What steps do you need to take to maintain your current lifestyle and save for retirement?
We’ll be covering what you need to do to get through economic downturns or stagnation, save for retirement, and still be able to hit your financial goals.
Note: If you don’t know about the bucket strategy, you’ll definitely want to read the previous article first because they’re crucial to surviving recessions.
What to Do, Financially, in a Recession
If you followed our advice on creating buckets, you know that whether or not you’re in a recession, we recommend segmenting your income into numerous buckets.
By the way, if you’re behind, don’t worry. So, even if you don’t have buckets in place just yet, you can also begin creating them in the middle of a recession.
When it comes to a recession, you may or may not need to adjust your buckets. For example, your financial advisor can help you reallocate some of your money during a mid-year financial checkup to lower your risk of losing money or ensure your needs are met.
Determine What’s Changed in a Recession
One of the key things we ask anyone going into a recession is: what’s changed? Emotion is a big one. A recession is scary and can cause people to make the wrong financial choices. In fact, studies from The Great Recession found conclusive evidence of mental health declines.
However, we want you to think about a few things:
- What’s changed in your life? You still have expenses, a career, and a future to think about. Your feelings may have changed, but that shouldn’t change your overall outlook. Recessions come to an end eventually.
- What are your costs? There’s a good chance many are the same. For example, if you have a fixed mortgage, you can be confident that your housing expenses will remain the same. You have a lot of fixed costs, such as your car loan or any costs associated with signed contracts.
- What are your goals? Do you still want to work less in the future and retire at the same time as before? If so, you need to keep saving the same amount and remember why you’re saving.
During a recession, many of your expenses will remain the same. That being said, you may notice an increase in other costs, such as food, but this is likely short-term.
Since World War II, the average recession lasted just 11.1 months, and the last major recession between 2007 and 2009 lasted 18 months. If a recession does occur, you shouldn’t sabotage your future because the economy was slower for less than a year.
Emotions are going to be the most difficult aspect of a recession for most people because it’s a scary time.
This is where a financial planner helps make a material difference in your life.
Financial Planners During a Recession
During a recession, financial planners work with you to control emotions. No one likes:
- Talks of recessions
- Inflation hitting 8+%
- Gas prices spiking
A lot of consumers have real concerns about paying for gas or the rising cost of groceries. It’s crucial to know that none of these things change:
- Who were are
- What we’re spending
- Why we have future goals
Instead, it changes the approach that you take to saving. A financial planner helps you manage emotion and what you’re spending to continue down your path of financial security. For example, you may need more money for food and gas. So, where does that come from?
Maybe savings, it’s possible we cut back on eating out. What about that gym membership? Total spending can remain constant, but the category may change.
However, what does reducing your retirement savings for the next year mean for your goals?
Retirement Savings and Cutting Back
Financial planners will work with you to:
- Create a quantitative analysis to learn how lowering your retirement savings will impact you in the long term.
- Analyze what happens if you put $15,000 into retirement a year instead of $20,000 to account for rising inflation costs.
Ideally, retirement is the last bucket that you’ll adjust. Quantitative analysis shows you the actual outcome of your decisions and helps calm emotions in the process. Perhaps this small reduction in savings won’t significantly impact your retirement.
However, when you have the data in front of you, it removes emotions and allows you to adjust course to meet your current financial needs while allowing you to reach your retirement goals.
You may also need to find ways to cut back on expenses. A few areas where you may need to adjust your buckets are:
- Entertainment. One of the first things people should look at adjusting is their entertainment spending. Do you really watch all of those streaming services? If not, cut the ones that you don’t watch to save money.
- Restaurants. A staggering 45% of diners go out to eat more than once a week. When money is tight, it may make more sense to cook some of these meals at home.
- Travel. Unfortunately, many people push their travel plans back during recessions because they simply can’t afford the vacation they truly want.
If you consider the examples above, you’ll also notice that reducing these buckets will not have a lasting impact on your future. You can likely get by cutting back on eating out for a year and then pick it right back up when the economy stabilizes.
However, reducing your retirement savings may mean you have to live on less in retirement or work a few additional years – something no one wants to do.
It can be very scary to make confident decisions without truly knowing the impact of your decisions or adjusting financial buckets. Advisors work alongside you to keep your emotions out of the decision-making process and help you reach your goals.
Unfortunately, there’s nothing that the average person can do to stop a recession. Financial and economic disturbances are a part of the world’s economies. Even if a recession doesn’t occur in 2022, it will occur at some point in time.
Keeping emotions out of your decisions and working with a financial advisor can help you maintain your financial health, save for retirement, and confidently reach your goals.
To learn more about how KPN Enterprises can help you with recession planning or to schedule a call, contact us here.