How To Prepare for a Recession

During a recession, there’s a severe drop in the nation’s gross domestic product (GDP), a high unemployment rate, along with wholesale and retail sales adjusted for inflation.

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.

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.

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.”

Create a contingency plan with a financial advisor to determine how much you’d need to cover three to six months of living expenses. Make sure to include reducing your debt in your plan.

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.

If you’re retired, there are several ways to offset the financial burden of 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.

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.

Editor Malori Malone contributed to this article.