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Retirement Weekly: 4 ways to help recession-proof your retirement savings

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We keep hearing that we may be in or almost in a recession. Anyone who was working when the Great Recession hit in 2008 knows the negative impact it had on their finances. But the economic indicators in 2022 aren’t the same as they were in 2008—so we’re not sure how bad this one will be, if and when it happens. Although the causes of a recession are out of our personal control, there are steps we can each take to help safeguard our own finances from the ripple effects.

Are we in a recession?

A recession is generally defined as two consecutive quarters of decline in gross domestic product (GDP), although it must also be declared as such by the National Bureau of Economic Research (NEBR). We have now passed the first milestone, as GDP decreased 0.9% in Q2 2022 following a dip of 1.6% in Q1 2022. But we haven’t passed the second one yet with the NEBR, and it’s not certain that we will.

But what matters to each of us is how the economy feels, and right now, it may feel uncertain.

Whether or not it’s called a recession, we’re living through an uncomfortable period for our personal finances. It’s time to help recession-proof your finances

As a retirement plan provider, we hear what people are asking about their finances every day. We know from proprietary data that retirement savers identify planning for retirement, paying off debt, and ensuring that savings are invested wisely, as top priorities. We understand that when times are tough, retirement accounts may look like good places to help ease the pain. ​It’s important to consider that doing so may cause other potential problems, as you may miss out on the power of time and the opportunity for investment growth and then potentially fall short of your retirement planning goals.

To help get your finances in order in a way that doesn’t potentially sacrifice your retirement savings, I have four tips to share that may help you make it through a recession—or any personal financial downturn.

1​.​ Create an emergency fund before you need one

When people don’t have enough money to cover an emergency, they typically look to credit cards, loans, family, and their retirement savings. But borrowing from all of these sources has consequences. Consider starting an emergency savings account, separate from your checking and other accounts you use for regular expenses—so that you’re less tempted to use it. Experts recommend that you save three to six months’ worth of expenses in an emergency account, to help you weather a job loss or surprise expense.

​​2​. ​ Continue saving in your retirement plan—even if the market is down

The idea behind investing is “buy low, sell high.” When the stock market is down, it may actually be a good time to contribute to your retirement plan. Over time, continuing to save and invest in all market conditions can help to smooth out your returns.

Why? Because of something called dollar-cost averaging. Dollar-cost averaging doesn’t guarantee a profit or eliminate the risk of a loss. However, when the market is high, you are investing in funds at a higher price, so your 401(k) contribution buys fewer fund units. The reverse is also true​:​ when the market is low, you invest in those same funds at a lower price, so your 401(k) contribution buys more fund units. Over time, the highs and the lows can help to balance out your overall returns.

Investors should also be aware that systematic investing involves continuous investment in securities regardless of price level fluctuation and retirement savers should consider their resources to continue the strategy over the long term. ​​

3​. ​ Understand the funds available in your 401(k) plan, your time until retirement, and your risk tolerance

Your 401(k) ​ should ​offer you a variety of investment options. If you’re not comfortable choosing your own investments, consider the plan’s default option or see if your plan offers advice or a professionally managed account. An important rule of thumb to understand is that generally, the more time you have until you retire, the more risk you can consider in your investments.

4​. ​ Develop a defensive budget that takes a hard look at ‘wants’ and ‘needs’

When the economy is great, it’s easy to call our daily iced soy latte with a pump of caramel a need. And although many of us do need some caffeine to start the day, there are more budget-friendly ways to get that jolt. Prepare a budget that can help you defend your finances from a downturn. Start separating your wants from your needs and prepare a budget that can help you pay for your needs and consider setting some of the remainder aside in your emergency or retirement savings account. Your retirement plan provider may have resources available to you to help do this, or you might want to consider speaking to a financial professional who can help you. Good steps to take, whatever the economy is doing

After several years of low unemployment and substantial market growth, many Americans may not know what it’s like to go through a recession. Whether the economic uncertainty we’re currently experiencing gets that label or not, there are things you can consider doing today to help safeguard your finances for a recession—which may also just make good sense even without a recession. No matter what the economic conditions are, saving for emergencies and retirement, getting your 401(k) investments on track, and creating a defensive budget all make good financial sense.

Sue Reibel is CEO of John Hancock Retirement.

Disclosure: There is no guarantee that any investment strategy will achieve its objectives. ​ ​The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent adviser as to any investment, tax, or legal statements made. ​ ​John Hancock offers record-keeping services to retirement plan clients through the following entities in the United States: John Hancock Retirement Plan Services LLC, John Hancock Trust Company LLC, and John Hancock Life Insurance Company (U.S.A.) (not licensed in NY), 200 Berkeley Street, Boston, MA 02116, and John Hancock Life Insurance Company of New York, 100 Summit Lake Drive, Valhalla, NY 10595. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC. ​ NOT FDIC INSURED. MAY LOSE VALUE. NOT BANK GUARANTEED. ​ © 2022 John Hancock. All rights reserved. ​

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