How to Recession-Proof Your 401(k)
Dylan Telerski / 7 May 2020 / 401(k) Resources
The panic is palpable during a recession. Watching the daily dip in the Dow can be a painful experience for people who are accustomed to checking their stock portfolios daily.
Retirement savers may have heard that they can take out a 401(k) loan to help them through the crisis. Whether you’re actively involved with your plan or not, the coronavirus downturn represents a good opportunity to recession-proof your 401(k).
Focus on what you can control.
What we know over decades of watching the markets through good times and bad is that a long-term focus with regular contributions is the best strategy to grow a retirement nest egg. Resist the urge to make a hasty, knee-jerk reaction and pull your money out. Leave it on autopilot and don’t look at the numbers. It WILL get better!
Make minor changes to benefit your situation.
What if you can’t rely on the long-haul, and you plan to retire within a few years? If you need short-term finances, you can sell some of your investments now. If retirement is still five or more years into the future, you can hold off and expect 10 percent annual returns when the market perks back up again.
Take a closer look at asset allocation. Market timing rarely works, but you should at least make sure your portfolio consists of diversified mutual funds, as well as a mix of stocks and bonds. Consider target-date funds if you are older, as the fund manager will move your assets from riskier stocks to less-risky bonds and money market funds as you get closer to retirement.
Even if you’re a younger investor, you can look at what assets you currently own and rebalance. If you’re overinvested in stocks, add some bonds. If you have invested too heavily in the market, add cash to a money market fund temporarily until it’s a better moment to invest in high-return stocks.
Assess the risk on your individual securities. Look for mutual funds with “growth and income” or “balanced” in the name.
Look for opportunity.
Where some see a market wipe-out, others see opportunity. Many investors are actually upping their contributions during the recession. Elective salary deferrals stretch further when stock prices drop. If you can afford to, contact your plan administrator to adjust the withholding percentage. This money will come out of your paycheck without you realizing it is missing. This strategy makes sense, particularly if you have failed to maximize your employer match; this is free money that will continue to grow for you over the long haul.
As of 2020, contribution limits have increased to $19,500, with an additional $6,500 allowed for those over 50. Take this chance to buy key stocks at relatively low prices to set yourself up for bigger future returns.
Recessions are common to the American economy, cycling every four years and lasting 10 months on average, but stock prices hit new highs after rebounding from each downturn. Hang in there, stay the course, and keep investing. You needn’t rest on your laurels during a recession. Rather, making small, thoughtful adjustments is the best way to right the ship and keep sailing on. Contact Ubiquity to learn more about how to maximize 401(k) plans during the pandemic.