Wednesday, September 28, 2022

Where Should I Put My 401k Money

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So What Should You Do Right Now To Protect Your 401 From A Stock Market Crash

What is a 401k? || How much should I contribute?

Protecting your 401 from a stock market crash will depend based on where you are in your career. If youâre younger, you can keep investing more in stocks because you have time to recover from any downturn. If youâre older, moving your money into government and municipal bonds will help shield most of your money from the volatility of the stock market.

Remember, time and consistency will help your 401 grow. If the stock market drops, keeping your money in your 401 is the best strategy. Youâll not only prevent you from cashing out your investments at a loss but will also see your 401 grow when the stock market recovers.

Consider talking to your planâs custodian or a financial planner as you near retirement. Youâll be able to get expert insight on how to best protect your 401 from a stock market crash.

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Try To Have Cash On Hand

Some financial professionals recommend retirees have enough cash or cash equivalents to cover three to five years worth of living expenses. Having cash reserves can help pay for unexpected expenditures that a fixed income may not otherwise be able to cover.

Cash on hand can also mitigate whats called sequence of returns risk. Thats the potential danger of withdrawing money early in retirement during market downturns and, thus, permanently diminishing the longevity of a retirement portfolio. By selling low, the longevity of the investors portfolio is jeopardized. However, with cash reserves retirees can withdraw less money from their 401 during a market decline and use the cash to cover living expenses.

But Why Would I Max Out My Roth Ira Before My 401k If Its So Good

Theres a lot of nerdy debate in the personal finance sphere about this very question, but our position is based on taxes and policy.

Assuming your career goes well, youll be in a higher tax bracket when you retire, meaning that youd have to pay more taxes with a 401k. Also, tax rates will likely increase in the future.

The Ladder of Personal Finance is pretty handy when considering what to prioritize when it comes to your investments, but it is just a tool. For more about the Ladder of Personal Finance and how to make it work for you, check out THIS video where I explain it.

PRO TIP: The video is less than three minutes long. It is worth your time.

Also Check: How Much Should I Have In My 401k At 55

Understanding Bond Mutual Funds

Whether or not you should put 401 money into bond funds depends on a number of factors that won’t be the same for everyone. While most investors want their 401 to go up in value, the path to achieving those earnings can vary considerably. Factors such as your age, your investment know-how, and your personal tolerance for risk all play a role in determining whether or not bond funds are appropriate investments for you.

Using The Wrong Broker Could Cost You Serious Money

How Much Should I Have In My 401k? Average 401k Balance By ...

Over the long term, there’s been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers – simply to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.

Don’t Miss: What Is A Robs 401k

Summary: Keeping Your 401k Safe

Finally, history proves stock market crashes are rare events that long-term market gains will make up.

If you can time the market to avoid the worst of a crash, then this is a good option.

Secondly, another way to keep your 401K safe is to keep your money in the market and use dollar-cost averaging to your advantage. Notably, the stock market erased all the losses from the 2007-2008 crash by October 2012, just four years later, and if you had doubled down on your investing during the worst periods of the crash, you would have a chance to outperform the market.

This is not specific financial advice I am not a registered financial advisor I am a market analyst. If you are concerned about your investments, seek the help of a registered financial advisor who can provide tailored advice to suit your specific risk and portfolio requirements.

Borrowing Money From My 401k

It may seem like an easy way to get out of debt to borrow from your retirement accounts for DIY debt consolidation, but you can only borrow $50,000 or half the vested balance in your account, if its less than $50,000. You wont face a tax penalty for doing so, like you would with an out-right withdrawal, but youll still have to pay the money back.

And unlike a home equity loan where payments can be drawn out over a 10-to-30-year period, most 401k loans need to be paid back on a shorter time table like five years. This can take a huge chunk out of your paycheck, causing you even further financial distress. Borrowing money from your 401k also limits the ability of your invested dollars to grow.

Paying off some of your debt with a 401k loan could help improve your debt-to-income ratio, a calculation lenders make to determine how much debt you can handle. If youre almost able to qualify for a consolidation or home equity loan, but your DTI ratio is too high, a small loan from your retirement account, amortized over 5 years at a low interest rate may make the difference.

Recommended Reading: Can You Contribute To 401k And Roth Ira

Convert Old 401s To Roth Iras

Lets pretend that youve changed jobs at least once in your career, and you still have a 401 from a former employer. If you have enough cash on hand, you can convert that 401 into a Roth IRA. Since the money in that 401 wasnt taxed when you first put it into the account, youll pay taxes on that money when you convert it to a Roth IRA. Doing that rollover is not complicated. Youll have to make some phone calls and fill out some paperwork.

Why would you want to convert that old 401 into a Roth IRA? There are a couple of reasons.

  • The money in a Roth IRA grows tax-free, remember? And its not taxed when you take it out in retirement. Win/win for you.
  • With a Roth IRA, you get to choose where your money is invested. A workplace 401 has limited options.
  • Remember this: converting is an option only if you have the cash on hand to pay the taxes. If you dont have enough, try Door #3.

    The Benefit Of A 401k

    Should I Decrease my Retirement Contribution and put more Money on Stocks

    The largest benefit of a 401k, and the only reason I say it is worth your time, is the employer match. Most employers offer to match your contribution to your 401k up to a certain percent. That is FREE money. And you should never walk away from free money. The power of the match is that it can double your investment.

    If your employer matches your contribution to your 401k, you should invest up to the point of the match.

    Read Also: Can You Have A Solo 401k And An Employer 401k

    Withdrawing Income And Rebalancing Your Portfolio All In One

    Its smart to plan your withdrawals at the same time that you rebalance your portfolio. Once youve decided which asset class or classes need trimming, look at your lowest-rated holdings for potential sales.

    As a simplified example, lets say that youre a new retiree with the following moderate portfolio. You intend to withdraw 4 percent, or $40,000, at the end of the year.

    Investment

    How Much Should I Put Into My 401k Plan

    How much should I put into my 401k plan? I thought about this as a walked in to talk to my financial adviser. When I asked my company financial adviser how much I should put into my 401 plan the answer was more. A year or two passed and again I asked the same question and received the same response, more. This game of more didnt quench my thirst for an exact percentage. I needed my assets to be balanced if we were going to keep a budget. I realized that I needed more clarity and did some research.

    Possible recommendations:

    The F.I.R.E. option is a little extreme at the moment because I have dreams of having real estate investments as well and I would like to get my house paid off first.

    15% seems to be the magic number . We plan on paying off our house first and then adding beyond 15%.

    My company offers a Roth 401 plan with good mutual funds within it. They also match my contribution up to 6%. I put in 9% and my company puts in 6%. This adds up to a total of 15%. If your company offers a Roth 401 plan, I would jump straight to the 15% magic number and youll be glad you did! The earlier you start the better. The Roth 401 plan is like having both a traditional 401 plan and a Roth IRA combined .

    Why does 15% work?

    15% is not bad even at an earlier retirement, although other sources of income might be needed.

    My Favorite Retirement Calculator:

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    How The Rollover Is Done Is Important Too

    Whether you pick an IRA for your rollover or choose to go with your new employer’s plan, consider a direct rolloverthats when one financial institution sends a check directly to the other financial institution. The check would be made out to the bank or brokerage firm with instructions to roll the money into your IRA or 401.

    The alternative, having a check made payable to you, is not a good option in this case. If the check is made payable directly to you, your employer is required by the IRS to withhold 20% for taxes. As if that wouldn’t be bad enoughyou only have 60 days from the time of a withdrawal to put the money back into a tax-advantaged account like a 401 or IRA. That means if you want the full value of your former account to stay in the tax-advantaged confines of a retirement account, you’d have to come up with the 20% that was withheld and put it into your new account.

    If you’re not able to make up the 20%, not only will you lose the potential tax-free or tax-deferred growth on that money but you may also owe a 10% penalty if you’re under age 59½ because the IRS would consider the tax withholding an early withdrawal from your account. So, to make a long story short, do pay attention to the details when rolling over your 401.

    Where Do I Invest After Ive Maxed Out My 401

    Should I put money in a 401(k) or IRA first? Youâve heard ...

    5 Minute Read | September 27, 2021

    If youre asking how to invest beyond your workplace retirement plan, then youre making huge strides in building wealth for your future! Youre laser-focused, youve set your goals, and youre working toward themand thats a great accomplishment.

    Once youve contributed the allowable amounts to your workplace investing program, you dont have to stop there. You still have options. Here are three investing vehicles to consider:

    Recommended Reading: How To Transfer 401k Accounts

    How To Protect Your 401 From A Stock Market Crash

    Market volatility is inevitable. Corrections happen every one or two years when stocks decline 10% or more from their most recent peak. These can even last several months at a time. Stock market crashes, on the other hand, are less common than corrections, but are more abrupt and severe. Look no further than the 2008 financial crisis or the 2020 crash ushered in by the coronavirus pandemic. But preparing for market volatility ahead of time is possible. A financial advisor can help you shore up your retirement savings for inevitable market events.

    Your 401 Is A Big Part Of Your Retirement Savings But You Don’t Know The Last Time You Logged In

    Effectively managing your investments and making the right financial decisions takes time, skill, and effort. Its not something you only need to do once. Your investment options change, the account needs to be rebalanced periodically, and as your 401 grows, you may benefit from a personalized investment mix rather than the age-based allocation in a target-date fund.

    Regardless of whether you lack the time, desire, or investment acumen, the result is the same. Thankfully, it’s a solvable problem, and likely worth it have an advisor manage your retirement plan. Time is money, and theres a cost to delaying good financial decisions or extending poor ones, like keeping too much cash or putting off doing an estate plan.

    Also Check: How To Avoid Penalty On 401k Withdrawal

    Gold May Not Protect Your Money

    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 Dot.com 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.

    Option : Keep Your Savings With Your Previous Employers Plan

    Should I Cash Out My 401K to Pay For a Car?

    If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.

    Some things to think about if youre considering keeping your money in your previous employers plan:

    Recommended Reading: What To Do With Your 401k

    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.

    Stay Away From Cryptocurrencies

    Next-generation financial technologies like cryptocurrencies are even more dangerous than precious metals. For instance, all cryptocurrencies lost 80% of their values between January and September 2018.

    Thus, the cryptocurrency crash of 2018 was worse than the dot.com crash of 2018. Bloomberg claims. For example, Ethereum , the second most popular cryptocurrency, had a Coin Price of $539.27 on March 24, 2018. However, Coinmarketcap calculates Ethereums price fell to $137.32 on March 24, 2019.

    Consequently, cryptocurrencies are far more unstable than stocks, so you should stay away from them. Cryptocurrencies are more unpredictable because they are a new technology that most investors do not understand.

    Obviously, cryptocurrencies do not belong in your 401K because altcoins are more likely to crash than stocks. Therefore, stay away from cryptocurrency unless you have a high tolerance for risk and money to burn.

    Also Check: What Is My Fidelity 401k Account Number

    Should You Put More In Your 401 Than You Need To Get The Employer Match

    by Christy Bieber | Updated July 21, 2021 – First published on April 12, 2019

    Many or all of the products here are from our partners. We may earn a commission from offers on this page. Its how we make money. But our editorial integrity ensures our experts opinions arent influenced by compensation. Terms may apply to offers listed on this page.

    You should always invest enough in your 401 to get an employer match. But should you put more money into your 401 or do something else with it?

    Many companies offer a 401 account as part of their workplace benefits package. A 401 is a retirement savings account employees can contribute to with pre-tax funds. Money is taken directly out of the paychecks of participating employees and put into the 401 account. Employers usually, but not always, match at least some portion of the employee’s contributions. The money is invested and grows, ideally until it’s needed to provide income when the employee retires.

    If you have a 401 at work and your employer offers a match, you should always invest enough in the 401 to claim the full match. If you don’t, you’re giving up free money. You can’t afford to give up free money and should take advantage of the help your employer provides to ensure you save enough for retirement.

    If you’re able to invest more in your 401 than necessary to get the employer match, should you do so? The answer depends upon your situation.

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