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How To Protect 401k From Market Crash

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How To Protect 401(k) From Stock Market Crashes

Market downturns can be reasons for anxiety and emotional panic for many, especially as it relates to their hard-earned money in their 401k retirement plans. While the fear around a volatile market may make you feel the need to do something, anything, sometimes the best thing to do is just stay calm and stick to your long-term strategy. In other words, if you have a solid financial plan, and your 401k is well-optimized, oftentimes the best thing to do in a market crash is to do nothing, especially if you are a younger investor with years until retirement.

Nearly 3 million individuals use Personal Capitals free tools to manage their money. From an investing standpoint, you can use the free tools to:

  • Analyze your investments

If you are closer to retirement, market crashes can be even scarier. But being properly prepared is key. Make sure you stay in close communication with your financial advisor in the years leading up to your retirement to ensure that your risk tolerance and asset allocation reflects your shortening time horizon. Here are some questions to ask your advisor if you are retiring or about to retire in times of volatility.

Dont Panic And Withdraw Your Money Early

Surrendering to the fear and panic that a market crash elicits can cost you. Withdrawing money from a 401 before age 59½ can result in a 10% penalty on top of normal income taxes. Its especially important for younger workers to ride out the market lows and reap the rewards of the future recovery.

Even people nearing retirement age may rebound from the crash in time for their first withdrawal. Consider the coronavirus-fueled crash of 2020 as a case study. The Dow Jones Industrial Average, which notched an all-time high of 29,551.42 on Feb. 12, 2020, fell to just above 19,000 by March 15, 2020. Then on April 15, 2021, it posted an intraday high of more than 34,000. Spooked investors who pulled their money from the market in March 2020 missed out on the bull market that pushed the DJIA to record highs by November 2020 just eight months later.

Think About Opening A Roth 401

If youre looking ahead a few years, you may also want to consider opening a specific type of 401 called a Roth 401. With the Roth version, you fund with after-tax money, but youre able to enjoy tax-free withdrawals at retirement. .)

Tax rates are relatively low, so now could be a good time to fund a Roth 401 rather than a traditional 401.

With the Trump tax law due to sunset in 2025, we are facing higher rates in the future, says Kinder. It could be an excellent time to utilize the Roth 401 option and take advantage of the lower rates now. This is especially true for folks under 40 or folks in the 10 percent or 12 percent tax bracket.

Lower tax rates mean that the cost to take advantage of the Roth plan is lower, since you fund it with after-tax money. Taxpayers in higher brackets may find their break on current taxes is more advantageous, however, and stick to the traditional 401 plan.

This Bankrate calculator can help you decide whether the traditional 401 or Roth 401 is better for you.

Recommended Reading: How To Use 401k To Start A Business

How To Protect Your 401k

So you have a 401k and are taking advantage of your employer match and youre wondering how to protect my 401k from a stock market crash.

Most advisors will tell you to leave your money alone and ride the waves saying, eventually the market will recover and so will your investments. But this could be devastating for your retirement if you dont have much time left in the market.

If you could prevent the loss in value that comes with a stock market crash by getting out at the right time, and getting back in when the prices are low, wouldnt you want to?

While timing the market will never go perfectly, you can experience greater returns if you use the right tools.

Be Ready To Buy The Dip

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

are when fortunes can be made. The trick is to be ready for the fall and willing to commit some cash to snap up investments whose prices are dropping.

You probably wont catch the stock at its low, but thats fine. The point is to be opportunistic on investments you think have good long-term potential.

Keep a running wish list of individual stocks you would like to own. Set aside some cash so youre ready for a flash sale when disaster strikes.

Dont be surprised if you freeze in place during the moment of opportunity. One strategy to overcome the fear of bad timing is to dollar-cost average your way into the investment. Dollar-cost averaging smooths out your purchase price over time and puts your money to work when other investors are huddled on the sidelines or headed for the exits.

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Understand How Your Portfolio Is Impacted

The key to understanding how your stock portfolio may be impacted is to use the right tools to analyze your current holdings and enable you to perform the proper research to enable your investing strategy.

For example, if your current portfolio is already very defensive and has a low correlation with the current market direction, you may not need to take aggressive action.

Portfolio analytics and stock research are the keys to long-term successful investing. You need a tool that can provide:

  • Detailed Company Financials
  • Dividend History and Estimates

Stock Rover is our recommended Stock Screening, Research, and Portfolio Management tool, winning both our Best Stock Market Software Review and our Best Stock Screener Review.

Stock Rover can perform detailed portfolio analytics and assessment and help with rebalancing your portfolio. Not only that, but it can also connect to your broker and even help you create a Warren Buffett Value Investing Portfolio or a stable Dividend & Income Portfolio.

Read the Stock Rover Review or get Stock Rover for Free.

Have Some Cash On Hand

Those who are already retired have to maintain a delicate balancing act. To protect against outliving their assets, most financial planners suggest holding onto at least some stocks.

At the same time, retirees need to be more cautious about their investments because they don’t have the long time horizon that younger investors do. As a safeguard against economic slumps, some investment professionals suggest keeping up to five years’ worth of expenses in cash or cash equivalents, such as short-term bonds, certificates of deposit, and Treasury bills.

“When you retire, most of your expenses should be relatively stable,” says Kirk Chisholm, a wealth manager at Innovative Advisory Group in Lexington, Mass. “However, on occasion, a big expense can come along unexpectedly. When this happens, you cannot compensate for it by working more hours. You will need to address these expenses by dipping into your savings. The last thing you want to do is to take money out of your investments when they have temporarily dropped due to market conditions.”

If you’re worried that the rate of inflation will grow and eat away at your purchasing power, consider having some of your “cash equivalents” in the form of Treasury Inflation-Protected Securities, or TIPS. While the interest rate on these securities is fixed, the par value increases with the Consumer Price Index. So if the rate of inflation hits 4% annually, your investment grows right along with it.

Also Check: How To Roll Your 401k From Previous Employer

Shift Your Asset Allocations As You Near Retirement

So weâve covered the different investment options, how time is your best strategy to weather the stock market storms, and what to do if the stock market does crash. But the absolute best way to protect your 401 from a stock market crash is to limit your risk from one the closer you get to retirement.

Obviously, no one can predict when the next stock market crash will be. So the next best option is to limit the effects of one on your 401 when you donât have as much time to recover before retirement.

If youâre invested in a target-date fund, your investments should already be reallocated to less risky funds, like bonds, the closer you get to 65. If youâre invested in index funds or mutual funds, youâll need to move your money to safer investments yourself. As mentioned earlier, if your 401 provides an online portal, itâs easy to reallocate your assets to lean more towards bonds. If not, your planâs custodian will be able to facilitate moving your money to other investments within the plan.

If your plan doesnât provide investment options that donât satisfy your goals, you can roll over your 401 to an IRA at an outside institution. These investment institutions like Fidelity have seemingly endless investment options to choose from within their IRAs.

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Protect your IRA, 401k, TSP from the Next Market Crash

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Recommended Reading: What Happens To Your 401k When You Leave A Company

Store Cash But Not Too Much

Finally, be sure you have cold hard cash on hand, preferably enough to last you through 2022 .

But, because of high inflation, it might be wise to limit how much cash you keep. You might want to create a fixed income strategy that helps you earn enough off interest to at least keep pace with inflation. GIC laddering, for instance, could be good for this.

How To Protect Your 401k From A Stock Market Crash

Are you riding your retirement on the success of the stock market? If so, its understandable that youre worried about what a crash could mean for your 401k.

If thats you and youre wondering how to protect your 401kfrom a stock market crash, Ive got good news for you:

You dont have to worry.

The stock market is volatile, but you can minimize that risk with the right investing strategy.

If you invest your money the right way, you can not only protect your retirement but also experience even greater returns so your retirement can be even sweeter. Ill show you how to take advantage of stock market volatility, which includes a stock market crash, so you can profit from the fluctuations instead of watching your portfolio take a plunge.

Are you with me?

Recommended Reading: Is An Ira Better Than 401k

Overvalued Us Stock Market

The Shiller PE 10 is a cyclically adjusted price-earnings ratio based on average inflation-adjusted earnings for the S& P 500 from the previous 10 years. The Shiller CAPE is currently sitting at 27.49 thats 65% above the historic average of 16.60. On only three other occasions since 1882 has it been higher: 1929, 2000, and 2007.

Gold May Not Protect Your Money

How to Protect Your 401(k) in the Event of a Market Crash ...

Specifically, $2,128.42 invested in the S& P 500 in 1980 would have grown to $6,517.82. Also, the inflation-adjusted return on that money with dividend reinvestment was 11.353%.

In the final analysis, a gold investor will lose money and miss out on stock market gains. Hence, gold is not a good hedge against stock market crashes.

Notably, there were three major stock-market crashes 1987, the 2000-2002 bust, and the 2008 meltdown during the years between 1980 and 2019. Yet, the S& P investor still received an 11.353% return on his investment.

Thus, precious metals do not belong in your 401K if you want to make money.

Recommended Reading: How Do I Know Where My 401k Is

How To Invest Before During And After A Stock Market Crash

The saying goes, Dont Put All Your Eggs in One Basket, which obviously means not investing your retirement into just one type of investment. However, I believe the following advice Im providing applies as well.

The goal to steadily grow a 401k or IRA is to diversify, and diversification can vary based on current age, retirement savings goals, risk tolerance, and a target retirement age. Diversifying in both aggressive and conservative investments will allow for a balance.

Dont Panic When Your 401 Loses Value

Itâs natural to freak out when your 401 loses value. Checking your 401 balance and seeing youâve lost hundreds or thousands of dollars in a few months is never fun.

However, what you donât want to do is panic and make any changes in the moment.

It may seem counterintuitive, but during a stock market crash, the last thing you want to do is take money out of your 401. The reason is that you paid a price for the stocks, mutual funds, and index funds youâre invested in. If they lose value and you sell, you sold your investments for a loss. In fact, the best strategy is to invest even more money into the funds youâre invested in because youâll be paying a discount for the same funds because theyâre lower in value. And because time is on your side, the funds will recover long before youâll need to start taking distributions during retirement.

Read Also: Can You Transfer Your 401k

How To Combat The Risk

The good news is that there are options for mitigating the risk.

The first is to simply plan to spend more conservatively, Pfau said. In other words, the less you spend consistently, the less you have to withdraw overall.

Another strategy is to adjust your spending when your portfolio performance is suffering.

“You look at your expenses and see if there are any you can stop,” Ramnani said. “So maybe you don’t take a trip, or you delay doing a large renovation that would require a big distribution.”

You also can actively reduce risk in your portfolio, Pfau said. For instance, you could have a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.

“You’re strategically reducing volatility,” Pfau said.

The last option is to have assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

“You would use that as a temporary resource while you wait for your portfolio to recover,” Pfau said.

He said that buffer could be cash, a reverse mortgage line of credit or permanent life insurance with a cash value, assuming it’s protected from market losses.

Additionally, given how well the market has generally performed over the last decade, you may simply be able to meet your goals without taking on the risk that comes with stocks.

“You could take some of that volatility off the table,” Pfau said.

Protecting Your 401 From A Stock Market Crash

How to protect your 401(k) during the Coronavirus-driven market crash

Any time you put your money in the stock market or other investments, you always run the risk of losses. While you can make largely educated decisions, things dont always go to plan. Also, because youre talking about something as important as your retirement, emotional decision-making can come into play.

Despite the above, there are many strategies, simple and complex, you can use to mitigate risk. For instance, spreading your assets across multiple types of investments and areas of the market can allow you to avoid the volatility that comes with stock-picking and concentrated investment positions.

Everyone has short-term expenses that periodically arise. For example, you might need to repair your car, replace a broken household appliance or pay for a medical procedure. Long-term expenses are even more prevalent, including student loans and mortgages. However, the best thing you can do is treat your retirement savings just as importantly as all of your other needs. This will ensure your pool of retirement funds will continue to grow over time.

Below are some of the most influential strategies you can use to minimize losses in your portfolio, even if a stock market crash comes around. Just remember that you can never fully avoid risk, though.

Read Also: How Do You Take A Loan Out Of Your 401k

Ways To Prepare For A Market Crash

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.

Every investor lives with the risk, no matter how remote, of a major economic meltdown. It has happened before. It can happen again. If it does, years of hard-earned savings and retirement funds could be wiped out in hours.

Fortunately, there are steps you can take to shield the bulk of your assets from a market crash or even a global economic depression. Preparation and diversification are the key elements of a sound defensive strategy. Together, they can help you weather a financial hurricane.

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