Our last major recession was a good nine years ago, which explains why for many, it's nothing more than a distant unpleasant memory. But because our economy tends to be cyclical, our chances of seeing another recession hit in the not-so-distant future are actually pretty high. In fact, most older Americans are convinced we'll see a recession within the next five years, according to data from the Nationwide Retirement Institute. And regardless of whether they're on point or we get a little extra breathing room before the economy tanks again, we should all do our part to ensure that we're able to weather that storm, no matter when it hits. Here's how.
1. Get used to living below your means
Most working Americans currently live paycheck to paycheck, so if you're one of them, it's time to change that habit. The fewer expenses you commit to, the more leeway you'll have if economic conditions decline and your income follows suit. The same holds true if you're already retired and are used to a certain standard of living. If your portfolio value drops and you're forced to sell investments at a loss to retain access to income, keeping your expenses low will enable you to liquidate fewer assets. So see about downsizing your home if your mortgage payment or maintenance is costly, or unloading a vehicle you technically don't need. Even smaller changes will go a long way toward buying you a modest degree of financial security.
2. Have a diversified portfolio
While portfolio values tend to decline on the whole during periods of poor economic conditions, you can protect your assets by diversifying them to the greatest extent possible. This means spreading your investments across a wide range of industries and making sure you have a healthy mix of stocks and bonds.
Furthermore, you might look outside the traditional stock-bond split if you're concerned that a recession is imminent. Real estate is another area you can dabble in, whether it be in the form of buying actual property or putting some money into REITs. Property values don't always move with the broader market, which means that if major indexes like the Dow or S&P 500 take a hit, you might still see your real estate investments holding steady.
3. Build strong emergency savings
The last thing you want to do when your investments drop in value is liquidate too much of your portfolio. That's why it's crucial to have a healthy level of cash reserves available, which you can tap in lieu of selling off stocks or bonds at a loss. Furthermore, a recession can lead to job loss, so it's not a bad idea to have a solid six months' worth of living expenses in the bank in case you end up falling victim to layoffs.
4. Boost your job skills
Once again, unemployment and recessions tend to go hand in hand, so the more you develop your job skills, the more protection you'll buy yourself if your company is forced to downsize. This is especially crucial if you're older because like it or not, workers on the verge of retirement are statistically less likely than their younger counterparts to find a job quickly. If you get laid off in your 60s when you were initially planning to work another five years, that could really derail your long-term plans.
5. Get a side hustle
The more individual income streams you have, the better protected you'll be if the economy takes a turn for the worse. And that's why it pays to get a side hustle, whether you're just starting out in your career or are slowly but surely nearing retirement. If you establish a side hustle and wind up losing your primary job, you'll have the opportunity to ramp up and generate more cash as you look for new work. And if you're older, it especially pays to have a side gig you can not only fall back on, but also possibly carry into retirement as well.
But it's not just workers who would be wise to get a side hustle; retirees can benefit from occasional work, too. If you're living off your savings, and your portfolio's value drops, having that extra income will limit the extent to which you need to take losses in the form of withdrawals. And that could spell the difference between your nest egg lasting or running out of money prematurely.
The more steps you take to prepare for a recession, the better equipped you'll be to handle our next one. And make no mistake about it: There will be a next one. It's only a matter of time.