make sure that your basic living expenses are covered by guaranteed sources of income that will last for life; with the remaining savings, you can take investing risks for the growth potential in your savings. My mother and father's 31 years of successful retirement confirm the efficacy of this strategy.

Another smart move -- my mother also paid off the mortgage on her house as quickly as possible so she wouldn't have that monthly expense hanging over her head. With housing one of the two highest budget expenses for most Americans, eliminating this expense goes far toward making your retirement affordable. And while her house is small by today's standards, it meets her needs just fine.

My mother keeps her living expenditures low and has no credit card debt. Until recently, she drove a 10-year-old car, but now she's stopped driving, which has reduced her transportation expenses considerably. She now gets rides from family members and caregivers.

She's in good health for a 91-year-old. She eats sparingly and keeps her weight down. She consumes lots of fruits and vegetables and she gets of exercise by walking and gardening. This has helped her survive a few health scares.

She also keeps in touch with friends and relatives, and sees family members at least once a week (all of her kids live nearby). At this stage in her life, her lifelong emphasis on maintaining family relationships has proved  priceless. Her social life provides most of her "entertainment," and our family is convinced it helps "keep her going."

In case she needs long-term care, my mother has held her home equity and the principal in her retirement savings in reserve. Any unused assets will serve as a legacy to her children and grandchildren. She now needs some in-home care, but because of her financial resources she can afford that for many years to come.

We're sure that if we experience another recession, my mother's life won't change very much. She'll still have about the same income and expenses, and she'll continue to do what gives her joy in life.

Having good strategies in place can help dispel the natural fear and anxiety that we all feel about the future. And these strategies can help us focus on what's really important in our retirement years -- reaching our full potential, taking care of unfinished business, spending time with friends and family, and passing along our legacy.

P.S. You can learn more about these strategies in my book, "Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin."

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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