What Do I Need to Understand if a Recession is on the Horizon?

Cash Flow Questions

• Could your cash flow change substantially?

If so, re-examine your budget looking for areas to reduce spending, especially discretionary expenses. Fund any shortfalls strategically, using the most advantageous source of cash. You may need to prioritize your obligations and take advantage of opportunities to extend due dates or alter payment schedules, minimizing fees, penalties, and any negative impact upon your credit.

• Might you need to increase your emergency fund?

Evaluate the size of your fund and assess the number of months that it can support your living expenses. Plan for a "Worst Case Scenario."

• How likely is there to a disruption in your employment?

If this is a possibility, prepare your resume should you need to look for another opportunity. Stay connected to your first, second, and even third level connections should you need to look for another position.

• Were you planning to retire in the near future?

Review your options to make sure you are still comfortable with retiring or if it makes sense to work a little longer. Review your budget, and possibly reduce spending in non-essential categories in the first few years of retirement.

• Are you taking a distribution from an investment or retirement account?

Consider the impact of changing your distribution schedule to protect accounts (defer remaining distributions until the end of the year or spread the distributions over the rest of the year).


Asset and Debt Questions

• Do you have a mortgage or debts?

It might make sense to refinance any debts now while interest rates are low. After fully funding an emergency fund, you might consider paying-off debts to reduce debt payments.

• Do you want to rebalance your investment and retirement accounts?

Revisit your asset allocation and overall investment philosophy. Identify holdings that you have retained only because of their low basis, and consider reducing your position while valuations are low, minimizing realized gains. As always, exercise discretion and discipline, taking a long-term view and prudent action.

• Do you have extra cash that is not earmarked for an upcoming expenditure?

Evaluate if it makes sense to take advantage of low valuations. Although, this assumes your emergency fund is fully funded.

• Do you typically make contributions to a traditional IRA or Roth IRA?

You might consider making a contribution if/when there is a market correction, to take advantage of low valuations.

• Are you a small business owner?

If so, you may be eligible for a small business loan, or other forms of federal, state, and community relief. What about any business commercial bank loans outstanding? Talk with your bankers to extend loan terms, refi to a lower rate, ask for potential other ways to manage your cash flow should you need to.


Tax Planning Questions

• Do you have a traditional 401(k) or IRA?

If so, converting some of the assets into a Roth IRA could be beneficial while valuations are low. If you are laid off, you may have more room in your tax bracket to do Roth conversions.

• Do you have any assets with a tax loss?

Consider harvesting the loss, which could reduce your tax liability.

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Long Term Planning Questions

• Do you have an annual gifting strategy in place to pass assets to your heirs?

You can gift assets (up to $16,000, per person, gift tax-free) now, when valuations are low, and while support may be particularly helpful to the recipient.

• Are you in a position to help family members in need of financial assistance?

You might consider making intrafamilial loans when the AFR (applicable federal rate) is low. This avoids gift tax, locks in a favorable interest rate for the borrower, and can act as an “advance” on an inheritance when structured with your heirs.

• Do you need to update your estate plan?

Review the impact of any change in asset values upon the ultimate distribution of your estate including probate and non-probate assets. Consider implementing wealth transfer techniques that take advantage of low valuations.

When outside factors like the economy change, or might change, it’s a good idea to review your financial situation to determine if adjustments might be warranted.

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-Paul R. Rossi, CFA