The Dow Jones Industrial Average lost roughly 30% between February 21 and March 23 of this year.1 The same is true for the S&P 500. The impact on 401k plans is quite predictable; most people saw a huge drop in the value of their retirement accounts. This begs the question: What now?
What steps should you take to prepare for this recession?
First, it’s important to point out that everybody is different, and there is no one strategy for every investor. But there are steps everyone can take that will help preserve their wealth, facilitate its growth, and most importantly, give you more confidence during a troubled financial time.
So How Can You Prepare for a Recession?
Back in February, we described several tax saving strategies, one of which was to add as much as possible to your 401k plan. The $19,500 you can contribute in 2020 can have a guaranteed return if your employer matches, and most do. CNBC reported that the average employer match reached 4.7% in 2019. As we like to say, “that’s free money!” Not only will you be saving money that will grow over time and increase with the market, but you’ll take advantage of built-in growth.
With most people across the country under some form of the stay-at-home order, our expenditures have changed. Now with the economy going into a recession, it is a great time to take a look back at your spending and how it has changed in the past two months. Then, apply your learnings to the future as the economy begins running stronger.
Most banks have online budgeting tools built into their online banking platforms. When you log into your bank account, look for tools or resources to begin your research. Take a look back at January and February and start tagging your expenses by category like housing, healthcare, food/dining, entertainment, etc. What you’ll find is a distribution of your expense behavior. Compare that distribution to what has happened since mid-March. What do you see that is different? Where have costs decreased or increased?
Using these tools, you can get a clear idea of where your spending was and where it is today. When restaurants and entertainment venues are re-opened, will you splurge in a frenzy of pent up demand? Or will you take the more prudent approach and modify your behavior so that any savings realized more recently can be multiplied?
The key to financially preparing for a recession is to find places where your spending was rampant and modify your long-term behavior.
A 401k is not the only place you can save. There are many investment opportunities and some that are easily set up. If you have found savings in your post-COVID-19 behavior, use those savings to create a personal investment fund.
For example, if you are saving $500 a month in food and entertainment, consider funneling that money into a brokerage account. You’ll be surprised how fast regular deposits into an online brokerage account can add up. Not only will you have the option to purchase stocks or other investments, but those funds will be more accessible than the savings in your 401k, so a sale and withdrawal can be easily done in an emergency.
Another opportunity would be to funnel extra savings into an account that is low/no risk to save for a larger investment. Make a 2-year plan for regular savings. Depending on where you live, just a few thousand dollars could be an entrance into an investment property.
The options are limitless, but the point is instead of putting your money away because of the recession you should be looking for new ways to invest your money for long term wealth.
Don’t wait for the recession to get worse before getting your finances in order. Among the strategies for dealing with market uncertainty, there are a couple of things that you should resist. First, resist the temptation to make early withdrawals from your 401k. The power of compounding has been widely covered, and early withdrawals can set you back years that you may never recover. If there is a dire need to take an early withdrawal, don’t proceed until you have a long conversation with your wealth advisor.
Second, don’t invest like a twenty-year-old if you’re in your late 60’s. Although the market will provide very good returns over time, if your horizon to retirement is within five or ten years, now is not the time to weight your portfolio into highly volatile market sectors.
Investing strategies based on sound principles shouldn’t change that much even during a recession or other negative market event, like that precipitated by the Coronavirus. But following these few tactics can help you weather the uncertainty that comes with a recession.
1 Yahoo! Finance