Tesla CEO Elon Musk recently predicted that the US economy would dip into a recession soon. Speaking at the Qatar Economic Forum, Musk said characterized as “more likely than not” in the near term.
Say Musk turns out to be right: How would that affect your ability to save for retirement? Recessions can lead companies to lay off workers, and in times of financial stress, people tend to take on more debt — two outcomes that can easily lead people to pause their retirement plan contributions. And even a short hiatus on the front might put your long-term savings goals out of reach.
Don’t make hitting your retirement saving target harder than it already is. Instead, try these three strategies to insulate your retirement plan from the effects of a recession.
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1. Protect your income
Layoffs rise in economic hard times, as do business failures. Whether you’re working for someone else or running your own business, now’s the time to start protecting your main income source.
To do this as an employee, work on making yourself indispensable to your employer. That might accepting new responsibilities, involve additional training, or assertively sharing your great ideas in high-profile situations. You might even seek out a mentor further up the management chain — someone who can give you advice about how to solidify your reputation in the organization.
If you’re a business owner, focus on building cash reserves. It would also be smart to negotiate ample credit on good terms now, before you need it. Also do what you can pay down debt, focus on finding efficiencies, and think creatively about ways to deepen your customer relationships.
2. Rework your budget for higher savings
Keeping your spending in check will be crucial if a recession occurs. so take a deep dive into where your money goes today. A thorough budget review should reveal some areas where you can cut back. You might adjust your grocery shopping habits, seek better quotes on your insurance premiums, or dial back spending on nonnessential items.
Whatever cash that effort frees up, route into your savings — either a cash account or a retirement account. As a rule of thumb, you should first top off your emergency fund until it’s robust enough to cover six months of your household living expenses. Once you reach that milestone, use further savings to increase your retirement contributions.
3. Consider building a second income stream
A second income stream can fund higher savings contributions. It can also minimize the long-term consequences of a layoff or income loss.
To be clear, a period of economic uncertainty when the threat of a downturn looms large is not the best time to dump money into starting your own business. But you can use resources you already own to generate cash. Examples include:
- Renting out an extra room in your home. In some areas, you can also rent available garage space or a parking spot in your driveway.
- Monetizing a hobby like writing or graphic design on gig sites like Fiverr or Upwork.
- Selling clothes, tools, and furniture you no longer use.
If you plan to retire within the next 10 years
Recessions are the riskiest to your retirement plans when you intend to stop working within the next few years — especially if you’re behind on building up your nest egg. At this stage, it’s worth the effort to do some contingency planning. Think through your options if you did lose your job within the next 12 months. Some questions to ask include:
- Could you downsize enough to live off your savings? Know that you can take 401(k) distributions from your current employer as early as age 55 if you lose your job.
- Can Social Security help? You can claim benefits as early as age 62, though your monthly checks will be smaller than if you began taking them later.
- Would there be opportunities for you to do consulting work if you lost your job?
Your answers will help you plan your next move.
A recession is not inevitable
You should know that Musk’s opinion runs contrary to the official line of the US government. On the same day Musk spoke, White House Economic Advisor Heather Boushey said she was optimism that the US economy could avoid recession.
At the very least, the jury’s still out on how the economy will respond as the Federal Reserve tightens its monetary policy and raises interest rates in its effort to bring today’s high inflation back down. The Fed is aiming for a soft landing for the economy, and may still be able to steer us to just that outcome. Still, the best time to prepare for recession is before the bad stuff happens. Once the economy is in a downturn, you’ll have fewer options to salvage your retirement plan.
Remember, too, that your efforts today won’t be wasted if a recession doesn’t materialize. Protecting your income and doing more to boost your savings are solid financial moves in any economic climate.
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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.