The 401(k) is a hallmark of American retirement savings. This employer-sponsored account is utilized by millions, who can invest in stocks and other assets through their 401(k) and build up a nest egg for retirement.
However, when an economic downturn or recession occurs, 401(k)s are not immune to the risks. Because holdings in these accounts are often largely tied to stocks, 401(k) losses can be steep if portfolios aren't structured in the best way.
That is not to say avoid saving through a 401(k). Instead, if a recession happens, try to keep a level head and adjust your retirement saving strategies so that you can minimize risk and still protect your financial stability.
Diversify your investments
Portfolio diversification should be a priority for every retirement saver. This concept basically relates to spreading your 401(k) contributions across several different categories of investments.
This is done to limit risk and 401(k) losses. For example, if someone invested solely in equities, any stock market decline might affect them disproportionately.
Depending on the 401(k) plan your employer offers, you might have the option to invest in different asset classes, including:
- Mutual funds.
- Real estate.
- Commodities and foreign currencies.
Personal circumstances and financial goals will ultimately determine your optimal allocation. Just keep in mind, a diversified retirement portfolio is one that might be best able to see you through economic uncertainty.
Try not to panic
It can be hard to keep calm when the economy or stock market tanks. After all, these events will have a direct impact on the retirement savings in your 401(k).
However, as best as you can, keep calm. Markets rise and fall but mostly rise over the long term. It is important to keep this perspective when short-term losses occur. If you're still decades away from retirement, there's lots of time to recover and adjust your risk tolerance.
Checking your balance daily during a market crash may only compound your stress or lead to rushed decision-making, like taking out money. Choosing to cash out early will come with considerable tax obligations. Withdrawals from a 401(k) before age 59 ½ are charged an additional 10% tax on top of income tax (except for Roth 401(k)s, which use after-tax income). Certain hardship exceptions exist, however, including those introduced by the CARES Act.
If you are closer to retirement age and concerned with your savings, speaking to a financial advisor can help you find the best solutions or guidance on how to handle near-term 401(k) losses.
Research target-date funds
If you want to safeguard your retirement portfolio against future recessions or market declines, consider allocating some of your 401(k) toward target-date funds (TDFs) when things are more stable.
TDFs are a class of mutual funds whose holdings become more conservative as they approach the target date. The assets the fund holds are dynamically managed. Often, the fund is weighted toward stocks initially, with a gradual rebalancing toward assets that provide fixed income and less risk.
Many different fund timelines exist, so investors can find a TDF that aligns with their planning. Investing in one may help you avoid significant 401(k) losses near your target retirement age.
Invest with confidence
When market volatility strikes, not all 401(k) losses can be avoided. The difference is in how you mitigate risk by structuring your retirement portfolio to protect your savings.
Looking for advice on an optimal allocation or opportune asset classes? Reach out to Comerica Bank today for guidance and information to help you invest with confidence and build your retirement savings.