For 11 years, U.S. investors have benefited from the longest bull market in history. While it has been expected the booming economy would eventually slow down – or correct, as financial experts say – no one could have anticipated that it would come to such an abrupt halt in March as coronavirus swept across the country, shuttering businesses and driving up unemployment rates.
It now seems likely that we're on the cusp of a recession. While a $2 trillion stimulus package from Congress is hoped to help boost the economy, here's what you should do right now to prepare your personal finances for a recession:
- Remain calm.
- Rebalance your portfolio.
- Revisit your budget.
- Boost your emergency savings.
- Max out retirement contributions, if possible.
- Have a Plan B for workplace benefits.
- Watch out for scams.
- Adjust retirement distributions.
Every day seems to bring fresh news of losses on Wall Street. For workers and retirees who have their retirement money invested in 401(k) accounts and IRAs, the falling numbers can be unsettling. However, the most consistent advice from financial advisors is to not panic and not make any emotional decisions.
"If your house went down in value, would you immediately throw a for-sale sign in the front yard?" asks Evan Press, certified financial planner with wealth management firm Equitable Advisors in Woodland Hills, California. By selling stocks now, investors will lock in losses and miss the chance to recoup their money when the market bounces back, as it inevitably will. "The worst thing to do is to sell low," Press says.
Those who have created an investment plan with a financial planner may want to touch base with that professional to calm their nerves. However, these conversations are often best done over the phone. "Using the phone over email really goes a long way to prevent miscommunication," says Jared Feldman, partner of financial firm Anchin Private Client in New York City.
Rebalance your portfolio
Most portfolios include a mix of funds that depends on a person's age, risk tolerance and investment goals. As stock prices tumble, a larger percentage of a portfolio may shift to bonds. Rebalancing the portfolio means moving some of that money from bond funds and back into stocks, which are essentially on sale given their current lower prices.
"You can also take this opportunity to be more aggressive with long-term money," says Kevin Philip, managing director of Bel Air Investment Advisors in Los Angeles.
Younger workers, and even those into their 40s, may want to put more investments in growth funds which have the potential to see greater gains when the market bounces back. However, these funds come with more risk, so money needed in the short-term shouldn't be placed there.
Revisit your budget
Employees who have shifted to remote work or experienced a layoff or reduced hours should take the time to rework their budget. Even those who haven't experienced changes to their work schedule yet may want to prepare for future cash flow changes. "We're still looking at best-case scenarios, but we're also looking at worst-case scenarios," Feldman says.
In addition to considering changes in income, workers may be able to find some savings in their budget. For instance, remote workers may not need to renew transit passes next month or fill up their car nearly as often.
Max out retirement contributions, if possible
For those who are able, now is a good time to contribute the maximum allowed in tax-incentivized retirement funds such as IRAs and 401(k) accounts.
"Market volatility will exist, but volatility can also bring benefits for long-term consistent savers," says Charlie Nelson, CEO of retirement and employment benefits at Voya Financial, which provides retirement, investment and insurance products and services.
Low market prices mean the opportunity to buy more shares of a fund and, in turn, see greater growth when prices rise. However, rather than buying indiscriminately, it's better to consult with a financial planner to map out which funds to buy right now.
Boost your emergency savings
With storm clouds on the horizon, now is the time to be sure your rainy day fund is filled. "Make sure you have a good cushion of liquid savings," Press says. The prevailing wisdom is to have enough in savings to cover expenses for three to six months. However, retirees, pre-retirees and those in industries that may see long-term impacts from a recession may want to set aside more.
If you have a home equity line of credit, now might be a good time to move some of that money into a savings account, Philip says. He notes that during the last recession, banks reduced or eliminated lines of credit which cut off access to money right when some families needed it most. "The whole idea is that if your regular paycheck isn't coming in, it gives you something to work with," Philip says.
Have a plan B for workplace benefits
Without government action, the unemployment rate could surge to 20%, according to U.S. Treasury Secretary Steven Mnuchin. That means another key step to preparing for a recession is to determine which benefits you receive from work and how you will continue them if you lose your job. Most pressing among these may be health insurance.
Under The Consolidated Omnibus Budget Reconciliation Act, known as COBRA, many workers can maintain their workplace policy for up to 18 months so long as they pay the full premium as well as an administrative fee.
"It's also important for employees to evaluate their voluntary workplace medical insurance, such as accident or indemnity insurance," Nelson says. Some policies may be portable, meaning workers have the option to continue paying premiums and keep their coverage after leaving a job. Others may end with unemployment.
Watch out for scams
A recession could give rise to financial scams. "The stock market is very famous for queuing the emotions of fear and greed," Philip says. Those emotions could lead to poor decisions as people either try to preserve their money or capitalize on the situation to make more.
People should be wary of investments that make promises seemingly too good to be true. Although not necessarily fraudulent, private placements involving nonregistered investments and other unusual money-making strategies can be risky. Philip cautions against putting money into any investment you don't fully understand.
Adjust retirement distributions
While younger workers may have decades to make up the losses from falling stock prices, most retirees don't have that luxury. Just as people shouldn't sell off stocks right now, seniors should avoid pulling money from retirement funds unless absolutely necessary. It's better if they can pivot to other sources of savings until the market rebounds.
If there isn't enough in liquid savings to ride out the poor market conditions, Press suggests retirees pull money from more stable fixed income and bond funds rather than more volatile equities.
Although it can be scary for investors to watch their dropping fund balances, Philip reminds workers and retirees that we are a nation of innovators who have overcome economic hardship in the past. He offers the following reassurance: "We'll get through this and be stronger in the end."
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