Four Strategies to Protect Your Retirement Money From A Recession

We continue to hear that a recession may be imminent or has already begun. Anyone employed in 2008 during the Great Recession is aware of its terrible financial effects. However, the economic indicators in 2022 are not the same as in 2008. Therefore, we do not know how severe this recession will be if it occurs. Although the reasons for a recession are beyond our control, there are steps we can take to protect our finances from the repercussions.

It is generally considered a recession when the gross domestic product (GDP) declines for two consecutive quarters (NEBR). By this definition, we are experiencing a recession. However, what matters to each of us is how the economy currently feels, which may be unpredictable.

Whether or not it is a recession, our finances are experiencing a difficult time. Many retirees are inquiring about their funds daily. We know from proprietary data that retirement savers rank retirement planning, debt repayment, and prudent savings investment as their top priorities. Moving money to what may be considered a safer investment may seem like a fantastic way to alleviate pain during difficult circumstances. However, doing this could result in a loss of income when you move the investment and a loss of opportunity.

Want to take control of your finances without jeopardizing your retirement savings? Here are four suggestions that could help you weather a recession or any personal financial downturn.

1. Create an emergency fund before you have to use it.

When individuals lack sufficient funds to meet an emergency, they often rely on credit cards, loans, relatives, and retirement funds. However, drawing from any of these sources has repercussions. Consider opening a separate savings account for emergencies, apart from your checking account and other accounts you use for everyday expenses, so you are less inclined to use it. A three- to the six-month emergency fund will help you weather a job loss or unexpected expense.

2. Continue Saving

Even if the market is down, continue contributing to your retirement plan.

The principle of investing is “buy low and sell high” When the stock market is declining, it may be advantageous to contribute to your retirement plan. Continuing to save and invest regardless of market conditions can assist in long-term growth.

Why? Because a concept is known as dollar-cost averaging. Dollar-cost averaging neither ensures a profit nor eliminates the possibility of a loss. Nonetheless, when the market is strong, you invest in funds at a higher price, so your 401(k) contribution can purchase fewer fund units. In times of market decline, you can invest in funds at lower prices, allowing your 401(k) contribution to purchase more fund units. Highs and lows can help to balance out your total returns over time.

Additionally, investors should be aware that systematic investing entails continual investment in assets regardless of price level fluctuations, and retirement savers should evaluate their ability to continue the approach over the long term. 

3. Know the assets available in your 401(k) plan, the time remaining till retirement, and your risk tolerance

Your 401(k) should provide you with numerous investing possibilities. Whether you do not feel comfortable selecting your investments, examine the plan’s default option or check to see if your plan offers financial counseling or a professionally managed account. The longer you have until retirement, the more risk you can take with your investments.

4. Develop a detailed defense budget that examines ‘wants’ and ‘needs.’

When the economy is thriving, it’s simple to classify our daily iced soy latte with caramel as a necessity. And even though many of us require caffeine to start the day, there are more cost-effective alternatives. Create a budget that can help you weather a financial crisis. Start by separating your wants from your requirements, creating a budget to help you pay for your needs, and considering setting aside a portion of the balance in an emergency or retirement account. Your retirement plan provider may have resources available to assist you with this, or you might consult with a financial professional for assistance. Consulting a financial advisor is an excellent action to take, regardless of the economic climate.

After several years of low unemployment and considerable market expansion, whether or not the current economic uncertainty is labeled as a recession, there are steps you can take today to prepare your finances, which may be prudent even in the absence of a recession. Regardless of the economic climate, it makes financial sense to save for emergencies, continue to save, optimize your 401(k) assets, and create a defense budget.