Tips for Protecting Your 401K During a Recession

If you’re one of the millions of people with a 401k account during tough economic times, you may have considered withdrawing funds or reducing your monthly contributions just to stay ahead of the financial game. Unfortunately, both of these strategies can work against you when you trying to maximize your funds.

Even when the Dow Jones Industrial Average drops and the economic climate is looking bleak, it is in your best interest to continue making the largest contributions possible to your 401k account and do whatever it takes to protect your investment. Here are some important tips for protecting your 401k during a recession:

1. Keep on contributing. The people who remain invested will generate the biggest returns in the long-term, according to the financial experts. Even when money is tight, make a habit of contributing as much as possible towards your 401k so that you can keep building your account. Even when the economy is experiencing a financial meltdown, you can secure your tax-free contributions and look forward to a high return on investment during your retirement.

2. Consider diversifying your portfolio. Even though you want to keep things steady during the rough economy, you also want to take the time to assess your risk tolerance and consider diversifying your portfolio for a better return. If you are comfortable with changing your lineup of accounts and investing in funds that will generate a higher return, don’t be afraid to do so. Sit down with a financial advisor and revisit your accounts to see what your options are.

3. Keep buying even when the market’s going down. One of the key principals of investing is to buy when prices are low, and during an economic recession, you can find record-low prices. If you are in a position to do so, consider investing more than usual to reap greater rewards when the market recovers. This can put you in a position to look forward to a healthier savings account that can reach up to 15% savings rates on your income.

4. Don’t cash out your entire account. One of the worst things you can do during a recession is to cash out your account entirely. If you do this before your retirement age, you will be paying high penalties and will also be paying taxes on the total value of the account. Do whatever you can to keep your account in good standing so that you don’t have to pay high penalties and fees.

5. Ask your employer for assistance. Some employers provide investment advice free of charge to their employees. Get some professional advice for managing your account so that you can earn the highest possible annual returns.

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Understanding 401k Asset Allocation

When you have a company-sponsored 401k plan, you have several options for asset allocation, a process that divides your money between different asset classes to help you get the highest return. The most conservative approach to managing your 401k plan is to invest in a Treasury bill or bond, or any other type of investment that is guaranteed by the United States government.

A less conservative approach is to invest in international stock funds or by investing in companies that are headquartered outside of the United States, because these types of investments typically carry more risk. Here’s a close look at the risks and rewards associated with various types of asset allocation classes and categories:

International Stock Funds

This is considered to be the highest risk of all asset class categories, but also has the highest rewards. These types of investments usually experience more volatility but do have a higher potential for high return than other investment options, especially those that are based in the United States.

Small or Mid-Cap Stock Funds

These types of fund are invested in U.S.-based companies and have market caps between $300 million and $10 billion. These types of investments also typically carry a higher degree of risk and return, and may be an attractive addition to your portfolio.

Large-Cap Stock Funds

If you are investing in U.S. based companies that have market caps above $10 billion, you may be positioning yourself to receive a high rate of return on your investment. However, these types of investments also carry a higher degree or risk.

Bond Funds

If you are investing in loans made to companies or government entities, you may be investing in accounts where values fluctuate over time, but generally provide a steady rate on your return. These types of investments typically do carry more risk than their cash equivalents, but usually less than equity accounts.

Short-Term Fixed Income

This type of asset class includes Certificates of Deposits (CDs), Treasury Bills and Money Market instruments. These are the least risky of all investments, and generally provide a very low yield on investment. Most people with limited funds or little experience in investing will focus on these types of investments.

If you are looking for a more aggressive asset allocation, you may consider investing over half of your 401k in large cap stock funds, and approximately a quarter in small or mid cap stock funds. Over ten years, you could potentially generate a very high return on your investments. A more conservative asset allocation would be a 40 percent investment of cash and short-term fixed income, and investing about 25 percent of your 401k in bonds.

Tags: 401k advice, 401k tips, retirement plans