If you are like most participants in 401(k) retirement plans, you may be making plans to work another five years or more beyond when you want to retire.
A stock market collapse or significant downturn can crush these popular retirement plans down to half their former sized in some cases.
Is there a way you can resuscitate your 401(k) in a reasonable amount of time (hopefully before you want to retire)?
The answer is maybe.
There are actually three versions of the answer depending on how many years you have before retirement.
Answer One: For People Under the Age of 50The farther you are away from retirement, the easier it may be to get your 401(k) back on track.
The most important steps include:
- Stay in the plan, especially if your employer offers to match some part of your contribution.
- Avoid borrowing from your 401(k) except in a real financial emergency. An emergency is if you are going to default on your mortgage or a severe health issue. A new car is not an emergency.
Younger 401(k) participants should have most of their investment in stocks. Your best chance for gains that will help rebuild your 401(k) is with stocks.
However, your 401(k) shouldn’t be your only savings plan. Keep a six-month (three-month for dual income households) supply of cash to cover living expenses if you lose your job.
Answer Two: For People Age 50 to Retirement Age
People in this age range have fewer years to rebuild their retirement plans.
However, it can be done if you hit a good market streak.
You should keep the majority (75 percent or so) of your 401(k) in stocks. The best percentage for you should consider your tolerance for risk and whether you are 53 or 63.
We are likely to face a period of high inflation in the future and stocks fair better than most other investments in this climate.
The closer you are to retirement, the more conservative you’ll want to be. This may mean shifting some or most of your assets out of stocks and into bonds or cash.
Answer Three: For People in or Very Near Retirement
People in this age bracket have been hurt the most by the stock meltdown. They have little or no time for their 401(k) to rebound.
Depending on other sources of retirement savings, you should consider keeping a portion of your retirement plan in stocks.
Again, stocks can be a good hedge against inflation.
However, with little or no time left at your peak earning capacity, your most important goal is preserving what you have left in your retirement account.
This may mean taking cash out of stocks and bonds (except for Treasury issues) and putting it in bank or money market accounts.
The reality for many people at retirement is they will need to continue working or find part-time work after retirement.
It’s a bitter pill, but one you must swallow and move forward.
Articles on Investing for Retirement in this Series
Tough Choices for Stock Investors Facing Retirement
What to Do If You Lose Your 401(k) Match
Can Your 401(k) Be Resurrected?
Investing to Avoid the Longevity Risk
Time to Re-Think Role of Stocks in Retirement
Don't be too Conservative with Stocks in Retirement
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