Five Rules for Protecting Your 401(K) Against Economic Uncertainty

Saving for retirement can bring its own set of challenges, and traditionally, Americans look towards their 401(k) retirement plan as a way to help them survive financially through their retirement.

The ongoing economic uncertainty, from the devastating economic impact of the pandemic, geopolitical tension, and the rising cost of living has reached deep into the savings of many American citizens.

As more Americans are set to leave the workforce behind in the coming years, and the younger labor force quitting their jobs at an exponential rate – experts are suggesting new ways in which soon-to-be-retirees and those still working can diversify their retirement funds to help protect it against any economic downturn.

Back in 2018, it was predicted that a sudden crash in the stock market would see some participants lose up to $20,000 of their retirement fund, that number today is a lot higher. With increased uncertainty and roughly $1.35 trillion in 401(k) plans being lost each year, affecting 24 million participants – having a strategy is the best way you can protect your retirement savings.

While experts suggest that there’s no need to panic, yet, sudden changes in the market can have dire consequences on the greater good of the American and global economy. The 2008/2009 financial crisis taught us how to be better prepared.

To ensure your retirement is protected against any sudden economic developments, here are five rules which you can follow.

1. Always Have a Diverse Retirement Fund

Generally speaking, American workers, who are in the position to have an employer-backed 401(k) plan will be able to enjoy the benefits of personal and employer contributions. Luckily there is no age limit to when you should be starting, and a majority of experts suggest that you should start as soon as you can.

Normally, employer contributions would make up around 10% of the overall retirement fund, the rest should be overseen by the person themself. For this, it’s advised to have a better understanding of where to allocate certain funds to help grow your retirement fund.

The first to look at is buying stocks on the market. This comes with added risks and market volatility never remains the same. Investors who are open to taking on major risks will usually invest in high-stakes stocks, whereas an older person might want to minimize their risks.

Perhaps bonds might be a better option for those who aren’t seeking to incur high risks and perhaps big losses. Bonds are a safe place to start, but they tend to deliver fewer returns as opposed to stocks.

The amount you allocate to each type of asset class depends solely on personal financial circumstances. That’s why it’s better to start sooner than later, as you’ll still be able to outlive the risks before retiring.

Follow the 110 Rule

For example, sake, let’s say you are looking to invest some money into stocks and bonds. After understanding how each asset class works, and what the risks could be, you’re now ready to diversify your life savings to help grow your retirement fund.

Normally, it’s good practice to start with minimal money and work your way up. This way, if you do lose some cash, or there are sudden market downturns, you’re not left losing thousands of your retirement fund.

The 110 rule works as follows. Experts suggest that you subtract your age from 110, the number you then get is the percentage of your retirement portfolio that should be allocated towards stocks. The older you are, the lower percentage you’ll be investing in stocks, and vice versa.

Perhaps you are a bit more open to running the risk of investing in the stock market. Investors would then subtract their age from 120, and if you’re in the comfortable position of not being phased by any market risk, you can subtract from 100.

This is a simple example or rule with which you can work, but it’s still highly advised to also ensure that you are in a comfortable financial position to invest in the stock market. Advise a broker, or other experts before making a final decision to ensure you are on the right path towards growing your retirement fund.

2. Make Continuous Contributions to Your 401(K)

Even well before retirement, some people stop contributing to their 401(k). Banking solely on employers funding the 401(k) plan is not enough, and during times of adversity, it’s good to ensure you have enough saved up to help you live out a comfortable retirement.

As the cost of living increases, and economic uncertainty has left millions of Americans scaling back from food, housing, utilities, vacations and other luxury items, contributions towards 401(k) plans should always be active.

Generally, some experts suggest that you should put away at least 30% of your salary towards your savings or retirement fund. For younger employers, who may still have a lower cost of living and other expenses, this is highly possible. Those who are well-advanced in their career and personal life run into more expenses over time, but this shouldn’t diminish monthly or quarterly contributions.

Revisit how you set up your monthly budget, and see where you can cut back on unnecessary purchases and luxury items. Consider how much money is being spent on goods and services that aren’t contributing to your overall well-being, and use that money towards your savings plan.

3. Set Cash Aside

It’s not unusual that your 401(k) will lose money over time, perhaps some of your mutual funds may not be performing at their current best, or you may need to consider reallocating your 401(k). There are different reasons that you may see small dives in your plan, but cause you to withdraw your cash.

Having cash aside is one of the best ways you can protect your retirement plan and your financial well-being. When the pandemic hit back in March 2020, millions of Americans were anxious about the time ahead, and the CARES Act allowed them to withdraw close to $100,000 from their 401(k) plans without incurring a withdrawal penalty.

What this meant is that millions of Americans could now have access to their savings, and ample cash, which helped increase their liquidity. Experts find that having enough cash on hand to cover essential expenses for up to six months is the best way to protect yourself, and your retirement plan against any market downturns.

The cash can also help with short-term needs, such as paying off debt, paying for utilities, rent, and other essentials if you’d have to lose your job, or the stock market takes a turn for the worse. Having cash aside, physically on hand is one of the more traditional ways that you can protect your wealth and 401(k) plan.

4. Diversify Beyond the Market

Perhaps the stock market remains too volatile, and diving into your savings to invest might hurt you more in the short-term than what you may actually get back in the long run.

Diversifying, as before mentioned, is crucial to growing your retirement fund, but there are more ways than the stock market. Some experts have found that participants usually look at alternatives such as traditional savings accounts with their bank, checking accounts, and the more popular annuities.

Have allocations to assets that aren’t directly affected or impacted by the stock market itself. This way, you will lower your risks, but also assist you to seek different investment opportunities.

Insurance companies also offer indexed annuities, and while it may mean that your money is in the hands of the bank or a third party, it still allows you more leverage, easy access in times of financial need, and increased diversification.

The Takeaway

Protecting your 401(k) does come with its own set of challenges, and over time you may realize that your plans are losing money, instead of growing. This is a common occurrence as the market, and economy moves through different phases of recovery and correction.

The best way to ensure your 401(k) plan keeps growing is to prepare and build a strategy that will help it grow, and adjust for any sudden shifts in the economy or market.

Ensure that your goals are attainable, and contribute as much as you can to a diverse set of assets throughout your time, the best is to start as soon as possible, and allocate to assets that will increase your retirement funds.

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This article was produced and syndicated by Wealth of Geeks.