How Recessions Affect Retirement Plans

Recessions, or two consecutive quarters of negative GDP growth, have been on many people’s minds lately and this latest article, What job woes mean to you by Chris Isidore, probably doesn’t help. Economic cycles happen and with each economic burst will come a correction of sort, a regression to the mean if you will. However, if you plan for it, you can mitigate the negative effects of a recession as best as possible.

The greatest concern during a recession is job loss, the focus of that article, and you can mitigate that by solidifying your worth to the company you work for and boosting your emergency fund. I wrote about the decision making process for contributing to a retirement fund or an emergency fund in the past, still worth reviewing if you haven’t read it. After the 401(k) match, I recommended that after you’ve saved 6 months of expenses you should move back to your Roth – I still agree.

However, I would amend that article and increase the emergency fund period to 9 or even 12 months. One benefit of a Roth is that you can withdraw your contributions penalty free under many conditions, so you aren’t significantly hampered by contributing, but the key here is to increase your emergency fund because the probability of a bad event, such as job loss, has increased.

You can’t control, to a certain extent, what happens to you but you can control how well you prepare for it.