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- A recession seems increasingly likely in 2023, but you can take steps to protect yourself.
- Millennials with full-time jobs should start by padding their savings, according to Alex Alba.
- If you can afford it, consider investing outside of your company’s 401(k) after maxing out your match.
Economists are predicting a recession in 2023, which means layoffs and stock market volatility might be on the horizon.
Financial planner Alex Alba at Merit Financial Advisors says, “I don’t think anyone knows exactly when the recession will be, or when the volatility of the stock market is going to end.”
However, says Alba, data points to the stock market “being back to normal and in the green” by late 2023 or early 2024. Keeping in mind that a recession would be a temporary and natural part of the economic cycle, here are four money moves Alba recommends for millennials who have full-time jobs.
1. Drop your emergency fund
An emergency savings fund has three to six months’ worth of living expenses typically held in a high-yield savings account. An HYSA allows you to access your cash easily if you get laid off from your job, get in a car accident, or face any other kind of emergency. Alba says it’s more important to drop your emergency fund now than ever, especially if you’re worried about layoffs.
2. Max out your company’s 401(k) match
A 401(k) is a company-sponsored retirement plan that lets you invest a percentage of your pre-tax paycheck in the stock market to grow passively until you retire. The company you work for might offer a 401(k) match, a percentage of your contribution that the company matches dollar-for-dollar and puts into your retirement account up to a certain dollar amount.
For example, your company may offer a 401(k) match of 3% up to $3,000 annually. In that case, to max out your company match, you’d need to save at least 3% of your paycheck (or more depending on how much you make) to get the maximum match from your employer.
Experts say taking advantage of a 401(k) match is one of the easiest ways to grow your money in the stock market. Alba says if you haven’t maxed out your company’s 401(k) match already, now’s a good time to make that change.
3. Start maxing out your 401(k) deferral
Another strategy that Alba suggests for millennials with full-time jobs is to max out your 401(k) deferral. A 401(k) deferral rate is the percentage of wages contributed to a 401(k) plan through your employer.
According to tax laws, if you make an annual salary of $330,000 or less, you can defer up to $22,500 of your annual pay and put it in your 401(k). Each year, the maximum deferral rate changes based on the IRS’ annual cost-of-living adjustments (COLA). This year, the IRS raised COLA by $2,000, from $20,500 in 2022 to $22,500 in 2023.
For example, if you make $100,000 a year and contribute 3% into your 401(k), by the end of the year, you’ll only be putting $3,000 into your 401(k) — $19,500 less than the 2023 401(k) deferral limit.
Alba recommends working with a financial planner to gradually increase your contributions to max out the 401(k) deferral limit.
4. Invest outside of your 401(k)
Alba says a recession is a great time to start investing outside of your 401(k) in a brokerage account because you’ll get “discounts” on stocks. He adds that market volatility can reveal how much risk you’re willing to tolerate as an investor, which will help you make better long-term financial decisions when investing in the market.
He adds, “Besides stocks, there are also great ETFs and funds. In order to get the right investment mix, I think having a relationship with the right financial professional is hugely important.”