Navigating the complexities of our economy can often feel like trying to predict the weather, and we’ve all seen how often even the so-called “experts” get that wrong. In my opinion, the economy is just as complex, and it’s made even more unpredictable because so much of it is driven by human emotion, which is often illogical.

Opinions on our economy today, and just as important, how to adapt, range from irrational optimism to soul-crushing pessimism. This is creating a perplexing conundrum for people seeking financial stability, security and peace of mind, especially those nearing retirement age. The day that active income ceases (“retirement”) is a day of reckoning that even the most ardent “savers” view with fear and anxiety. 

The key to understanding the economic landscape and shifting accordingly rests not in opinions, but in data and history. And unfortunately, data indicates we’re heading towards an economic slowdown, which naturally raises concerns for those on the brink of their golden years. A declining economy, coupled with anticipated higher inflation, can dramatically reduce the value of their retirement accounts and the income they produce.

So the question is this, “How does one not only survive, but also thrive in retirement, regardless of the economic climate?”

The answer lies in meticulous planning, strategic decision-making, and a keen understanding of optimizing income sources. This includes preparing for both the best and worst-case scenarios.

Too many variables exist to predict our future economy with certainty, especially in tough times. The best case forecast is a "soft landing," meaning the Federal Reserve wins the fight against inflation without tanking the economy. The worst? A hard recession with massive layoffs, bankruptcies and wealth destruction combined with persistent core inflation; with food, energy and housing costs continuing to rise.

Prior proper planning prevents… (Well, you know the rest!)

In an ideal world, the economy will constantly grow, investments will flourish, and your nest egg will multiply. However, we must also prepare for less favorable outcomes, because let’s face it — they are inevitable. In a worst-case scenario, we could be heading towards a drawn out downturn where retirement accounts are further decimated, layoffs escalate, and inflation runs rampant. In either case, a relevant financial plan is crucial.

Your plan should be comprehensive, considering factors like consumer and corporate debt, notwithstanding U.S. sovereign debt and deficit spending, ongoing inflation, market volatility, supply chain issues (geopolitical deglobalization), and credit contraction/illiquidity. It should also be flexible enough to adapt to changing circumstances yet robust enough to provide a sense of security and direction. And it’s important to regularly review and adjust this plan as the economy evolves. Who’s in your court to help you navigate this turbulence? 

Have a laser focus on reducing debt

Generally speaking, debt is dangerous in a contracting economy and rising interest rates. Obviously, there are cases where debt can be properly utilized to acquire appreciating assets when the investment return outpaces the interest rate, but that’s not the economic cycle we have at present. We’re talking about consumer and business/capital market variable rate debt. High-interest debt, in particular, will significantly erode your net worth and buying power and in turn, limit your financial freedom. Tackle debt head on to free up more of your income for saving and investing.

Whether you use the “Snowball Method” Dave Ramsey often talks about or a different strategy, you need to follow a plan that allows you to systematically eliminate your debt while keeping your accounts in good standing. Many budgeting apps are available for free to help you create a plan of attack, showing you where to apply more money and where to pay the minimums, along with estimated payoff dates.

This is far more important than most people realize — even more important than investing — because you’re paying interest on your debt, so any investments would have to generate a return that's higher than both the interest rate on your debt and the current inflation rate. And considering that the average credit card rate is 24.52%, and the current inflation rate is 2.97%, you’ll be hard pressed to find any investment that meets that criteria.

Build your “war chest” (AKA - emergency fund)

More than half, or 58%, of all Americans are now living paycheck to paycheck, according to CNBC, which puts them in a precarious position even in the best of times, and that risk climbs as the economy gets worse.

Your emergency fund serves as a financial safety net during unexpected crises, providing much-needed support when you need it most. Ideally, this fund should cover at least 3-6 months' worth of living expenses. This helps you to avoid a financial crisis in the event of a layoff or unexpected expenses. (This also helps you to avoid adding new debt.)

To help build this emergency fund, put a hold on investing and consider selling any unnecessary assets. Especially if they’re financed. You can also greatly reduce eating out, streaming services, and other subscriptions.

Future-proof yourself

Whether you’re employed by a company or you run your own, you can always benefit from self improvement. This is like a life preserver because the more value you’re able to bring to your employer or clients, the more likely they will be to keep you around when things get tough for them.

This involves expanding your skill sets in leadership, communication as well as networking to build new relationships. Additionally, becoming better versed in predicting where your industry is going and how the needs of consumers are evolving. Ice hockey star Wayne Gretzky famously said, “I skate to where the puck is going, not where it has been,” and that applies in the business world just as much as it does in the hockey rink.

Frankly, this is something you need to be doing all the time anyway. In a good economy, it’s a value-adding move, but in a declining economy, it’s a survival tactic.

Avoid risky investments — investment vs. speculation

Investing can bring out both the best and the worst in people.

Everyone wants the best possible return they can get from their investments, and that can lead to taking unnecessary risks. When the economy takes a hit, though, people are often willing to ignore seemingly red flags and dive headfirst into incredibly risky investments. Sometimes, people do this because they’ve bought into the lie that risk equals reward, while other times, they’re motivated by the desire to recoup a previous loss. And the latter can escalate out of control pretty quickly.

In a down economy, you should avoid speculative investments, like day trading, crypto, and real estate development, for example, and focus on stable investments, like cash flowing real estate, value-based dividend stocks, precious metals, and short-term treasury notes.

When faced with an economy like we have now, your focus should be less about generating the greatest returns possible and more about capital preservation hedging against loss.

Become a master of financial discipline

The best plan in the world won’t do you any good if you don’t follow it, so you need to take steps to ensure your financial discipline. Your ability to follow your plan is essential to thrive through today’s declining and rapidly evolving economy.

This includes creating a budget, reducing existing debt and avoiding new debt, making sound investments, and doing everything in your power to increase your income or revenue — and doing all of these things simultaneously.

Build a formidable mindset

You’re going to face growing adversity as the economy worsens. Over time, that can demoralize even the strongest people, so you need to proactively build an unbreakable mindset that will pull you through the tough times.

One approach that I’ve used in the past is to focus on something bigger than myself. This played a huge role in my success when I was forced to transition from my dental career to one in real estate. When my daughter suddenly faced a health crisis, it made me realize that in order to properly support my daughter through this battle, I would have to relinquish my dental practice because I couldn’t do both. So I did everything in my power to help her survive, and then later, go on to live a happy, healthy, and productive life.

What allowed me to do that was my singular focus on that mission. It wasn’t about me, it was about her, and that created a much stronger mindset and “reason why” that pulled me through the challenges I probably wouldn’t have overcome if I was focused on myself.

For you, the mission will be different, (I hope, because no one should have to go through a health crisis with a loved one) but the mindset will be similar. You need to find something bigger than yourself to focus on. That might be your family, your team, a particular cause, or ways that you can contribute to others.

This is how some of the most important goals in history have been achieved, and it will help you achieve greater things than you ever could by focusing on yourself.

It’s also important to remember that markets go through an average of 6-8 year cycles. Learning how to alter and adjust both your mindset and your money habits will allow you to persevere.  I’ve found that simply knowing there’s a light at the end of the tunnel makes it a lot easier to persevere through difficult times.

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Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.