By Shawn Weber, CLS-F and Mark Hill, CFP, CDFA
The headlines are troubling. Donald Trump’s escalating trade war with China, no signs of a Brexit deal in Europe and unrest in Hong Kong are all making the world’s stock markets nervous. Global gross domestic product is falling, and recession fears are rising as we approach what will be the first economic downturn since the Great Recession of 2009 in the next 18 months.
Interest rates are sending an early warning. Ever since the U.S. two-year/ten-year yield curve inverted on August 14, the news media are a flutter about a possible looming recession. Every recent recession has been accurately preceded by this economic milestone.
NOTE: If you need a primer on the Inverted Yield Curve, read the Forbes article by Carmine Gallo, “How The Finance Prof Who Discovered The ‘Inverted Yield Curve’ Explains It To Grandma.”
Many knowledgeable financial experts believe we are heading for a recession. There’s some disagreement about timing, but there is consensus our economy behaves cyclically.
We’ve been enjoying an unusually long ten-year economic expansion. Things have been going great, but eventually the law of gravity applies and what goes up comes down. Markets periodically correct. It’s not a question of whether a recession is in our future, it’s a question of when and how deep it will be.
Family law professionals witnessed the devastating effects of the Great Recession on clients. While an upcoming recession is unlikely to be as staggeringly awful as in 2009, there are some important lessons for people considering a divorce in the near future.
If you fall into the “Grey Divorce” category (people choosing to end their marriage in their 50s or later), you could be even more vulnerable and need to pay extra attention. If you have created retirement portfolios and diligently invested, assumptions by you and your financial advisors regarding future returns and safe withdrawal rates may suddenly no longer be valid.
What Is Your Divorce Recession Risk?
For people considering a divorce in uncertain financial times, understanding what happened in the last recession can inform your decision now.
Do you own a business? You have significant reason to be concerned. The 2009 experience showed us how recession can impact divorce decisions in two major areas: falling prices and declining income.
Things that can go down in value include real estate, retirement accounts, stock accounts and business assets. When your assets decline in value, it impacts your divorce decisions. There simply will not be as much money to divide.
Declining Business Value: Are You Vulnerable?
Is your business safe? Don’t answer too quickly.
In the last recession, people in the real estate and banking fields were shocked to be laid off. Next time, we see the potential for another round of U.S. business failures. It all comes down to too much debt. Since interest rates have been at historically low levels for a decade, and since banks like to lend in the good times, many businesses have become overleveraged.
The debt amassed in recent years is staggering, but even in today’s strong economy about 20 percent of U.S. companies still cannot make their loan interest payments from cashflow. The only way they can pay their interest is to constantly refinance. In a recession, this situation worsens, putting as many as another 20 percent of companies at risk. What happens if your sales drop in a recession, and you can’t get a loan to tide you over? Your company may not be as solid as you believe.
During the Great Recession, banks were not lending money. They were even pulling existing loans, creating chaos for corporate finances. Banks are happy to lend money in good times, but in bad times they can get quite stingy with their lending. We could easily end up with nearly half of all American businesses having difficulty borrowing and unable to make loan payments. If they cannot borrow money to keep the doors open, they will go belly-up. By “they,” we could mean YOU.
Businesses of all sizes were devastated by the actions of their bankers in 2009. Companies failed, and workers were fired. In addition, many self-employed people who once ran strong, profitable businesses found they had nothing left.
In the next recession, we predict that the most vulnerable businesses will be those heavily involved in imports and exports, or in high technology. Trade wars create uncertainty which restricts buying and selling activity. With tech businesses, we are doing what America has a habit of doing: turning our heroes into goats.
How Healthy Are Your Retirement Assets?
Many people are not aware how vulnerable their retirement assets are to drops in the stock and bond markets. If the market loses value, your retirement assets lose value.
In an impending divorce, you need to assess whether your retirement plans can survive a recession. We believe you face the greatest risk if your portfolio is heavily exposed to technology companies, and businesses involved in import/export activities. Tip: if you own stock mutual funds, you are exposed.
Watch For Falling Real Estate Prices
Recent strength in the real estate market should not blind people to the reality of dropping prices. Current market strength is a result of the incredible low interest rates available. Although experts predict interest rates will remain low, even modestly higher rates can make real estate unattractive or even unaffordable. Many marriages have a significant amount of their net worth in the family home. When prices fall, there is less to divide, and sometimes not enough to live on.
Are Your Financial Assets in the Recession Crosshairs?
In a recession, anything you own can decline in value. In some cases, property you count on selling and dividing in a divorce settlement won’t sell at any price you can accept. If your assets or employment are vulnerable to market forces, you may want to reconsider the timing of your looming divorce.
Loss of Income and Cash Flow
Typically, recessions mess with people’s ability to pay their bills. With recession and divorce, people lose their liquidity in two key ways: loss of financing and loss of income. Additionally, when people already overspend, a loss of income or financing makes life all that much harder.
Preparing For A Loss of Access to Financing
In the last recession, banks became unwilling to make loans, including real estate and business loans. Consider BEFORE a recession hits whether to borrow money now while lending is available. In 2009, we advised clients to pull money from their line of credit before the bank cancelled the line. It was good advice, because the clients were able to ensure they had cash before it became inaccessible.
What If Your Income Drops?
Consider carefully whether your business or your employer could be in the crosshairs. In the upcoming recession, the most vulnerable businesses will be those involved in the tech industry, manufacturing, farming or retail. Remember, if it costs more money to bring in or send out from the United States, manufacturers who rely on foreign trade will suffer and jobs will be lost.
Can You Handle a Change In Your Current Lifestyle?
Many of our wealthier clients suffer from “affluenza.” People are feeling flush, consuming more and saving less. A recession will likely reduce income for many of these people. Costs will increase due to ongoing trade wars.
After a divorce, both clients will consume more. Two households cost more to maintain than one. When there is less money to go around and things cost more, families with higher spending patterns are hit much harder.
How will you balance your own needs together with the needs of your children? Will you be able to afford expensive activities for the kids like riding lessons or club sports? Something will have to give. How can you best prepare now?
Is there a divorce in your near future? Worried about the effect of recession on divorce could impact you? Learn your level of risk for suffering a serious financial hit if you divorce during a financial recession. It might change your thinking about your circumstances and how you want to proceed in the best interests of your family.
Guest Blogger Mark Hill, CFP®, CDFA
A nationally-recognized speaker on the financial aspects of divorce, Mark Hill is the founder of Pacific Divorce Management.
With nearly 40 years as a financial planner and the last 20 years specializing in divorce, Mark is a wizard at cutting through the complication of the divorce finances. Mark is a luminary in the Collaborative Practice movement and brings his unique blend of financial expertise and dispute resolution skills to even the toughest divorce situations.
Pacific Divorce Management educates and provides guidance so divorcing couples can make informed decisions without feeling insecure about the consequences of those decisions. They gather, organize and evaluate the data and then tailor services to the clients’ needs.
At Weber Dispute Resolution, we love teaming up with Pacific Divorce Management to bring our clients superb financial advice for a secure future. To learn more about how Mark Hill and Pacific Divorce Management can help you with your divorce case, visit PacDivorce.com or give Mark a call at 858-257-4612.