Saving for Retirement
Protect Your 401(k) in Turbulent Times
Don't be tempted to stop saving or cash out your retirement accounts. Take these four steps instead.
By Cameron Huddleston, Contributing Editor, Kiplinger.com
October 1, 2008
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For many American workers, just thinking about the damage done to their retirement accounts since the beginning of 2008 can be painful. It has gotten worse lately as turmoil in the U.S. financial sector has sent worldwide markets into a tailspin, dragging hundreds of billions of dollars invested in retirement plans along for the ride.
So what can you do to stem the flow of any more money out of your 401(k), 403(b) or 457 plan?
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What Should Investors Do Now? | ||
Let's start with what you shouldn't do: DON'T stop contributing to your retirement plan or cash it out entirely.
Sure, 777-point Dow plunges in a single day and relentless talk of a recession are scary. But, remember, you're in this for the long run -- even people in their fifties, sixties and seventies shouldn't worry too much. You won't need all your savings immediately, and because retirement can be a 30-year prospect these days, your investments have time to rebound.
"Just because things are happening (with the stock market) doesn't mean you have to take action," says Clare Bergquist, director of 401(k) strategies at Charles Schwab. "The action you need to take is: Take a deep breath and assess your plan."
Here's what you should do:
Study your history. "Remember, markets go up and markets go down, but history has proven that over the long term, they go up," Bergquist says. Over the past 20 years, the Dow has had some tumbles worse than the 19% it's fallen this year: a 23% drop in October 1987 when the stock market crashed; a whopping 47% plunge during the 2000-02 bear market; and a 684-point plummet the day the stock market reopened after the September 11 terrorist attacks.
After each of those drops, though, stocks rebounded, and markets reached new highs. Taking the really long view, large-company stocks have returned an annualized 10.4% since 1926, according to Ibbotson Associates, an investment-research firm.
Plus, for long-term investors, a market downturn can be a good thing. "At the point where it's most scary, it seems the most bleak and you're the most depressed, that's the point when there's the least risk and the biggest gains are to be had," says Brent Brodeski, managing director of Savant Capital Management, a fee-only financial planning firm in Rockford, Ill. You can buy more stocks -- or mutual funds -- at cheaper prices, then reap the rewards as the market recovers.
Study your investment plan. Your retirement account is for buying and holding investments, not for day-trading stocks. But now might be a good time to review your plan based on your personal situation and risk tolerance, Bergquist says.
Reader Comments (16)
Posted by: Linda Mesnard at 01/28/2008 11:06:23 PM
...I've had three brokers "taking care" of my 40lK's over the years and three times I have lost a significant amount of money. For the last 5 years, I have decided to take care of my porfolio on my own. Not only have I made enormous amounts of money, I recently have pulled out of the market and am waiting for a more predicitable time to start trading again. My advice to all readers. Take your financial matters into your own hands. No one will look after your money the way you will. Good Luck.
Posted by: Alex at 01/29/2008 07:49:34 AM
Cash out and buy gold and silver. Or push for a self managed borkerage account so you can own bear funds, sector funds, commodity funds etc. Many 401 plans offer very undiversified choices. They'll all crash and burn together. Inflation and a declining dollar are going to ravage. Professional advisors can't predict what will happen next week, let alone 10, 20 or 30 years from now.
Posted by: D... at 01/30/2008 02:44:01 PM
...I have a court date coming up and I think I will represent myself - no one will look out for my best interest better than I would. Hopefully I will have self-diagnosed that mysterious ailment by then so I can prescribe myself the most appropriate medicine. No one cares more about my health than I do. I could go on...
Posted by: Joe at 01/31/2008 02:57:00 PM
...go ahead and pay 5% of your returns to an "expert" who will handle your money. I'm going to invest in index funds and pay a whopping .2% to .5%, and I will beat most actively managed funds.
Posted by: Maurice at 02/07/2008 05:00:59 PM
There is only one sure way of protecting your retirement from the uncertainty of the stock market. Investing in an Index Universal Life plan. It's way better than a 401 (K) plan because your money is safe, you can't lose it and you're guaranteed decent returns when the market appreciates. I think it's a bad idea to put so much money in 401(K) It's inflexible and there are too many penalties along the way...
Posted by: Shane at 02/08/2008 03:49:50 PM
...most managed funds (the bulk of 401k funds available) UNDER-PERFORM the market. Joe is exactly right, the fund managers take 1-5% right off the top. It's IMPOSSIBLE to beat the market over the long haul by 5% a year to make up for these fees. Joe isn't talking about picking individual stocks, he's talking about just buying into these index funds...You'd be very smart to move most or all of your 401k money away from managed funds and into index funds if your plan offers them. And if it doesn't, you should suggest to your HR dept that they consider the option.
Posted by: james m. at 04/26/2008 10:36:58 PM
I have been retired for about 3 years and at present don't need any of my 401k to get by. When or should I do anything with my 401k? Thanks any input will be greatly appreciated.
Posted by: Henry at 05/29/2008 11:14:14 AM
James M. The IRS requires you to take money at 70 1/2 years old.
Posted by: audrey at 06/01/2008 08:33:04 PM
James M--Every situation is different. You should not take random advice...
Posted by: Linda at 08/15/2008 01:50:51 AM
I have the same question as James M. If you are retired and will tapped into 401K in the next year, what is the best thing if anything to do with your current 401K? Linda
Posted by: Cameron Huddleston at 08/15/2008 02:24:10 PM
To Linda: Hi again, this is the author of the story. You have to start taking withdrawals on 401(k) accounts once you turn 70/12 or you'll pay a penalty. If you're 701/2 and still working, you don't have to take minimum distributions until you actually retire. The exception doesn't apply to 5% owners in a company. Use our search option to find my story entitiled How to Tap Your Retirement Accounts. (Type in that title, and you will get a link to the story.) Hope this helps.
Posted by: Lea at 10/02/2008 11:51:20 AM
I heard that if you cash in some of your 401K to pay for college you don't have to pay the 10% for cashing early is this true?
Posted by: Rick at 10/06/2008 03:32:22 PM
I'm 54, voluntarily unemployed, and have been taking a monthly 72(t) distribution from my IRA for the last few years. I know I need to take "substantially equal" distributions each year, but I'd like to stop taking the monthly distributions for the remaining months of '08, then take the three months' distributions towards the end of December, with the hope that the markets will have recovered somewhat by then. Likewise, if things are still shaky in early '09, I'd like to not take the monthly distributions until things (I hope) recover somewhat, realizing I'll still have to take an annual distribution sometime during the year. Thoughts?
Posted by: Shirley at 10/25/2008 11:31:15 AM
I am 41 yrs old and my 401K had $19,000.00 in Feb 2008, today I am down to $15,000.00, What should I do, transfer to an IRA or hold it out, I am the sole provider in our home, my husband has been unemployed for 2 yrs, we have no children and a credit card dept of $10,000.00.,
Posted by: Catherine at 11/13/2008 01:53:10 PM
My company just made cut backs and I was let go this week. I am 32 years old and have $14,000 in my 401K. I also took out a 6K loan from my 401K that is not fully paid back. I was told it would be recorded as a loan default and not go on my credit report. Should I roll over my 401K into an IRA? I want to put the money into the safest option possible until the stock market bounces back. Should I put it all into bonds until a later date?
Posted by: Jeff at 12/29/2008 11:55:34 AM
I have a $20,000 loan against my 401K. I was laid off over a year ago and I am trying to make payments on my 401k loan. Wouldn't it make sense for the govt to allow a "freeze" on the payments (back to myself), until I am employed again. Why make matters worse for me by hitting me with penalties, taxes and a now less funded 401k. Just give me a little time to get back on my feet. Not asking for a handout - just time.