In recent years, there has been much talk about whether the economy is headed for a hard recession or a soft landing. Some experts are even predicting a new phenomenon, the ‘rolling recession’. Let’s take a closer look at these scenarios and what they could mean for your retirement.
As a retiree, the state of the economy can have a significant impact on your financial well-being. When the economy is thriving, your investments may grow, and you may feel more comfortable spending money. However, when the economy is in a recession, you may be concerned about losing money and may be more inclined to tighten your belt. Can the US stick the landing, beat inflation, and avoid a recession?
Below, we will go over three possible scenarios and provide some tips that will help you maximize your savings for retirement, whatever way the economy turns. Here’s what you need to know.
Hard Recession
A hard recession is a severe economic downturn that is typically characterized by high unemployment rates, falling GDP, extreme inflation rates and a significant decline in the stock market. During a hard recession, retirees may see the value of their investments plummet, making it difficult to maintain their standard of living.
Despite the word “recession” having negative connotations, there may be a silver lining to the current economic situation. According to most economists, if we are indeed in – or on the verge of – a recession, it is likely to be a mild one.
If you are a retiree, you may be concerned about the impact of a mild or hard recession on your retirement savings. To prepare, it is absolutely essential to have a solid retirement plan in place. You can help maximize your savings during hard economic times by focusing on diversifying your investments and preserving your cash.
Even in a hard recession, it’s necessary to revisit your retirement goals. If you had planned on taking a lavish vacation or making a large purchase, you may need to put those plans on hold until the economy stabilizes.
Soft Landing
The flip side of the recession debate is the potential for having a soft landing. A soft landing is a more gentle economic slowdown. These slowdowns typically result in a mild recession or a period of slower growth. During a soft landing, the stock market may experience a small decline, but the impact on retirees’ investments is likely to be less severe than during a hard recession.
One of the main reasons why economists are predicting it to be mild is due to the fact that unemployment has fallen to 3.5% – the lowest level it’s been in a half a century – despite the fact companies have struggled to find workers for a prolonged period of time.
Essentially, companies are less likely to lay off employees with a soft landing in comparison to a typical recession. Therefore, the current recession may not resemble previous recessions in terms of its impact on unemployment rates. It’s important to keep in mind that a recession can still happen regardless of low levels of unemployment. Overall, the current economic situation may not be as dire as it seems, and there may be some positive aspects to it.
For retirees, a soft landing may mean that you do not need to make significant changes to your retirement plan. However, it is still important to monitor your investments and consider reducing your expenses if necessary.
Meet the 3rd Scenario – The Rolling Recession
So far in this blog you’ve read about a hard landing of the economy – a full-blown recession where millions of jobs are lost. And you’ve read about a soft landing – where the economy slows to a nice, steady pace without decimating the labor market as inflation comes down. A rolling recession is an industry term used to describe a bit of a hybrid between them both.
Some economists say that is exactly where we’re at right now.
Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics explains what retirees should expect from a rolling recession: “This means some parts of the economy take turns suffering rather than simultaneously.” He added, “Rather than an abrupt contraction, Americans need to brace for a “rolling recession” that is already in progress.”
This could be the soft landing Fed officials have been aiming for after aggressively raising interest rates to tame inflation. But many Americans are struggling in the face of sky-high prices for everyday items, such as eggs, and most have exhausted their savings and are now leaning on credit cards to make ends meet. The danger here lies in the fact most credit cards have a variable annual percentage rate, which means there’s a direct connection to the Fed’s benchmark, so anyone who carries a balance has seen their interest charges jump with each move by the Fed.
By avoiding variable-rate debts, streamlining your spending and sashing extra cash (preferably in an inflated-protected asset like Series I bonds, real estate investments and TIPS), you can help protect yourself from the sting of a rolling recession, or even make it so that its effects aren’t felt at all.
Preparing for All Scenarios
While the impact of inflation is being felt across the board, every retiree and pre-retiree will experience a recession to a different degree, depending on their industry, income, savings and job security.
This is why it is essential to have a plan in place to protect your retirement savings. Here are a few tips to help you prepare for all scenarios:
1. Diversify your investments – By diversifying your investments across different asset classes, you can help reduce the impact of market fluctuations on your portfolio.
2. Invest for the long-term – As you near retirement age, you should make sure that you have enough money in liquid, low-risk investments to retire on time and give the stock portion of your portfolio time to recover.
3. Maintain an emergency fund – An emergency fund can provide a financial cushion during tough economic times. Aim to have at least three to six months’ worth of living expenses set aside.
4. Consider reducing your expenses – If the economy takes a turn for the worse, you may need to cut back on your expenses to make your retirement savings last longer.
5. Review your retirement plan regularly – Regularly reviewing your retirement plan can help you make any necessary adjustments based on changes in the economy or your personal circumstances.
How APO Financial Can Help
Whether the economy is experiencing a hard recession, a soft landing or somewhere in between, APO Financial can provide valuable assistance to retirees and pre-retirees seeking a knowledgeable partner to help manage their wealth.
With a focus on meeting the specific requirements of retirees, APO Financial offers a comprehensive suite of wealth management services, including risk management, retirement income planning, tax planning, estate planning, and insurance solutions.
Our team of highly experienced Fiduciary professionals have decades of industry experience, enabling us to offer expert advice across a wide range of retirement financial needs.
Final Thoughts
Regardless of the turbulent state of the economy, it is essential for retirees to have a solid retirement plan. By following the tips above, you can take a significant step towards safeguarding your assets.
At APO Financial, our primary objective is to provide you with a secure and comfortable retirement. If you are ready to begin your retirement planning journey, schedule your complimentary strategy session here today.
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