8 Ways to Prepare for a Recession

By Chris Duderstadt

July 7, 2022

8 Ways to Prepare for a Recession

Key Points – 8 Things to Prepare for a Recession

  • The Importance of Forward-Looking Tax Planning
  • Have You Rebalanced Your Portfolio Lately?
  • There Are Opportunities to Be Had Even When Preparing for a Recession
  • Managing the Emotions of Fear and Greed with Your Finances
  • Acting Now in a Patient Way
  • 7 Minutes to Read

Preparing for the Storm During Signs of Recession

It’s been nearly a month since we officially entered a bear market. If you’ve been keeping an eye on the markets in recent months, that wasn’t much of a surprise. Now, the question is if (or more realistically when) we’ll go into a recession. While we can’t give a straight answer to that, we’ve compiled a list of eight things to do when preparing for a recession that can hopefully be helpful to you during these uncertain economic times.

1. Roth Conversions

Whether we’re preparing for a recession or celebrating double-digit positive returns, Roth conversions are oftentimes top of mind for our advisors at Modern Wealth Management. Not that our Modern Wealth Management team needed any reassurance about the power of Roth conversions, but we were fortunate to receive that recently from America’s IRA expert, Ed Slott. When Ed came to Kansas City in May for Ed Slott’s Elite Advisory Group workshop, he also joined Dean Barber on The Guided Retirement Show™.

Ed agreed with Dean that the Roth is the one of the best things about the tax code. Simply stated, a Roth conversion is the act of taking money from a traditional IRA and moving it over to a Roth IRA. While there are taxes due at the time of the conversion, as long as you hold the Roth IRA for at least five years and are at least 59½, all that income will then be tax-free.

Of course, tax bracket management is key here. If you’re in a lower tax bracket, you can still stay there all while taking advantage of Roth conversions. Small, sequential Roth conversions can be critical in the years leading up to retirement so you’re still paying the least amount of tax possible.

The main thing to keep in mind about Roth conversions is what your future tax rate will be compared to your current tax rate. If you will be in a higher tax bracket in the future, it makes a lot of sense to pay it now by doing a Roth conversion.

2. Tax Loss Harvesting/Gains (if you have them)

That brings us to our second thing to do when preparing for a recession, which is tax-loss (or gain) harvesting. Harvesting capital losses and gains can be done by selling assets, so tax implications come into play here.

There’s a reason that forward-looking tax planning is one of the most popular topics on America’s Wealth Management Show, The Guided Retirement Show™, and the Modern Wealth Management Educational Series. Just like with Roth conversions, the main goal here is to pay the least amount of tax possible over your lifetime. And that’s of the utmost importance when preparing for a recession.

We’ll start by discussing tax-loss harvesting. People who are highly invested in taxable accounts have likely had more than a decade of appreciation in most of their investments. So, they probably feel like they’re in a bit of a predicament right now. Selling those investments would likely be a significant tax event. Tax-loss harvesting is crucial in this scenario to determine the tax budgets for those taxable accounts.

While tax-loss harvesting is more of the focus right now given how we’re preparing for a possible recession, we want to touch on tax-gain harvesting as well. When Dean and Bud Kasper discussed harvesting on America’s Wealth Management Show in October, it wasn’t because they were cherishing the last bit of the fall season. They were talking about harvesting capital gains because a lot of people were enjoying double-digit returns at that time. Last fall was just the beginning of the market volatility we’re currently experiencing. Hopefully you harvested some of your gains so they can be used while preparing for the likelihood of a recession.

3. Rebalancing

It’s understandably hard to not let it ride when the good times are rolling in the markets. As Dean so often says, fear and greed are usually people’s two strongest emotions when it comes to their investments. Some people might not realize the greed component when those good times are rolling and then scoff at the idea of rebalancing.

When markets aren’t extremely volatile, rebalancing once or twice a year will typically suffice. That clearly hasn’t been the case, though, in 2022. Let’s look at another fairly recent instance of market volatility to help realize the importance of rebalancing. The stock market plummeted when the pandemic initially hit in 2020. If you started 2020 with a 70/30 or 60/40 portfolio, you needed to rebalance to not be overexposed in equities.

However, the markets bounced back in a hurry. As the markets recovered, rebalancing back to around where you started 2020 was the move to make. Unfortunately, there’s no saying how quickly we could recover from this current market decline. But rebalancing is still something to strongly consider right now if you haven’t done so recently. We’ll touch on this more later, but doing nothing is the one thing you don’t want to do when preparing for a recession. We encourage you to connect with your advisor to see if rebalancing or some of these other financial planning strategies could work for you.

4. Prepare Yourself for Opportunities During a Recession

Needless to say, everyone at Modern Wealth Management has kept their head on a swivel lately so the retirees and pre-retirees that we work with can continue to live their one best financial life, even amid preparing for a recession. While it’s easy to be in a defensive mindset right now from a financial planning perspective, it’s still critical to prepare yourself for opportunities to arise.

There have been slim pickings for those opportunities as we prepare for a possible recession, but they’ve still been there. And we need to commend many of our clients for being proactive with some of those opportunities.

Let’s go back to the example of the onset of COVID-19 really quick. A lot of people went to bonds when the stock market was struggling, but this time is different. The stock and traditional bond markets are both getting hit hard. However, there are bond options that are netting positive returns. With inflation hitting 40-year highs, treasury inflation-protected securities (TIPS) have been a popular bond option. And then there are I-Bonds, which a few clients came to us with questions about. I-Bonds are shielded from inflation and their value increases as interest rates increase.

So, even while preparing for a recession, there are still opportunities out there. We’ll be sure to keep an eye on for opportunities, big and small, and hope that you’ll do the same. And if you think you might know of a possible opportunity that could benefit you but are worried about asking a dumb question about it, please know that there is no such thing as a dumb question, especially while preparing for a recession.

5. Objective Risk vs. Subjective Risk – Stress-Test Your Portfolio

Mitigating risk is clearly something we want to do while preparing for a recession but remember that there are different types of risk. Let’s do a quick review of objective risk vs. subjective risk. Objective risk is the main focus, meaning that you’re reviewing risk through a lens with how it could impact your retirement. You do this by stress testing your financial plan.

For example, let’s say that you and your family are wanting to go on a vacation. Thinking about risk subjectively is an easy thing to do right now and could prevent you from planning that vacation altogether. It’s no doubt an uncomfortable feeling to have with the economic uncertainty we’re facing.

By factoring in the vacation into your financial plan and stress testing the future of your plan through various economic conditions, you can get financial clarity to alleviate that uncertainty. Since we’re in a bear market right now, our advisors have been stress testing people’s plans against previous bear markets to help determine their probability of success. In many cases, that vacation can go from being a dream to a reality thanks to viewing risk objectively. Even if you get some unpleasant results from stress testing, that can put you back on track so you achieve your retirement goals down the road.

6. Maximize Your Social Security and Other Income Sources

When discussing income for retirees and pre-retirees, it doesn’t usually take long for Social Security to enter the conversation. Just as there is more than one way to skin a cat, there is more than one way to claim your Social Security. What works best for your neighbor or friend to maximize their Social Security might not be the case for you. And vice versa. Or maybe even you should claim your Social Security now and your spouse should delay claiming it. Or vice versa.

We could go on and on about how to maximize Social Security, but we’ll stick to these five factors.

  • Health status
  • Life expectancy
  • Need for income
  • Whether or not you plan to work
  • Survivor needs

When all is said and done, your benefit will depend on how much you earn over your working career and the age you apply for benefits. Delaying your Social Security benefits can lead to more income later on, but will those five factors above come into play for you to decide otherwise? Again, there is a lot to consider for how to maximize your Social Security. It’s always critical to review all those factors, but especially while preparing for a recession.

7. Stay Patient

This may be the simplest, but hardest one. Stay patient. Now, there is a massive difference between staying patient and doing nothing. We listed staying patient because it’s pivotal to avoid emotional decision making from a financial perspective. Remember how we said that fear and greed can be your two biggest emotions? Well, let’s talk about fear now for a second.

Fear is an emotion that has gone hand in hand with this economic uncertainty. And understandably so. But rather than making quick, emotional decisions that stem from fear, let a financial professional guide you through that process. They can walk you through things like Roth conversions, tax-loss (or gain) harvesting, maximizing Social Security, rebalancing, and so many other things that deal with risk management and your financial life while preparing for a recession.

One misstep with an emotional decision can turn your financial life upside down to the point where it can be nearly impossible to recover. Working with a CERTIFIED FINANCIAL PLANNER™ Professional can help prevent those emotional decisions from happening.

8. Hope Is Not a Strategy…Act Now

While there’s a huge difference between staying patient and doing nothing, doing nothing—just like making an emotional decision—can have big consequences. We talked about this a little bit with rebalancing, but now is not the time to just sit it and forget it and hope your financial plan will be OK. It’s time to act now, but in a patient manner.

Our CERTIFIED FINANCIAL PLANNER™ Professionals can meet with you in person, by phone, or virtually to further discuss these ways to prepare for a recession. You can meet with them during a 20-minute “ask anything” session or a complimentary consultation.

What’s more, you can start building your plan from the comfort of your own home with our financial planning tool. Get started today by clicking the button below.


Whether you’re just starting to build your plan or are looking to improve or maintain its probability of success, we hope that these eight ways to prepare for a recession can give you clarity and confidence in your financial life.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.