Economic downturns and inflation could impact your life savings and retirement nest egg. Recessions are a regular part of economic cycles, so one will inevitably occur at some point. However, no one can accurately predict when a downturn will occur or whether it will be mild or severe.
Though it’s impossible to precisely forecast recessions, economic shifts can indicate the potential for a slowdown. You might want to take a few actionable steps to recession-proof retirement savings and other investments.
How Can I Protect My Savings From Inflation?
You can be proactive about shielding your hard-earned money from inflation and a recession, such as saving an emergency fund in a high-interest account, establishing other income streams and reducing debts and fixed expenses.
1. Put Your Emergency Fund in a High-Interest Savings Account
If you do not yet have an emergency fund, now is the time to start one. The rule of thumb is to save for a few months’ or even a year’s worth of living expenses. You can use this savings if you lose your job during a recession. With an emergency fund, you can continue paying your bills while you look for another income source.
Be sure to put your emergency fund in a high-interest savings account insured by the Federal Deposit Insurance Corporation. This move ensures your money retains its value and remains highly liquid, so you can access your funds whenever you need them, such as after a job loss or a medical emergency.
2. Establish Additional Income Streams
Even if you love your full-time job, having additional income can help you weather times of economic downturn and market volatility. Whether you sell items online, offer consulting services or drive for a ride-sharing service, there are various ways to establish other income streams.
Job security is not guaranteed even during economic stability, so if you rely solely on one employer, you could be risking your finances. Instead, if you establish additional income sources, you will still make money even if you lose one of them.
3. Reduce Debts and Fixed Expenses
To protect your savings and income during a recession, take steps to reduce your debts and fixed expenses. If you can, accelerate your plan to pay off your high-interest debts like credit card or medical debt. Remember, you can also try to negotiate your medical bills and call your lender to ask about lowering your interest rate.
Along with reviewing your debts, examine your fixed expenses. There may be areas in your budget where you can save, such as a cellphone bill, internet service or auto insurance. For example, if you are paying for auto and homeowners insurance, bundling your policies can help you spend less on your premiums.
How to Protect Retirement Money From a Recession
To protect your retirement money during a recession, follow the steps below.
1. Prepare for the Worst
Consider the worst-case scenario in your situation if a recession occurs. For example, if you are close to retiring, you may be concerned about a drop in the market. If you are a working professional, you may worry about job loss. Losing income could mean relying on your savings to cover your living expenses.
Since unemployment tends to increase during a recession, it may be wise to prepare for this worst-case scenario by honing your investment strategy. Additionally, you may want to create a plan for your retirement savings goals.
2. Continue Making Contributions
Even if the markets are down, keep contributing to your retirement accounts. By investing during a recession, you can reap the rewards when the market bounces back in the future. Grow your portfolio and buy in at a lower cost.
3. Diversify Your Portfolio With a Self-Directed IRA
Investing all your money in a single share or asset type could put your retirement savings at greater risk. To avoid losing your money, consider diversifying your portfolio with a self-directed IRA. This recession-proof IRA allows you to invest in alternative assets beyond bonds and stocks. Ensure your investment portfolio consists of various asset types, such as real estate, private equities and precious metals. Diversifying can help you lower your risk in a recession.
4. Reduce Stock Exposure
If you are nearing retirement age, now is the time to reduce your stock exposure and make your portfolio more conservative. Gradually increase your exposure to bonds instead. If you need guidance on what your stock exposure should be for your financial situation, reach out to us at Accuplan.
5. Invest for the Long-Term
Market drops can occur during a recession, which can lead investors to panic and sell investments to avoid further losses. However, you can avoid these losses by keeping your money in the market long-term. The market is cyclical, so you will likely have more opportunities in the future to sell high. Buying in when the market is down may result in higher returns.
However, if you are close to retirement, you may want to shift your investment strategy to a lower risk and ensure you have enough liquid cash to access throughout your golden years. Remember, you do not have to take out all your money when you reach retirement age, and your investments may still have time to recover by the time you need to withdraw them.
Contact Us at Accuplan for IRA and 401(k) Advice in the Current Market
At Accuplan, we provide administration for self-directed IRAs and 401(k) retirement plans. When you have a self-directed IRA, you can choose from more investment options and invest in what you’re passionate about, such as:
- Real estate
- Private equity
- Precious metals
We will guide you along the way, give you the support you need, answer your questions and provide input to help you follow the laws and IRS guidelines. Since 1985, we have been helping our clients with estate planning and began offering our benefits services in 2007. We are dedicated experts and have an intuitive dashboard that can make investing easy and efficient. Contact us at Accuplan or begin the onboarding process today.
Our information should not be relied upon for investment advice but simply for information and educational purposes only. It is not intended to offer, nor should it be relied on for, legal, accounting, investment or tax advice.