Many financial experts spent the better part of 2022 warning consumers to gear up for a 2023 recession. Only that never happened. And while we’re not quite done with 2023, at this point, it’s pretty fair to say that the economy is in a good position to hold steady until 2024.
But just because we managed to avoid a 2023 recession doesn’t mean we’re permanently in the clear. There’s a good chance all of us will experience a recession at some point in time. And if you have money sitting in an individual retirement account (IRA), you should know that a recession may or may not have an impact on it.
What’s a recession, anyway?
Technically, a recession is defined as two or more consecutive quarters of decline in gross domestic product. But when the media talks of a recession, it generally refers to a period of general economic decline. Higher levels of unemployment, for example, could be called a recession, as could a drop in consumer spending.
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But one thing that’s worth noting is that a recession is not defined as a decline in stock market values. A recession could cause stock values to drop, but that’s not guaranteed to happen.
Another recession is likely
Over the past 40 years or so, the U.S. economy has experienced a number of notable recessions. In the early 80s, rampant inflation and interest rate hikes drove the broad economy into a slump. In the early 1990s, rising oil prices fueled a downturn.
In the early 2000s, the dot-com bubble burst. That, coupled with the events of Sept. 11, drove the economy into a recession. And anyone who was of working age or older in 2007 surely remembers the Great Recession — a multi-year affair triggered by the collapse of the housing market that led to widespread job loss.
Interestingly enough, our last recession — the one that took place in early 2020 following the COVID-19 outbreak — was fairly short-lived. And its impact on the stock market was quite temporary. Stock values briefly declined during the first half of the year before staging a marvelous recovery before 2020 closed out.
The point of all of this is that we’re likely to have another recession. And it may or may not impact your retirement savings. Recessions don’t always drive stock values down, but they could. So it’s important to know what to do in that situation.
Safeguarding your IRA in recession
If a recession hits and causes your IRA to lose value, the best thing to do is actually nothing. See, you don’t lock in investment losses in your IRA unless you actively sell off investments when their value is down. If you leave your IRA alone after it loses value, you give it a chance to recover.
In March of 2009, the S&P 500 index (which is generally considered representative of the stock market on a whole) had a value of about 683. Compared to 1,288 a year prior, that read like a huge hit. But as of this writing, the index’s value is roughly 4,240.
People who sold off investments at a loss in 2009 may have never recovered. Those who left their portfolios alone may be sitting pretty right now.
All told, it’s hard to predict exactly what will happen to your IRA in a recession. But if you pledge to leave your savings alone, you can set yourself up to recover nicely.
It’s also important to load your emergency fund with cash you can tap in the event of losing your job — something that may be more likely to happen during a recession. If you have money in a regular savings account for that purpose, you’ll be less likely to need to tap your IRA in a pinch.
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