How to Recession-Proof Your 401(k)

Author: Siân Killingsworth / Reviewer: Siân Killingsworth
10 Oct 2022 / 401(k) Plan Information

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, any market downturn presents a good opportunity to reassess and potentially recession-proof your 401(k).

Focus on what you can control

What we know from 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. Stick to your plan to reach your investment goals.

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, but remember that prices are low. You may end up taking a loss on the sale versus the price you originally paid for the stock. However, if retirement is still five or more years into the future, you can hold off and expect more normal annual returns when the market resumes its course 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 review the assets you currently own and rebalance. If your portfolio is skewed heavily toward stocks, consider adding some bonds. If you have invested too heavily in the market, shifting to cash temporarily can be a protective measure if market volatility is wild.

Assess the risk on your individual securities. Look for mutual funds with “growth and income” or “balanced” in the name.

Most importantly, discuss your situation with your financial advisor. They know your portfolio and the market, so are better able to assess your chances of success or failure when taking your investments into your own hands.

Look for opportunity

Where some see a market wipe-out, others see opportunity. Many investors are actually increasing 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 seamlessly and go directly into your retirement savings. This strategy makes sense especially 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 2023, contribution limits have increased to $22,500, with an additional $7,500 allowed for those age 50 and older. This may be an opportunity 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. Sticking to your plan is always safe, but don’t pass up an opportunity when it knocks. You may be able to make small, thoughtful adjustments that can optimize your returns. Contact Ubiquity to learn more about how to maximize 401(k) plans during the pandemic.