For many months the business news has been dominated by scary talk of housing bubbles, mortgage meltdowns, and subprime spillover. This housing turmoil recently triggered a credit crisis that prompted the Federal Reserve to make a double-sized cut in interest rates. And now we're hearing economists setting odds on the likelihood of a recession. What does the possibility of a recession mean for retirement planning? To answer this question, let's look at some history.

The classic definition of a recession is a decline in Gross Domestic Product (GDP) for two or more consecutive quarters. GDP is a broad measure of a nation's economic health that includes total consumption, investment, government spending, and all imports and exports.

Just as healthy people suffer an occasional cold, healthy economies have occasional recessions. According to the National Bureau of Economic Research (NBER), the United States has had nine recessions since 1950. Those periods totaled 93 months, which means the nation has been in a recession about 14% of the time. Although each recession was triggered by unique circumstances, they shared similar effects: slowed consumer spending, decreased business revenues, and a rise in unemployment.

Markets Fall Before Recessions Start

We all know that recessions impact the financial markets. But, as a review of the last nine recessions illustrates, the degree and timing of the impact are quite unpredictable. Take a look at the chart below.

	Recessions	Length in Months	S&P 500 Decline at Start from Previous High	Months from Previous High to Start	S&P 500 Change from Start to End
1	Jul 1953 - May 1954	10	-9.1%	6	16.4%
2	Aug 1957 - Apr 1958	8	-3.7%	12	-12.3%
3	Apr 1960 - Feb 1961	10	-8.5%	8	11.5%
4	Dec 1969 - Nov 1970	11	-14.0%	12	-10.4%
5	Nov 1973 - Mar 1975	16	-10.4%	10	-22.9%
6	Jan 1980 - Jul 1980	6	-5.0%	3	8.7%
7	Jul 1981 - Nov 1982	16	-7.7%	7	4.4%
8	Jul 1990 - Mar 1991	8	-2.1%	1	3.0%
9	Mar 2001 - Nov 2001	8	-18.7%	11	-12.7%
10	Dec 2007 - ?	?	-5.9%	2	?
	Average	10	-8.7%	7.2	-1.6%

  Recession data from NBER: www.nber.org/cycles.html

If we use the S&P 500 as a surrogate for the U.S. stock market, we can see that by the time a recession starts, the market has already declined from its previous high. The average pre-recession decline is about 8.8%, which is a bit less than the proverbial 10% correction. But the range of pre-recession decline, anywhere from 2.1% to 18.7%, is vast. Likewise, the speed of the recession's onset, measured by the time between pre-recession high and the recession's start, also varied widely -- from a year in 1957 and 1969 to a single month in 1990.

Perhaps the most unexpected finding is that, at the recession's close, the S&P 500 was actually higher five of these nine times. At one extreme, an S&P 500 gain of 16.4% for the ten-month 1953 recession was the start of a four-year run culminating in a 97% gain -- a near doubling of the market from the beginning of the recession.

At the opposite extreme, the savage recession of 1973, triggered by the Arab Oil Embargo, was accompanied by a decade of high inflation, sometimes in double digits. After falling 10.4% from the pre-recession high, the S&P 500 declined an additional 22.9% during the recession. In fact, our benchmark index didn't permanently rise above the pre-recession high of 120.24 until September 2, 1982 -- almost a decade later. It was during this prolonged sideways market that the word "stagflation" (coined from "stagnation" plus "inflation") entered our economic vocabulary.

The Unpredictable and Imperfect Correlation

History thus tells us that the timing, duration, and severity of recessions are unpredictable and imperfectly correlated to market performance. Even less predictable is whether an economic slowdown will lead to a recession in the first place. Stock market pessimists always expect the worse. We're talking about the folks who, as the joke goes, "predicted nine of the last two recessions." And they are counterbalanced by "Goldilocks" optimists, who see every dip as a buying opportunity.

For those of us planning for retirement or already there, an objective review of recession history offers three lessons:

• Don't let recession anxieties influence your long-term investment plans. Recessions are short-term, unpredictable events, while investing is a lifetime enterprise.

• Ensure that you have an asset allocation strategy based on your retirement date and on an educated understanding of your risk tolerance.

• In evaluating your risk tolerance, make sure you factor in the long-term impact of inflation before letting short-term recession fears drive you to sell off equities.

A version of the article appeared in the December 2007 Motley Fool Rule Your Retirement newsletter.