Give yourself a better shot at significant long-term gains.
This year, the S&P 500 dipped 20% before crawling back to a 12% loss. Your 401(k) balance is probably moving up and down along with the benchmark index -- and I'm guessing that's not making you feel awesome about investing.
You're right to ask the question: Should I keep investing in my 401(k) right now? For most people, the answer is yes. Read on to find out why that is, and when you should make an exception.
Down markets are efficient for 401(k) investors
Since the advent of public stock trading, stock prices have moved up and down in waves. While the stock market goes up more than it goes down, those down cycles can feel more pronounced. Time flies when your 401(k) balance is growing, but it drags when your balance is shrinking.
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The thing is, continuing to invest in your 401(k) gives you a better chance of robust long-term growth. Here are two reasons why:
- It's efficient to invest when share prices are down. You get more shares this month for the same contribution you made last month. More shares mean greater growth potential later.
- Market cycles are unpredictable. You can't predict when bear or bull markets start and end. The only way to manage that unpredictability is to continue investing regardless of the investing climate. But here's some food for thought: Even if you had a crystal ball, you'd still invest in down markets. After all, why pay more for shares if you could pay less? The crystal ball would only prevent you from selling in a down market, because you'd see the recovery coming.
About 401(k) investing in down markets
You might naturally feel nervous about continuing to invest while share prices are falling. There are two protective measures investors take during bear markets. They are:
- Only invest money you won't need for at least five years. This gives you the flexibility to wait for a recovery, and higher share prices, before you must liquidate.
- Invest in safer stocks, rather than speculative stocks. Unproven companies can show more volatility in tough markets versus, say, blue chip stocks.
You may already be taking these actions in your 401(k). If you're younger than 50, you shouldn't be withdrawing money for at least five years, or possibly 10. And your investment menu may not even offer speculative fund options.
Still, it's smart to check in on your investment selections. Make sure most of your contribution is allocated to a large-cap or S&P 500 index fund.
When you should not invest in a down market
Now for the scenarios when you shouldn't invest in your 401(k) during a down market. It can be a bad idea keep investing when you have low cash reserves and your job outlook is unstable or you're planning to retire soon.
- Low cash reserves: You should have enough cash on hand to cover three to six months of living expenses. If you don't, it might make sense to lower or pause 401(k) contributions to build up your cash.
- Unstable job outlook: If you're worried about getting laid off and you have low cash reserves, don't lock up too much money in your 401(k). It's counterproductive if you end up taking a hardship withdrawal later. Save in cash until you're comfortable you can survive temporarily without your job.
- Retiring within five years: When you retire, you take distributions. To fund those distributions, you normally must sell shares. It's not ideal to liquidate in a down market, because you get less cash in those transactions. You might have the option to delay retirement. In that case, it's appropriate to keep investing. If you can't or won't delay retirement, you might trim your 401(k) contributions in favor of higher cash deposits. Your cash fund can cover some of your living expenses if the down market lingers.
This market won't break your retirement
At some point, the stock market will shift back to growth. Whether that happens this year or two years from now, no one knows. But either way, it shouldn't break your retirement or zero out your 401(k) balance.
If your retirement timeline and cash reserves allow it, continuing to invest now could reap big rewards later. And seeing big, unrealized gains in your 401(k) is probably the best way to get that awesome feeling about investing.
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FAQs
Aim to contribute as much as possible to your 401(k) regardless of economic events. A recession is one of the best times to contribute to your 401(k). Buying investments while the market is down is like shopping on sale.
Is it smart to keep investing in 401K right now? ›
Don't reduce your 401(k) contributions, or the allocation of new savings to stocks, just because the stock market is struggling at the moment. In fact, a bear market is often the right time to increase the percentage of income you contribute to your 401(k) if you can afford to do so.
Should I still keep putting money in my 401K? ›
As your income grows, it is important to continue to save 15% to 20% of it so that you can invest the funds and grow your investments until you need to start taking distributions in retirement."
Should I cash out my 401K before the market crashes? ›
A 401K is an investment in your ““golden years” and people are living longer now, so you'll need quite a bit more money by then. So, even if there were a “crash”, leaving your funds in there would help you ride out the crash when the economy returns to good times.
Should you stop 401k contributions during a recession? ›
While you shouldn't stop investing in your 401(k) during a market downturn, there are some things you can do to help protect your saved cash. Set retirement goals: Without a plan, going into any extensive life choice isn't a promising idea. The same goes for investing.
At what age should you get out of the stock market? ›
Key Takeaways: The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.
Where should I put money in my 401k before the market crashes? ›
Bonds, on the other hand, are safer investments but usually produce lesser returns. Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.
Should you ever stop investing in 401k? ›
Firstly, you might miss out on employer match savings, which is like free money for your retirement. Stopping contributions also disrupts the habit of saving regularly, making it easier to get used to the extra money in your paycheck and harder to start saving again later.
Where is the safest place to put your 401k money? ›
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Should I panic if my 401k is losing money? ›
Don't “panic sell” your investments
The stock market historically has bounced back from short-term declines, so pulling your investments could mean missing out on some of the market's best days. Staying invested is usually safer than trying to time the market. Selling is how you realize losses in your account.
A 401(k) can be a powerful tool to fuel your retirement savings efforts, but all is not lost if you don't have one. You can take advantage of other savings and investment plans to enjoy the kind of retirement you want, from IRAs to HSAs.
What is the average 401k balance at age 65? ›
Average and median 401(k) balances by age
| Age range | Average balance | Median balance |
|---|
| 35-44 | $91,281 | $35,537 |
| 45-54 | $168,646 | $60,763 |
| 55-64 | $244,750 | $87,571 |
| 65+ | $272,588 | $88,488 |
2 more rowsJun 24, 2024
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
Should I move my 401k to stable fund? ›
Should I Move my 401(k) to a Stable Value Fund? This depends on your risk tolerance, and how long you have until you retire. Stable value funds are ideal for investors nearing retirement. They are not designed for growth.
How to stop a 401k from losing money? ›
Portfolio diversification should be a priority for every retirement saver. This concept basically relates to spreading your 401(k) contributions across several different categories of investments. This is done to limit risk and 401(k) losses.
When should I stop investing in my 401k? ›
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.
Is it better to invest in 401k or stock market? ›
The Bottom Line. For most people, the 401(k) is the better choice, even if the available investment options are less than ideal. For best results, you might stick with index funds that have low management fees.
What to do if your 401k is falling behind? ›
However, if you're falling behind, there are adjustments you can make to your 401(k) savings, even small ones, that can make a substantial difference to your bottom line over time. “Consider upping your contributions or looking into investment options that might offer higher growth potential,” says Taylor.
Where to put money before market crash? ›
The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.
