The Fed just announced its seventh and final rate hike of the year — bringing its benchmark interest rate to the highest level in 15 years.
“I wish there was a painless way to restore price stability,” Fed chairman Jerome Powell told a reporter from NBC. “There isn’t.”
The last 4 federal funds rate hikes have been by 75 basis points, while the newest one is a jump of 50 basis points that brings the target rate range to 4.25% and 4.5% .
It’s becoming more expensive to borrow even as stubborn inflation keeps prices high, and Americans are feeling the strain on their retirement savings.
In fact, four in 10 older Americans are delaying retirement in the midst of challenging economic conditions, according to the Nationwide Retirement Institute — double those who were pushing back retirement last year.
However, keeping your finances on track can help you still reach your retirement goal on time, even with an economic downturn on the horizon.
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Why you shouldn’t panic
The Fed is raising interest rates in order to combat persistent inflation — which clocked in at 7.1% in November, according to the latest data.
More rate increases will be on their way in order to bring inflation down to 2%. The Fed expects the rate will hit 5.1% in 2023 and a recession remains likely.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the The Federal Open Market Committee said on Wednesday.
A recession is typically characterized by a significant decline in economic activity, rising unemployment levels and low consumer demand. While GDP rose in the third quarter of 2022 and unemployment remains low, high prices and declining real wages are increasing the likelihood that demand will drop and a recession will begin next year.
That said, recessions have lasted less than a year on average since the Second World War, and many economists are expecting next year’s to be relatively mild.
Soon-to-be retirees might have concerns — especially if the value of their IRAs has dropped with the stock market. Average retirement savings have plunged by nearly $10,000, according to data from financial services company Northwestern Mutual.
But if you take some precautionary measures to get your finances in order, you might not be severely impacted by an economic downturn.
What soon-to-be retirees can do to prepare
Fortify your emergency fund
During a recession, when economic activity is stifled and unemployment starts to spike, older workers tend to be at higher risk of losing their jobs compared to those in the middle of their careers.
You can prepare for this possibility by beefing up your emergency fund. Experts generally recommend setting aside three to six months’ worth of living expenses in normal circumstances.
However, if you’re barely making ends meet in the midst of rampant inflation, start with smaller savings. You can build up your cash cushion over time, but be realistic about how much you can conserve.
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Scoop up shares on the cheap
Although the market’s been down, this might be a good opportunity to purchase shares while they’re cheap — and benefit over the long-term.
If you’re in a strong financial position, consider building a diversified portfolio with sectors that traditionally perform well throughout economic cycles, like health care, utilities and consumer staples.
Short-term assets, like cash, prepaid expenses and short-term investments, can also help you ride out a recession. They’re meant to be used within a year, which can help you avoid tapping into your long-term investment funds.
Take advantage of low tax rates
The market downturn might actually make for a good opportunity to convert your traditional IRA into a Roth IRA.
A traditional IRA lets you grow your money tax-free until you make withdrawals in retirement. With a Roth IRA, you’ll need to pay your taxes upfront but can benefit from tax-free withdrawals in retirement instead.
So why might it make sense to convert over to a Roth IRA now? While the market’s down, your portfolio value has likely shrunk as well, which means there’s less to pay taxes on.
You’re also currently benefiting from 2017’s tax cuts — which will no longer apply by Dec. 31, 2025.
If you think you might be in a higher tax bracket in the future, consider taking on a lower tax burden now and gaining from tax-free withdrawals in your retirement.
Get expert financial advice
Setting yourself up for a comfortable retirement is nerve-wracking — especially with a 7.1% inflation rate and potential recession peeking around the corner.
According to the Federal Reserve, only 40% of non-retirees thought their retirement savings were on track as of 2021. One solution is to find a financial adviser who can help you navigate your finances and make sure your assets are safeguarded.
Researching and calling multiple financial planners can be a time-consuming hassle, but there are ways you can easily browse vetted advisers that fit your needs. Booking a consultation is free and only takes a few minutes.
If you’re unsure of how to safeguard your savings during a recession, the time to find a financial adviser is now.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
