The fact that we've landed in a recession is no surprise. From the moment COVID-19 took hold in the U.S., widespread shutdowns have forced millions of Americans into unemployment and caused countless businesses to close their doors. An official recession wasn't declared until June, but it was clear long before then that the economy was in serious trouble.
Still, some have been optimistic about a swift recovery, citing declining unemployment in May and June. But a recent uptick in U.S. COVID-19 cases tells the opposite story. We might be dealing with our current recession for a long time. In fact, 72% of Americans believe that our recession will extend into 2021, according to SimplyWise's July 2020 Retirement Confidence Index.
Here are three ways to prepare for that possibility.
1. Boost your emergency savings
A good 20% of workers who lost a job during the pandemic plan to withdraw from their emergency savings. If your income is holding steady and you don't have at least three months' worth of essential living expenses in the bank, start socking extra money away immediately.
Right now, unemployment benefits get a $600 weekly boost, which is making it possible for many out-of-work Americans to keep up with their expenses in the absence of a job. But that boost is set to expire at the end of July, and so far lawmakers haven't pledged to extend it. If you lose your job in the coming months, you may find that you're out of work for quite some time and that your unemployment benefits don't replace enough of your earnings to allow you to cover your bills, so having cash in the bank is crucial.
You may be thinking: "I have retirement savings and investments, so I don't need an emergency fund."
But that line of thought could get you into trouble. If you're forced to liquidate investments in your brokerage account to scrounge up money for bill-paying purposes, you risk having to unload them when they're down, thereby locking in losses.
Furthermore, while you can take a penalty-free early withdrawal of up to $100,000 from a retirement plan this year if you've been impacted by the COVID-19 crisis, doing so could also mean locking in losses -- not to mention having less money available during your senior years. You can't simply fall back on an investment portfolio or retirement plan; you need money in the bank, too.
2. Check on your investments
A diversified portfolio is always a good thing to have, but during a recession, it's crucial. You eventually might have to cash out investments to drum up the money you need to live. If your investment mix is diverse, you're less likely to face serious losses.
Assess your portfolio and make sure it's filled with stocks from a variety of market segments, not just one or two. Right now, the stock market is in decent shape despite the ongoing recession, so it's a reasonable time to shift things around if your investments aren't as diversified as you'd like them to be.
3. Keep funding your retirement plan
People tend to operate in survival mode during recessions, but if you're in a strong enough financial position to keep putting money into your IRA or 401(k), do so. That way, if you lose your job down the line, you'll have at least contributed some amount to your retirement plan this year. And if you don't lose your job, you'll get the peace of mind that comes with knowing you've managed to stay on track for retirement, even during a financially precarious time.
It's too soon to tell how long our current recession will last. Its duration largely depends on coronavirus vaccines or treatments, and how effectively Americans curb the pandemic. It pays to assume that we'll be in recession territory for the rest of the year and even beyond -- and to prepare accordingly.