Close to retirement and worried about your nest egg? Another Fed rate hike is expected later this month while economic fears persist — but here's why soon-to-be retirees shouldn't panic

Serah Louis
·5 min read
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The Fed is expected to make another rate hike announcement later this month while its benchmark interest rate currently sits in the 4.50% to 4.75% range — the highest level in 15 years.

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"I wish there was a painless way to restore price stability," Fed chairman Jerome Powell told a reporter from NBC in December. "There isn't."

It’s becoming more expensive to borrow even as stubborn inflation keeps prices high, and Americans are feeling the strain on their retirement savings.

According to a 2022 survey from insurance giant Allianz, 54% of Americans say they have stopped or reduced retirement savings due to inflation. And the Nationwide Retirement Institute found that four in 10 older Americans are delaying retirement in the midst of challenging economic conditions, according to the — double those who were pushing back retirement in 2021.

However, keeping your finances on track can help you still reach your retirement goal on time, even with an economic downturn on the horizon.

Why you shouldn’t panic

The Fed is raising interest rates in order to combat persistent inflation — which clocked in at 6.4% in January, according to the latest data.

Fed rate increases are likely to continue in order to bring inflation down to the goal rate of around 2%. The Fed expects the rate will hit 5.1% this year and a recession remains a strong possibility.

A recession is typically characterized by a significant decline in economic activity, rising unemployment levels and low consumer demand. While GDP rose in the third and fourth quarter of 2022 and unemployment remains low, high prices and declining real wages are increasing the likelihood that consumer demand will drop and a recession will begin at some point this year.

That said, recessions have lasted less than a year on average since the Second World War, and many economists are expecting this one to be relatively mild.

Soon-to-be retirees might have concerns — especially if the value of their IRAs has dropped with the stock market. Average retirement savings have plunged by nearly $10,000, according to data from financial services company Northwestern Mutual.

But if you take some precautionary measures to get your finances in order, you might not be severely impacted by an economic downturn.

What soon-to-be retirees can do to prepare

Fortify your emergency fund

During a recession, when economic activity is stifled and unemployment starts to spike, older workers tend to be at higher risk of losing their jobs compared to those in the middle of their careers.

You can prepare for this possibility by beefing up your emergency fund. Experts generally recommend setting aside three to six months’ worth of living expenses in normal circumstances.

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

Scoop up shares on the cheap

Although the market’s been down, this might be a good opportunity to purchase shares while they’re cheap — and benefit over the long-term.

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

Short-term assets, like cash, prepaid expenses and short-term investments, can also help you ride out a recession. They’re meant to be used within a year, which can help you avoid tapping into your long-term investment funds.

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Take advantage of low tax rates

The market downturn might actually make for a good opportunity to convert your traditional IRA into a Roth IRA.

A traditional IRA lets you grow your money tax-free until you make withdrawals in retirement. With a Roth IRA, you’ll need to pay your taxes upfront but can benefit from tax-free withdrawals in retirement instead.

So why might it make sense to convert over to a Roth IRA now? While the market’s down, your portfolio value has likely shrunk as well, which means there’s less to pay taxes on.

You’re also currently benefiting from 2017’s tax cuts — which will no longer apply by Dec. 31, 2025.

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

Consider calling in an expert

According to data by the Federal Reserve Board, only 40% of non-retirees feel confident about their retirement savings — clearly many Americans could use help navigating their finances and making sure their assets are protected.

Working with a financial adviser can be a smart move, and it’s better to get started sooner rather than later. Researching and calling multiple financial planners can be a hassle, but there are online services that can match you with a pre-screened financial adviser who will meet your unique needs.

You can get started for free by answering a few questions about yourself and your finances — and in just a few minutes you can set up a no-obligation call with a qualified adviser to explore your options.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.