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People start buying Treasury Bonds and this results in interest rates falling; employers stop hiring new employees and gradually start laying off workers as the demand for their product reduces since people are not willing to spend.
In order to revive the economy, the Federal Reserve in the United States usually lowers interest rates so that business lending and investment regains moment. In addition, the federal government sets up tax breaks so that consumers start spending money again.
If you are investing money in your retirement savings plan, you will be affected by a recession. Most plans offer mutual funds, stocks and money market funds. As the investment market spirals down and enters a bear market, the value of your fund decreases dramatically. This means what you had before the recession can get effectively wiped out. You could end up having less than what you have been contributing for all these years. This could play havoc with your planning.
To give you some peace of mind, most recent recessions in America have not been that bad. But you should be prepared for any eventuality like losing your job. If your contribution to the retirement plan is more than your employer’s, you should scale back. Instead the money you save should be put aside into an emergency fund. You should not touch this fund unless you are really facing hardship.
Recession is cyclic. It will come and go so there is no need to panic. In the long run, your retirement investments will be safe but during the recession it can really pull down the value of your investments. And if you are retiring during a recession, you might end up having lesser money than you projected, which is never good news. Rather than withdrawing from your retirement fund, it would be better to use your emergency fund until the recession is over.
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