How to Protect Your 401K During a Recession

The 401K Salvation Strategy

By: Pam Grundy

Rating:

( 3 Votes )

With the stock market tanking and the recession looking scarier every day, how can you recession-proof your 401k? Is there a point at which you should abandon your 401k entirely? Or, with minor adjustments and changes, can you salvage your 401k, even in this tough economy? The answers to these questions will depend on age, and personal circumstances, but some general principles do apply. Here are some basic actions anyone can take to keep that money safe:

Review Your Portfolio

Most people never look at their 401k once it is first set up, but financial experts recommend a review of your 401k at least once each year. When conditions are difficult like they are now, it is even more important to review and adjust how your money is invested within the plan. Most companies provide software that will make these adjustments for you automatically, but you have to take the time to actually go into the plan, use the software, and make the changes.

Choose Safety if You're Over 50

Don’t choose the high yield, riskier strategies with your 401k to make up for losses when you’re nearing retirement. Choosing the low risk approach is smarter. A 2% return is a much better deal than another 30% loss.
Some 401ks limit the amount of money you can invest in the safest funds, others don’t. Choose a conservative investment strategy. You can always readjust later when the market recovers.

Act, Don't React

While it is important to complete a yearly review and adjustment; don’t react to every negative market trend by fearfully jumping into your 401k and mixing it all up. The market goes up; the market goes down. Pick a strategy and stick to it. Most employers provide services that allow you to choose pre-mixed portfolios of high, moderate, or low risk. Choose according to your current age and circumstances, and then leave your portfolio alone for at least six months. Even if you are over 55, constantly shuffling your 401k investments is not the answer, and will only increase your anxiety.

Don’t Get Scammed Run from anyone who advises you to cash out your 401k and invest the money in a single fund that ‘guarantees’ a magically high return.
Even during good times, no one can ‘guarantee’ a high return. Cashing out your 401k will cause you to incur significant penalties if you are under 55, and even if you are over 55 you will in most cases still have to pay income tax on the disbursement. If something sounds too good to be true, it probably is.

Check Out IRAs

Some IRAs (Individual Retirement Accounts) are set up like CDs, and do come with a rate of return that is set for a certain time period, the same way a CD does. Other IRAs are set up in money markets funds, and are similar to a 401k in terms of risk.
A few employers allow a rollover of a 401k to an IRA without penalty.
If you are nearing retirement and facing further losses on your 401k investments, the IRA option might or might not be a good way to lock in a set rate of return. The only way you can know is to ask.

Limit Contributions

Most employers match a certain percentage of 401k contributions. Especially during a recession, you want to make sure you are getting this money. Turning down free money from your employer is nuts, but if you’ve been contributing more than the maximum employer matching percentage, consider dropping your contribution and putting the difference into a high yield liquid savings account instead.

Build Liquidity

Every working person should have at least three months wages put away in an interest bearing savings account. Six months is better. Most people don’t even have one month of savings salted away.
Start saving. A good way to do it is to choose one of the high yield savings accounts at an online bank, and have the money taken directly from your checking account or your paycheck. Online banks typically pay higher interest rates than regular retail banks, and it is harder to get at the money in an online account, so you’re less likely to spend it.

Use CDs Intelligently

Many, many, many people refuse to park money anywhere besides a checking or savings account, even when the savings account pays a single percentage point in interest or even less.
If you have over $2,000 in a savings account that you haven’t touched for six months, put the better part of that money in a Certificate of Deposit instead. CDs pay higher interest rates in exchange for your agreement to lock up your money for a set period of time. The longer the time period and the greater the deposit amount, the more interest a CD will pay. Banks offer regular CD specials designed to lure customers away from other banks, so shop the rates before locking your money up. CDs are guaranteed by FDIC up to a total deposit amount of $250,000, just like checking and savings accounts, but the return is much, much better.

Low-Risk Investments

In most cases, it makes no sense whatsoever to cash out a 401k and put the money somewhere else. Most 401ks come with options for low-risk investment strategies, that don’t require taking any drastic steps that will incur taxes or early withdrawal penalties. If you are under 55, try not to obsess about your choices. Pick a strategy and leave your 401k alone. If you are over 55, shift as much as you can to low-risk investments within the plan, and check out IRA options if they are available. No matter what your age, this is a good time to build liquidity in the form of savings accounts or certificates of deposit. When the market stabilizes, you can always put that money back into stocks.

Don't Panic

Finally, don’t panic. No one makes good decisions out of fear. Don’t do anything drastic because you are upset, and don’t invest in anything that sounds too good to be true.

blog comments powered by Disqus

Inspiration...

Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like." - Will Smith
Be a Good Role Model When It Comes to Money...

More Quotes.....

Search Local Help & Info

Browse by state

  All Local Guides
  Alabama
  Alaska
  Arizona
  Arkansas
  California
  Colorado
  Connecticut
  DC
  Delaware
  Florida
  Georgia
  Hawaii
  Idaho
  Illinois
  Indiana
  Iowa
  Kansas
  Kentucky
  Louisiana
  Maine
  Maryland
  Massachusetts
  Michigan
  Minnesota
  Mississippi

  Missouri
  Montana
  Nebraska
  Nevada
  New Hampshire
  New Jersey
  New Mexico
  New York
  North Carolina
  North Dakota
  Ohio
  Oklahoma
  Oregon
  Pennsylvania
  Rhode Island
  South Carolina
  South Dakota
  Tennessee
  Texas
  Utah
  Vermont
  Virginia
  Washington
  West Virginia
  Wisconsin
  Wyoming