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6 Ways to Protect Your 401(k) From a Stock Market Crash

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If you’ve been contributing to a 401(k) plan over the past several years, you’ve probably seen some pretty cool benefits. At least until early 2022, when the stock market really took a dive. Since most 401(k) plans invest assets in mutual funds, stocks, and bonds, you’ve probably noticed a decrease in your retirement savings as well. What is an investor to do?

How Can I Keep My 401(k) Safe During a Market Crash?

The best way to protect yourself and your retirement savings in the event of an accident will depend on a few factors, including how much risk you’re willing to take and how long you have until you plan to retire. But whatever your situation is, the first thing you should do is not to panic. The market goes up and down – that’s the nature of it.

Next, consider your specific situation and your best response. Here are some steps to take.

6 Steps to Protect Your 401(k)

  1. understand the market situation
  2. Review your specific situation
  3. View your asset allocation
  4. keep contributing
  5. stay the course
  6. don’t cash out

understand the market situation

The first step is to understand what will happen to your 401(k) if the stock market crashes.

While it is disappointing to see your account balance fall, the nature of the stock market is that it rises and falls. The general trajectory is upward over time, but it is certainly not a straight line. The market has fallen before – sometimes sharp – and it will fall again. But it will also rise again.

Review your specific situation

In a down market, it is important to keep your eye on the rewards, the rewards, in this case, having a comfortable retirement. Take a look at your goals, which will tell you how much money you’ll need to retire. If you don’t already know it, this is a good time to crunch some numbers and try to figure it out. You can then adjust your strategy to make it more likely to achieve those goals.

Consider how much you’ve already saved and how much you’ll save between now and retirement. Then calculate your expected rate of return, which will depend on how your assets are invested. Finally, factor in what you expect to spend during retirement, and see if you need to make adjustments to get where you want to be.

View your asset allocation

Whenever there is a downturn in the market, certain types of investments do better than others. Unfortunately, it’s not the same type of investment in every recession, so it’s hard to predict where to put your money to save it.

The solution is to ensure that your portfolio is diversified across a wide variety of assets and different asset classes. So, you should own both stocks and bonds, and your stock position should include small-, mid- and large-cap stocks, as well as growth and value stocks.

The percentage of your assets allocated to each type will depend on your risk tolerance and the number of years you have until retirement. Smaller investors can take more risk as they have more time to recover any losses, but no one should take too much risk that they cannot sleep at night.

Many 401(k) accounts are invested in target-date funds. These are mutual funds that are designed to allocate your assets based on your estimated retirement date. As you get closer to retirement, the asset mix in these funds will change, moving money from riskier investments to less risky positions over time.

keep contributing

When you look at your account balance and see it decline, the temptation is to stop “throwing good money after bad,” as the old saying goes. But stopping your contribution to a down market is the wrong way to go.

Think about it this way: Stocks are “on sale” over the past year. You are buying shares of the same investment at a lower price than last year. Eventually, the market will be bullish again, and the prices will rise.

If you’ve been thinking about increasing your contribution, now would be a great time to do so. Again, you’ll be buying at a lower price, and those shares will have more room to grow. And you should always contribute at least enough so that your company can match if any. If you can’t find the perfect match, you are giving away free money, and free money is always a good investment.

stay the course

You may be wondering which is the safest place to put your 401(k) or if you should move your 401(k) to a safer investment. The safest place to put your money is cash, but the returns you’ll get are negligible and certainly won’t keep pace with inflation, meaning you’ll lose purchasing power. So, unless you are about to retire, this is probably not the best strategy.

Besides poor returns, the other issue with moving to cash is timing. If you sell your investments and keep the cash in your 401(k) to get out of the down market, when will you get back? Just as you couldn’t see the deceleration coming, you wouldn’t see it starting to rise until it was in the rear-view mirror. Until that time, you may miss out on some big gains.

For most investors, leaving your 401(k) assets invested is the best strategy, even in a recession.

don’t cash out

The temptation to cash out your 401(k) when the market goes down can be strong, but there are good reasons not to do so. First, cashing out when the market goes down locks in your losses.

Plus, you’ll need to pay income tax on any withdrawals — not just profits, if any. The money you invest is taxed at regular income tax rates when you withdraw it. Plus, if you’re under 59½, you’ll pay a 10% early withdrawal penalty on top of taxes.

take away

The bottom line is that market volatility is a fact of life. In fact, they are what make the investment worthwhile. And even though it’s hard to see your account balance drop, try to focus on the fact that if history is any guide, it’s going to go up again someday.

Every market downturn in history has resulted in a market high afterwards. The most savvy investors know to stay the course and wait.

About the Author

Karen Doyle is a personal finance writer with over 20 years of experience in investing, wealth management and financial planning. His work GOBankingRates, Yahoo! Has appeared on many news and finance websites including! Finance, MSN, USA Today, CNBC, Equifax.com, and more.

Source: www.gobankingrates.com

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