Tesla CEO Predicts Recession: How Retirement Savers Should Prepare for Smart Changes: Personal Finance

(Catherine Bullock)

Tesla CEO Elon Musk recently predicted that the U.S. economy will soon slip into recession. Speaking at the Qatar Economic Forum, Musk described a recession as “more likely” in the short term.

Saying Musk is right: How will this affect your ability to save for retirement? Recessions can cause companies to lay off workers, and people tend to take on more debt during times of financial stress—both outcomes that can easily lead to people suspending retirement plan contributions. Even a brief interruption on the front lines can put your long-term savings goals out of reach.

Don’t make meeting your retirement savings goals any harder than it is now. Instead, try these three strategies for recession-proofing your retirement plan.

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1. Protect your income

Layoffs increase during difficult economic times, as do business closures. Whether you work for someone else or run your own business, now is the time to start protecting your main source of income.

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To do this as an employee, try to make yourself an integral part of your employer. This may involve taking on new responsibilities, completing additional training, or confidently sharing your great ideas in high-profile situations. You can even look for a mentor up the management chain – who can advise on how to strengthen your reputation in the organization.

If you’re a business owner, focus on building a cash reserve. It’s also wise to negotiate ample credit on good terms now, before you need it. Also do your best to pay down debt, focus on improving efficiency, and think creatively about ways to deepen customer relationships.

2. Re-budget to save even more

Controlling your spending will be critical if a recession hits. So take a deep dive into where your money is going today. A thorough budget review should reveal some areas where cuts can be made. You might adjust your grocery shopping habits, seek better insurance premium quotes, or spend less on non-essential items.

No matter how much cash this effort frees up, it can be put into your savings – a cash account or a retirement account. As a rule of thumb, you should first top up your emergency fund until it’s strong enough to cover your family’s living expenses for six months. After you hit that milestone, use more of your savings to grow your retirement.

3. Consider building a second revenue stream

A second source of income can fund higher savings contributions. It also minimizes the long-term consequences of layoffs or lost revenue.

To be clear, a period of economic uncertainty is not the best time to put money into your own business when the threat of a downturn looms. But you can use the resources you already have to generate cash. Examples include:

  • Rent an extra room in your home. In some areas, you can also rent available garage space or driveway parking.
  • Monetize hobbies like writing or graphic design on gig sites like Fiverr or Upwork.
  • Sell ​​clothing, tools and furniture that are no longer used.

If you plan to retire within the next 10 years

A recession is most at risk for your retirement planning when you plan to stop working in the next few years — especially if you’re falling behind in building your savings. At this stage, it’s worth doing some contingency planning. If you lose your job in the next 12 months, carefully consider your options. Some questions to ask include:

  • Can you downsize to live off your savings? Know that if you lose your job, you can get a 401(k) distribution from your current employer as early as age 55.
  • Can Social Security help? You can claim benefits as early as age 62, but your monthly checks will be smaller than when you start getting them later.
  • If you lose your job, is there a chance for you to do consulting work?

Your answers will help you plan your next steps.

Recession is not inevitable

Be aware that Musk’s views run counter to the official line of the U.S. government. On the same day Musk spoke, White House economic adviser Heather Boushey said she was optimistic the U.S. economy could avoid a recession.

At the very least, the jury is still out on how the economy will respond as the Fed tightens monetary policy and raises interest rates to bring down currently high inflation. The Fed’s goal is to achieve a soft landing for the economy, and it may still be able to guide us there. Still, the best time to prepare for a recession is before bad things happen. Once the economy hits a downturn, you’ll have fewer options to salvage your retirement plan.

Remember, too, that your efforts today wouldn’t be in vain if the recession hadn’t happened. Protecting your income and doing more to increase your savings are solid financial moves in any economic climate.

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Catherine Bullock has no positions in any of the stocks mentioned. Motley Fool has a position at Tesla and recommends Tesla. The Motley Fool has a disclosure policy.

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