The Federal Reserve just raised interest rates by 0.75% for the 4th time in a row - escalating fears of a global recession.  But here's why future retirees shouldn't panic

The Federal Reserve just raised interest rates by 0.75% for the 4th time in a row - escalating fears of a global recession.  But here's why future retirees shouldn't panic

The Federal Reserve just raised interest rates by 0.75% for the 4th time in a row – escalating fears of a global recession. But here’s why future retirees shouldn’t panic

The Federal Reserve just announced its sixth interest rate hike this year — and some economists predict that future increases will push the key rate above 5%, triggering a recession in 2023.

The federal funds rate has already jumped three percentage points since March, with the most recent increase of 0.75% closing in on a range of 3.75 to 4%.

Borrowing is getting more expensive, even as stubborn inflation keeps prices high and Americans feel the strain on their retirement savings.

In fact, four in 10 older Americans are delaying retirement amid tough economic conditions, according to the Nationwide Retirement Institute — double the number who delayed retirement last year.

Keeping your finances in check, however, can help you reach your retirement goal on time, even with an economic downturn on the horizon.

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Why you shouldn’t panic

The Federal Reserve has been aggressively raising interest rates to combat persistent inflation — which hit 8.2 percent in September, according to the latest data.

There will be more interest rate hikes to bring inflation down to 2%; however, officials hint that they may not be so drastic in the future.

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags by which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said on Wednesday.

A recession is typically characterized by a significant decline in economic activity, rising unemployment rates, and low consumer demand. While GDP rose in the third quarter of 2022 and unemployment remains low, high prices and falling real wages increase the likelihood that demand will fall and a recession will begin next year.

However, recessions have lasted less than a year on average since World War II, and many economists expect next year to be relatively mild.

Future retirees may have concerns — especially if the value of their IRAs has fallen with the stock market. Average retirement savings are down nearly $10,000, according to data from financial services company Northwestern Mutual.

But if you take some precautions to get your finances in order, you may not be severely affected by an economic downturn.

What future retirees can do to prepare

Strengthen your emergency fund

During a recession, when economic activity is stifled and unemployment begins to rise, older workers tend to be at a higher risk of losing their jobs than those in mid-career.

You can prepare for this eventuality by building up your emergency fund. Experts generally recommend setting aside three to six months of living expenses under normal circumstances.

Read more: Stay out of ‘Financial La La Land’: Suze Orman says most Americans need to do this now to survive their next crisis

However, if you are barely making ends meet in the midst of rampant inflation, start with smaller savings. You can build up your money over time, but be realistic about how much you can save.

Win cheap stocks

Although the market is down, this may be a good opportunity to buy stocks while they are cheap – and benefit in the long run.

If you’re in a strong financial position, consider building a diversified portfolio with sectors that traditionally perform well through economic cycles, such as health care, utilities and consumer staples.

Short-term assets such as cash, prepaid expenses, and short-term investments can also help you ride out a recession. They are designed to be used within a year, which can help you avoid using up your long-term investment funds.

Take advantage of low tax rates

A market downturn can actually create a good opportunity to convert your traditional IRA to a Roth IRA.

A a traditional IRA allows you to grow your money tax-free until you make withdrawals after retirement. With a Roth IRA, you’ll have to pay your taxes up front, but you can take advantage of tax-free withdrawals in retirement instead.

So why might it make sense to switch to a Roth IRA now? As the market falls, the value of your portfolio has probably also shrunk, meaning there is less to pay in taxes.

You’re also currently taking advantage of the 2017 tax credits — which will no longer apply until December 31, 2025.

If you think you may be in a higher tax bracket in the future, consider taking on a lower tax burden now and benefit from tax-free withdrawals in retirement.

What to read next

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  • ‘They don’t live their lives to impress’: Here are the top car brands that wealthy Americans make more than $200,000 drive the most – and why you should too

This article provides information only and should not be construed as advice. Provided without any warranty.

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