It’s here, we’re officially in a bear market since inflation has caused chaos on the equities markets since the start of November. Crippling inflation has experts nervous about the United States heading into a recession. During economic turmoil, most investors with a 401K will see significant swings in their retirement account.
If you have a retirement fund, do you reduce your investment, cash out or stay the course?
For younger investors, the thought process is to embrace the opportunity to continue to pad your 401K account with cheap equities. If you have a long term horizon of 5+ years before you need to return, history leans with staying invested and continuing to contribute. If anything, you get an opportunity to buy equities at a discount that will serve you well in the long run.
If you are close to retirement, it’s a different story you have more to think about. Cashing out in its entirety down 20%+ is a tough pill to swallow and likely decreasing your quality of life in retirement. If your very close to the retirement, a few suggestions on how to handle it:
Leverage Your Cash Before Withdrawing: If you can stick out the market changing it’s course, then you will be able to have more purchasing power in your non-working years. Many have very specific plans for retirement, so this may not be an option for all but if you have cash put away, drawing on your cash is an option. The typical bear market lasts around 514 days so you may need a substantial amount of cash before you withdraw early. You also should have an understanding if your retirement plan has factored that cash, if the answer is yes to then you might want to think again about this plan.
Continue Working Until Market Conditions Improve: Delaying retirement is probably something you may not want to hear, but if your portfolio is down 20%, you withdraw 4% then you’ve decreased your future retirement funds significantly.
Everyone has a unique situation in terms of their 401K. Before you make any decisions on your retirement plan, be sure to think it through and always take a worst case approach.