Many people are about to close 2018 Statements 401 (k). right now, and you’re probably seeing significant drops in the value of your account for the first time in recent memory. If this happens to you, should you worry? The answer: it depends.
On the one hand, it depends on your age, and on the other hand, it depends on whether you have a strategy for dealing with the inevitable stock market fluctuations that will occur during your lifetime. Let’s look at the steps that two different age groups should follow.
Workers under 50 years of age
If you’re under 50, “doing nothing” is probably the best course of action when market crashes cause your 401 (k) to drop. One of the worst things you can do during a stock market crash is sell yourself, block your losses, and potentially give up the opportunity to earn futures.
Instead, take comfort in the fact that the stock market experienced nine consecutive years of positive returns in the S&P 500 index, including dividends, from 2009 to 2017 before it had a loss in 2018. If you invested in stocks during this winning streak, you are still well ahead of it compared to investing in bonds, market monetary fund or stable value fund, even with the recent fall.
At your current age, you probably won’t need to take advantage of your 401 (k) account for at least 10 years, so you have time for the “double-double” stock market to work for you. This term refers to two historical trends of the stock market:
- Since 1926, the S&P 500 has been positive in more than twice as many years as years with negative returns. To be exact, 68-year-olds had positive returns versus only 25 with negative returns.
- When the S&P 500 experiences a positive annual return, the magnitude of the average gain is almost double the magnitude of the average annual loss.
Because your investment horizon is 10 years or more, you have time to overcome stock market crashes.
If you’re still worried, you may want to review your investment strategy with the goal of helping you overcome stock market crashes. A good strategy is to commit to just “buy low” and “sell high” instead of “buy high” and “sell low”. You can do this by investing in a fund that has a specified distribution of assets between stocks and bonds and that periodically rebalances its portfolio.
If the shares decrease relative to the bonds due to a market crash, the fund buys more shares to achieve the target asset allocation and vice versa in the opposite scenario. Some examples of these funds that are typically found in 401 (k) plans include balanced funds or target date funds.
Older and retired workers
Older workers are in a different place: they don’t have as much time available to overcome a market crash and rebuild with the rebound. But if you are an older worker or retired with a reflective strategy to turn your hard-earned savings into a retirement income portfolio, this should allow you to sleep through the night even during stock market volatility, like the wild changes that have become commonplace recently.
If you do not have such a strategy and are approaching your retirement years or are already retired, you should change your thinking about accumulating assets to generate retirement income. Here’s a strategy that can work for many people:
- Cover your basic living expenses with “retirement checks” that don’t fall if the stock market crashes. Sources include National Insurancepensions, low – cost annuities, bond scales and tenure payments reverse mortgages.
- Cover your discretionary living expenses with “retirement premiums“They have growth potential through stock market investing. However, be prepared to reduce your discretionary spending if stocks close.
This strategy can help you overcome any market crash because you know you have money to pay for housing, food, utilities, and health insurance premiums.
For most retirees, Social Security accounts for between 50% and 80% or more of their total retirement income. As a result, much of their total retirement income is already protected from the fall of the stock markets. Thinking carefully about the part of your retirement income portfolio that will be devoted to retirement checks should allow you to sleep through the night.
As life expectancy increases, it is inevitable that we experience a few more cracks in the stock market during our lifetime. But no one can accurately predict when one will pass and when a recovery will occur. The best thing you can do is develop strategies to overcome crises, without having to know exactly when they will happen.
If you plan ahead, you will be given the best opportunity to live the retirement you have always dreamed of.
- In:
- 401k
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