How To Prepare for a Recession
To prepare for a recession, start building an emergency fund that can cover your living expenses for three to six months. In addition, lowering your debt before a recession begins can make it easier to survive financial hardship. Learn more about preparing for a recession, such as specific tips for retirees and which investments to stick with.
- Written by Lindsey Crossmier
Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.Read More
- Financially Reviewed ByBrandon Renfro, Ph.D., CFP®, RICP®, EA
Brandon Renfro, Ph.D., CFP®, RICP®, EA
Retirement and Social Security Expert
Brandon Renfro is a Retirement and Social Security Expert and financial planner. He focuses on helping clients create a secure financial future in retirement and co-owns Belonging Wealth Management. He is also a former finance professor and writes for several publications.Read More
- Published: May 4, 2023
- Updated: August 12, 2023
- 6 min read time
- This page features 5 Cited Research Articles
- Edited By
- There are ways to make yourself “recession-proof” and reduce your chance of losses during a recession.
- Consider investing in CDs, government securities, dividend stocks and money market funds during a recession.
- If you’re a retiree, consider a part-time job or delaying Social Security benefits to offset the financial repercussions of a recession.
What Happens in a Recession?
You can expect stock markets to become volatile, causing panic buying and selling. Within a recession, the housing market has been known to take hits too, according to U.S. News. Prices of homes drop, but there’s an increase in foreclosures and short sales.
A recession threatens the financial stability of millions. Your retirement savings plan will likely take a hit if you have high-risk investments. In addition, if you’re looking to downsize, you won’t be able to sell your home for much.
If you lose your job during the recession, you will likely no longer have healthcare coverage and may need to anticipate paying for medical costs out-of-pocket.
The key to weathering a recession is to prepare in advance. Also, think in terms of timeframes. Your short-term savings should be in stable instruments like cash, CDs or bonds. Longer-term savings can remain invested.
Unfortunately, all the features that define a recession sound recognizable to most Americans. It begs the question: Are we currently in a recession in 2023?
RetireGuide asked Barbara O’Neill, CFP®, CEO of Money Talk and author of “Flipping a Switch” if she thinks we’re currently in a recession. “It’s hard to say if we’re in a recession or not since the National Bureau of Economic Research (NBER) has been giving conflicting signals.”
“At one point last year, the NBER was saying one of the big indicators of a recession was two consecutive quarters of drop in the GDP. It happened, but they still didn’t announce a recession because, at the same time, they were seeing a lot of job openings, which we still have today.”
O’Neill stressed the importance of assessing your personal financial situation — not just a NBER declaration of a recession. “There’s the personal recession and the official reception. The bottom line is if people are hurting now, you could be in a personal recession, even though it may not be official.”
While a recession can be daunting, there are ways to proactively prepare to avoid taking large losses.
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Tips To Survive a Recession
O’Neil offered RetireGuide three tips on surviving a recession. “My number one tip to best handle a recession is to have an emergency fund to cover at least three to six months of expenses. My second tip is to lower your debt since it’s always easier to have low debt versus high debt during a recession. It’s also a good idea to consider a bear market fund, which is beneficial in an economic downturn.”
A bear market fund is a mutual fund that can provide returns during a market downturn. If you’re considering a bear market fund, make sure you diversify your investments first, since this option can be on the riskier side.
- Have an emergency fund that covers three to six months of living expenses
- Eliminate as much debt as possible in advance
- Consider a bear market fund (with a financial advisor’s aid)
How To Prepare for a Recession if You Are Retired
If you’re retired, there are several ways to offset the financial burden of a recession.
- Delay Your Social Security Benefits
- Each year you delay your Social Security benefits, the amount you will receive increases until the cut off at age 70. Say you’re 67 years old, and you assume we’re going to be in a recession by next year. You could wait to collect benefits until you’re 68 so you have a higher benefit amount when the recession arrives.
- Get a Part-Time Job
- You can put off retiring for a few months by getting a part-time job and bulking up your savings.
- Downsize in Advance
- If you have a large home, you could sell your home before the recession hits and home prices drop. Then you’d have a lofty nest egg to purchase a smaller, modest home with a lower mortgage to handle during the recession.
What To Invest in During a Recession?
“You could invest in high-interest brokered certificates of deposit (CDs), or CDs from online banks. I recommend laddering the CDs since we don’t know what’s going to happen with the economy. Dividend-paying stocks, government securities and money market funds are also good investments during a recession,” O’Neil told RetireGuide.
Gold can also be a worthy investment since it has historically performed well, or even increased in value, during a recession.
If possible, try to keep investments that are fairly liquid. Having cash on hand will make it easier to weather a recession.
- Dividend-Paying Stocks
- Government Securities
- Money Market Funds
Laddering your CDs is a noteworthy tactic to consider. By laddering CDs, you’re hedging all the interest rate uncertainty since you’re locking in current rates.
If rates go up by the time your short-term CDs mature, you can reinvest at a higher interest rate. And if the rates start to come down, then you still have the other long-term CDs with locked, higher rates to limit your risk.
Make sure you regularly review and rebalance your investments during a recession. Ask for advice from a financial advisor before making rash decisions with any high-risk investments.
Frequently Asked Questions About Preparing for a Recession
Editor Malori Malone contributed to this article.
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5 Cited Research Articles
- Gobler, E. (2023, April 27). What Assets Are Recession-Proof? Retrieved from https://www.usatoday.com/money/blueprint/investing/what-assets-are-recession-proof/
- Thorsby, D. (2023, April 27). When Will the Housing Market Crash? Retrieved from https://realestate.usnews.com/real-estate/articles/when-will-the-housing-market-crash
- Brooks, K. (2022, December 28). The Top 10 Recession-Proof Jobs for 2023. Retrieved from https://www.cbsnews.com/news/recession-jobs-2023-payscale-report/
- Corporate Finance Institute. (2022, December 5). Recession. Retrieved from https://corporatefinanceinstitute.com/resources/economics/recession/
- Kerr, E. (2022, July 14). What We Can Learn From Past U.S. Recessions. Retrieved from https://money.usnews.com/money/personal-finance/family-finance/articles/how-long-do-recessions-last-what-we-can-learn-from-past-recessions
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