Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Planning for retirement includes accounting for all the bills you may need to pay post-retirement. You may have various expenses, like housing, medical, food, traveling, etc. But add one more concern to your list: recession.
With the decline in gross domestic product (GDP) and rising inflation, a recession is a common fear for most Americans. A recession is unavoidable sooner or later. Another point of certainty is that recession hits your retirement savings the hardest.
A decline in stock markets means your investments can lose value. According to Business Wire, the Fidelity Investment analysis showed that the average 401k account balance dropped to $103,800 from $121,700 from Q1 to Q2 2022. That is a 15% drop from Q1 2022 and a 20% drop from Q2 2021.
It is a serious concern, especially for retirees and soon-to-be retirees. It may cause havoc in your life while trying to manage your day-to-day with rising prices and your 401k to secure your retirement. In such situations, you must know what mistakes you should avoid to protect your 401k from recession.
Build your emergency fund
While trying to secure your retirement, building an emergency fund is a crucial step to protect your 401k. Creating a solid retirement account is useless if you are forced to break it before time. Figure out how much money you need to retire and then plan on creating an emergency fund. With an emergency fund, you can protect the rest of your investments.
A recession may last for 18 months, and it is best if you build an emergency fund that would last from at least six to 12 months. In case of uncertainty, you can tap on your emergency fund while letting your 401k grow or recover the loss.
Don't let your debts pile up
Do not let your debts pile up, especially those with high interest rates. Curb spending habits like traveling, eating out, or shopping during a recession. However, you cannot decide not to pay your debts or slowly exhaust your investments by paying for them.
Preferably, target the debts with the highest interest, like the mortgage or credit card debt. If you need to tap into your 401k, you could look for other alternatives, for instance, consolidating your credit card debt. This way, you can pay for the debt at a lower interest rate and keep from exhausting your 401k.
Don't stop your contributions
A recession can cause the stock markets to be unstable and unpredictable. You may feel in such unforeseen situations that it is wiser to stop making contributions to your 401k.
It is a common belief that you should only invest in markets when prices rise. When the prices fall, you should continue to make regular contributions or even contribute more. The idea is that our contributions can buy shares at lower costs, and you must aim to buy at a lower price and sell at a higher price.
Don't sell your equities
Watching the balance in your account decrease can be daunting. You may be tempted to sell your equities, seeing the value drop significantly. It might appear like the right move to sell all your shares before the market drops and get back before it rises again.
However, this fluctuation in stock markets is temporary, and as a long-time investor, this is a wrong move. A recession does not last more than 10 to 18 months, after which the prices of stocks reach new heights. Stocks that have suffered a significant drop but still have strong fundamentals can pay off when the markets improve and the stocks begin to rise in value. A sound investment strategy is always to sell your shares at a higher price.
Don't keep your portfolio concentrated
When you have a diversified portfolio, market fluctuations will have less impact on your overall investments. Diversifying your portfolio limits your dependency on market fluctuations. If you require to pull out some money in the recession, you will have the option to do so from a safer portfolio. This strategy will give your stocks enough time to recover the loss.
Depending on your age and risk-bearing ability, you may want to diversify your portfolio or remain diversified as you are. For example, you can invest some money in a safer portfolio like CDs, savings accounts, or short-term bonds.
Rebalance your portfolio
Market shares have different values at different times. Some investments may yield better value than others at some other point, which changes the value of money invested in each asset.
As a result, you can be exposed to a higher risk. However, when you rebalance your portfolio, you return the invested percentage of money to your initial investing target. By adjusting the amount you have in different assets or by rebalancing your portfolio, you can minimize the risk of recession.
Don't make decisions in a panic
Market fluctuations can feel never-ending, making the instinct to make decisions stronger. However, it will be over soon. In such situations, making significant decisions under panic, fear, or without enough knowledge can be a big mistake.
Instead, consult a financial advisor before making major strategic adjustments during similar market fluctuations. A financial advisor can make the decision-making easier for you, and they can walk you through your plan to help you figure out what financial decisions are best for you.
Closing thoughts
When a recession strikes, it is understandable to panic or worry about your retirement savings. It is common to look at your 401k balance and feel discouraged when your savings drop. However, it is crucial to stick to your savings plan and avoid making mistakes like selling off your equities, exhausting your retirement account to pay off debts, etc.
Market fluctuations are not usually the ideal time to make significant strategic changes to your 401k. Generally, you must analyze your investment strategies yearly and make necessary changes. If you are scared or unsure of the right investment strategy for recession, it could help to reach out to an attorney.
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.
Read more articles by Lyle Solomon
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
