By Carla Fried January 15, 2019
After almost nine years of steady economic growth, Americans are starting to worry that
a recession may be coming.
The risks of a global trade war and the fallout from the government shutdown are
beginning to put a drag on economic growth and are partly behind the recent stock
market volatility. The S&P 500 dropped 13.5 percent in the fourth quarter of 2018,
though it partly rebounded in January.
Still, there are other indicators that the economy is still in growth mode. More than
300,000 new jobs were created in December, according to the U.S. Bureau of Labor
Statistics, and the unemployment rate is below 4 percent.
Truth is, no one can accurately forecast the timing of the next recession, but a downturn
is part of a normal economic cycle. Since the end of World War II, there have been 11
such cycles, with the last one officially ending in June 2009, according to the National
Bureau of Economic Research.
That's why it makes sense to factor in these downturns as part of your long-term
planning. If you don’t already have a strategy in place to protect your finances, get
“Reacting in the middle of a recession is going to be too late,” says Timothy Hewitt, a
certified financial planner in West Conshohocken, Pa.
Here are six steps that can help you ride out an economic slump.
Boost Your Emergency Savings
Financial planners typically recommend building a rainy day fund that can cover three to
six months of expenses. But in an economic slowdown, there’s a greater risk of job loss
and prolonged unemployment—right now the average length of unemployment is 22
weeks. In 2011, in the wake of the Great Recession, the national average reached 29
weeks; for workers ages 55 to 64, the average was one year.
If you are worried that your job won’t last through the next downturn, aim to build cash
reserves that can cover six to 12 months of costs, Hewitt says. Look for highyield
online bank savings accounts that can help speed your savings.
Along with a robust rainy day fund, consider opening a home equity line of credit, or
HELOC, if you don't already have one. With a HELOC, you have a backup source of
funds, as long as you don't deplete it with other spending. Shop now, because lines of
credit are harder to obtain in a recession.
Pay Off Credit Card Debt
It’s always smart to minimize credit card debt, especially if you're paying a high rate. But
if you need another incentive, consider how hard it will be to pay off high-rate debt if
your job and income disappear in a recession.
"Credit card debt is so toxic, I would work on getting rid of it before increasing an
emergency fund beyond three months," says David Schneider, a certified financial
planner in New York City.
Funnel as much as you can now into payments. For example, if you’re expecting a large
tax refund this spring—the average last year was more than $2,800—consider
earmarking some or all of it to shrink that balance.
You can also seek out a zero-rate balance transfer credit card deal and use the
opportunity to whittle down your debt. Don't wait too long, though.
“In a recession, offers for zero-rate balance transfers may disappear,” Schneider says.
Reduce Your Spending
Take the time now to scrutinize your budget and get a handle on your cash flow.
“Once you see where all your money is going, it’s easier to find big and small ways to
save,” Hewitt says.
Perhaps you can cut the cable cord or skip a vacation, or raise your home or auto
insurance deductible. With these moves, you will get a better understanding of how
much you really need to meet essential expenses, as well as free up cash for saving
and debt reduction.
Proactive budgeting is especially important for pre-retirees and recent retirees, who may
be tapping their portfolios for income. If you start out your retirement by making large
withdrawals in a down market, you will lower the future growth of your portfolio,
Schneider says. That raises the risk of running out of money.
Upgrade Your Job Skills
When the next wave of downsizing hits, you don’t want to be a vulnerable target. Older
workers tend to be most at risk, because they typically earn higher salaries—and are
often perceived as lacking up-to-date skills. More than half of full-time workers over the
age of 50 eventually suffer a job loss, according to a new study by the Urban Institute, a
research group; the study was funded in part by ProPublica.
Keep your skills and knowledge up to speed by taking advantage of every on-the-job
training opportunity, says Catherine Collinson, president and CEO of Transamerica
Center for Retirement Studies.
More than 80 percent of employers offer some form of financial assistance for
continuing education. Up to $5,250 per year that you receive in employer-provided
educational benefits are exempt from federal income tax. (Amounts above that will
generally be taxed.)
You should also maintain an up-to-date resume and keep networking. In the event that
you have to job hunt, reaching out for leads and contacts will be a lot easier if you’re
already in touch with colleagues who may be able to help.
Take Advantage of Market Losses
The stock market often heads down well before a recession strikes. That may give you
an opportunity to trim your tax bill, Hewitt says. Using a strategy called tax-loss
harvesting, you can use losses in your taxable accounts to offset taxable gains.
In years when the taxable losses exceed your gains, you can deduct up to $3,000 of
those losses against your ordinary income on your federal tax return. Any losses above
that amount can be rolled over to offset gains in future years.
Down markets are also a good time to consider converting pretax 401(k) or IRA
assets to a Roth IRA, which allows your after-tax savings to grow tax-free. Having more
money in a Roth can give you greater flexibility in retirement. Plus, it minimizes
future required minimum distributions.
Although you will not have to a pay an early withdrawal penalty, you will owe taxes on
the amount you pull from your pretax accounts, which is why it can make sense to take
advantage of market declines to do a conversion, says Joe Wirbick, a certified financial
planner in Lancaster, Pa.
Still, the benefit of a conversion depends on your financial situation, as well as
expectations for future returns and tax rates. Consider speaking with a financial adviser
or accountant before making this move.
Fine-Tune Your Portfolio
If you’ve kept your portfolio on autopilot for most of the past decade, it's time to take
charge and review your asset allocation. The asset mix you chose years ago may carry
a lot more risk than you feel comfortable with today, especially if you're worried about a
If that's the case, consider tilting your portfolio toward a slightly more conservative asset
mix by shifting a portion of your stock holdings into bonds.
As a guideline, the Schwab Target 2035 Index fund holds 76 percent in stocks and 24
percent in bonds and cash. By contrast the Schwab Target 2030 Index fund, designed
for those retiring five years earlier, keeps 69 percent in stocks.
If the markets do hit a prolonged decline, don't stop investing.
"Buying shares when stocks are down is the heart of a buy-low, sell-high strategy," says
Wirbick, who notes that the 2008 to 2009 meltdown helped unleash a record bull
market. Even recessions can have a silver lining.