Written by Jeremy Biberdorf
Preparing for a recession is something anyone getting ready for retirement should think about. You might have the perfect plan — but if a recession hits, your well-thought-out retirement fund may disappear faster than you had thought. The good news is there are several ways you can prepare for a recession comfortably.
Have an Emergency Fund
It is a wise idea to contribute an amount of money from
each paycheck to your emergency fund. Even if it is not a lot, every bit
counts. You and your financial advisor should decide how many months of living
expenses you should save up.
Do not worry if you only have a small fund so far. Even
if you only have a couple months of living expenses saved up, you still have a
start. Consider keeping this emergency fund in a higher-interest savings
account rather than a low-interest checking account so you earn some interest
Stay in the Market
When the market takes a dip, your first impulse
might be to sell everything and get out. But this may not be the best idea.
Since many people are living longer, you will most likely need your money to
last a while. Also, if you are not yet retired, you won’t need the money in
your retirement portfolio. Retirement accounts can withstand more ups and downs
for people who are not currently using the money and won’t need it for several
Diversify Your Savings
The closer you are to retiring, the more important
it is to diversify your investments. You should never keep all your eggs in one
basket because this presents a huge risk to your savings. If you have your
portfolio spread around multiple sources, it is more likely that at least part of
your portfolio will respond positively when the stock market is down.
One rule that many people used to use is the 60/40
where 60 percent of your portfolio is invested in higher risk with a better
return and 40 percent is invested in lower risk that does not pay as well.
However, this rule may not be enough for people who are retiring soon. Historically,
factors such as high equity valuations, low prices in commodities, and increased
risks in bond funds have all served to make the 60/40 rule work. But now, you
should consider an even broader mix of investments.
Manage Your 401(k)
It is best to think of your 401(k) as a long-term
investment, which means it will experience fluctuations during market changes.
And when the market is changing, you should not make major changes to your
Maximizing your 401(k) savings now can help you save
as much as possible. This is especially true if your employer offers matching contributions.
Never forgo employer matching. This is free money and is one of the best ways
to build retirement savings over time.
Pay Off Your Debt
It is especially important to pay off any remaining
debt while you are still getting an income. When you are paying off your debts,
you should never use your 401(k) to pay down debt.
Instead, building regular debt payments into your
budget will help you get rid of debt without making your retirement savings
suffer. It is a wise idea to plan to pay off a bit more of the debt each month
than required. That way, when the debt is gone, you can invest the money you
would have put toward your debt in your portfolio instead.
Earn Extra Income
More and more people are working part-time in
retirement. Just because you are retired does not mean you have to sit around
at home by yourself. Once you have more time, you may want to consider doing
something fun, like pet-sitting or starting a small side business. You may even
consider helping out at a local business. This extra income can help you
supplement your retirement funds, especially in a recession.
Have Sources of Retirement Income
In an ever-changing market, not all your income
sources are sure things. Having some stable sources of income during your
retirement, such as annuities, pensions, and social security, will help ensure
you are still getting an income, even if other parts of your portfolio fail.
Strong dividend paying stocks are also wise to have as they are generally less
volatile over time. There are plenty of dividend payers, such as Exxon and
Procter & Gamble, that have paid out a solid dividend for decades without
ever cutting their dividends.
Work with an Expert
Navigating retirement savings can be tricky, especially
when the market is uncertain. Luckily, you do not have to do it alone. A
financial advisor can understand your financial goals and guide you to options
that will help you reach them. They can also help you make wise financial
decisions. For example, if the market suddenly goes downhill, a financial
advisor can encourage you to avoid making the mistake of panicking and selling
If you decide not to go with a financial advisor, many
other options can guide you through retirement planning during a recession. For
example, retirement blogs and forums can be an excellent place to connect with others
planning for retirement and to gain invaluable advice. You can also look into
retirement planning apps to help you in your journey.
Do It Yourself Retirement Planning
There are a lot of great online financial and
retirement planning tools available to do-it-yourself types. Serious financial
and retirement planning software was once only the realm of financial advisors.
But that is no longer true. A financial and retirement planning application
allows consumers to create their own sophisticated financial and retirement
plan. Consumers can also run a lot of different what-if scenarios, including
what happens to their retirement portfolio during a recession.
Following these tips can give you peace of mind
during any recession. Managing your finances wisely and saving up for a rainy
day will help you comfortably get through any tough times up ahead.