Are You Prepared For the Coming Recession?

After a brief reprieve following the inauguration where it looked like President Trump may have been open to not starting a trade war, it looks like tariffs are back on the table, with him reiterating how big of a fan of tariffs he was in a rambling press conference, and then again in his remarks to the World Economic Forum in Davos.

Economists have been scrambling to understand the potential impact of these across-the-board tariffs of the US’s two biggest trading partners, and the results look terrible. 25% tariffs like what President Trump is suggesting would carve 2.5% GDP off of Canada’s economy, resulting in an instant recession. For comparison, this is about twice the economic impact of the COVID-19 pandemic, so if you thought 2020 was tough, look out below.

Similar threats against Mexico promise to spin their economy into a recession as well, and the impact of retaliatory tariffs from our government and the Mexican government would spark inflation in all three countries, resulting in a dreaded combination of recession and high inflation.

Granted, it’s entirely possible that all these tariff threats are just that, threats, designed to throw everyone off balance and extract concessions from our government, but it’s also entirely possible that President Trump simply doesn’t care about the devastating impact that tariffs would have and may impose them anyway.

All this means that there’s a good chance that a recession is coming to Canada sometime in 2025. This could not come at a worse time for Canadian households, who are already dealing with record-high debt levels and a cost of living crisis. If a recession happens, many Canadian families are going to have an extremely difficult time coping.

So under this backdrop, FIRECracker and I sat down and had a detailed discussion about our own plans should Canada lurch into a recession. What should the Millennial Revolution family to do keep us and Little MatchStick safe?

Don’t Panic Sell

Fortunately, this ain’t our first rodeo.

It didn’t feel like it at the time, but we had the good fortune of encountering our first major market crash way back in 2008. Why was this good? Because this was right at the beginning of our investing journey, and we learned what to do and what not to do early on.

The crisis back then was also a world economic slump and it was hella scary because the entire global financial system was in danger of collapsing. Stock markets had been cut in half and houses were being repossessed left and right.

But even then, when every cell in my body was screaming at me to sell everything and move to cash, I listened to the principles of index investing and didn’t. Instead, I continued ploughing money from my paycheck into the stock markets as it fell. And because I did that, when markets inevitably rebounded, we were able to participate in the upswing stronger than we felt the downswing since we had bought so many more ETF units on sale. A few years later, we had recovered all our losses and continued on to enjoy the subsequent decade-long bull market.

So if this crash ends up happening, we’ll use the same strategy. Even if our portfolio gets cut in half, we won’t be selling, and instead we’ll be deploying any money we earn from our writing careers into the stock market as it falls.

Fortunately, the fact that we hit Dividend-FIRE a few years ago makes this much easier. Because we can live completely off the dividends from our portfolio, we don’t actually need to sell anything to cover our living expenses.

If you’re still in the accumulation phase, do what we did back in 2008. Keeping buying into the falling markets and wait for the inevitable rebound. And if you just recently retired and are at risk of sequence of returns screwing your retirement over, make sure your Yield Shield and Cash Cushion is ready to go. You may need it very soon.

Cash Is King

Retirement is all about managing your cash, and on this front we are in good shape.

Living off our dividends doesn’t mean we literally spend it as soon as we receive it. Because different ETFs pay out at different times, this would result in a constantly changing monthly budget that would be a nightmare to manage. Instead, as dividends come in, we sweep it up into money market ETFs like CMR (CAD) and SHV (USD). Then, at the end of the year, we sell off our money market funds and withdraw everything.

So that means that our living expenses budget for 2025 was actually paid out over the course of 2024. That also means that no matter what happens this year, it can’t affect our 2025 budget, since that cash has already been harvested and sitting in a savings account.

A downturn could affect our 2026 budget, but only if our dividends get cut.

Dividend cuts are actually pretty rare, and even during the 2008 Great Financial Crisis, dividends got reduced by about 10% before recovering the next year. Also, during a recession prices plummet, so the decrease in the cost of living greatly exceeds any potential cut in dividends. So given this year’s projected dividend payout of $73,000, a 10% cut would bring our dividend income down to about $65,700.

I showed this “worst case” spending target to FIRECracker and she said it would be a piece of cake. According to our 2024 spending numbers, even with optional, luxury “Portfolio B” spending, we spent a total of $61k, so we’d be able to fit this within a budget of $65,700 without breaking a sweat.

And finally, we have the greatest weapon of all…

Geographic Arbitrage

If shit hits the fan, we’re moving to Thailand.

Using travel as a strategy to reduce costs in retirement sounds counter-intuitive, but when you spend time in lower cost of living regions like Eastern Europe or South East Asia, it can make a big difference. The cost of everything is so much cheaper in a place like Thailand, Vietnam, or Poland that you can easily find yourself spending less than your dividend yield, meaning you’d be making money while sitting on a beach!

Going back to fully nomadic has always been a goal of ours ever since Little MatchStick was born, but the process of figuring out how to be parents (not to mention all the vaccinations he needs to get in the first year) kept us pretty solidly anchored in Canada for his first year of life.

But now that he’s gotten a bit older and he’s all caught up in his vaccinations, going nomadic is back on the table!

Honestly, we wanted to do this in 2025 anyway, but now that the news has gotten all crazy, it’s pushing us to go out onto the road even more. Travelling with a young child is definitely more work than before, and we’re definitely going to have to go slower than when it was just the two of us, but this would have the dual effect of lowering our costs even more while getting away from the craziness happening on this side of the world. Win-win.

Conclusion

FIRE really is the gift that keeps on giving. After FIRECracker and I put together our game plan for countering these tariff threats, we realized that we have tons of options. Having our money invested in low-cost index funds means it’s liquid, we can access it any time, and it generates a passive income that we can spend anywhere in the world.

Overleveraged homeowners, on the other hand, are screwed if a recession hits them and they lose their job. In fact, with Canada’s historically high levels of household indebtedness, plus mortgages that will renew higher this year, any spike in unemployment has the potential of spiralling into a full-blown foreclosure crisis.

I sincerely hope that all of this tariff talk is just bluster and that a painful recession never actually happens. But if it does, I’m confident that we’ll be just fine because of the gift of freedom that FIRE has given us.

How about you? Do you have a plan in place if a recession hits this year? Let’s hear it in the comments below!

Related