Have a 401k Plan? Don’t Panic If the Economy’s Struggling
Have you been worried how the global recession has affected your retirement savings?
It’s impossible not to worry about your 401k plan when news headlines talk of struggling stock markets and of recession. And, it can be tempting to make changes to your savings arrangements in light of negative news about the performance of stocks.
However, it’s important to remember that your 401k plan is an investment for the long term. Keep reading to discover why you shouldn’t panic about your retirement savings if the economy is struggling.
What effect does a recession have on my 401k plan?
When the economy is struggling, it generally means that there are falls in the values of stock markets such as the Dow Jones and NASDAQ. As many 401k accounts are at least partly invested in the stock of public companies, falls in the value of stocks can lead to a fall in the value of your investments. A recession can therefore hit the value of your retirement savings.
However, it is worth remembering that most 401k accounts aren’t made up solely of stocks. Funds invest in a wide range of asserts including bonds, cash and money market investments which means that the value of your retirement savings is unlikely to fall in proportion to decreases in the value of stock markets.
So-called ‘asset diversification’ is designed to help stabilise the value of your investments in difficult economic times. And, of course, the value of assets fluctuates but rarely does the value of an asset disappear entirely.
Should I take my money out of my 401k plan when the economy is struggling?
It is generally not advised that you withdraw from your 401k plan. There are several reasons why.
Firstly, if you are under 59.5 years of age, any withdrawals you make from your 401k plan will be subject to a penalty as well as income tax. Taking money out of your account is expensive and reduces the value of your retirement fund. (For more information about 401k withdrawals read our article here.)
Secondly, it is important to remember that while stock values may decrease during a difficult economic period, they could increase in a strong economy. 401k plans are designed for long term money management and growth is likely to smooth out over the medium to long term. You should ideally never consider selling off assets/stocks during an economic downturn.
Should I change where my 401k plan is invested if there is a recession?
Your 401k plan is probably invested in a wide array of different types of asset. And, the more diversified your assets, the more protection you have against falls in stock markets or against shifts in the performance of the economy.
So, it may be worth reviewing your 401k plan if the economy is struggling. If your 401k plan is held mostly in stock (often the stock of your employer) then consider changing where your cash is invested. You may want to look at other securities or assets.
Should I stop paying into my 401k plan if the economy isn’t doing well?
Keith – thanks for your question. Ultimately, it is up to you but it’s not generally recommended. This is especially true if your employer is matching your contributions (or similarly paying into your 401k plan on your behalf). The contributions from your employer may stop if you case payments into your plan and then you’ll be losing an important benefit of the 401k scheme.