Many investment options for the 401(k) retirement plan include stocks, bonds, and cash. Often, in earlier stages of employment, stocks account for most of the 401(k) investments. With proper asset allocation, the stock-bond ratio should change over the years to mitigate risks.
To make the best of a recession, continue contributing to your 401(k) plan. Make sure you have a well-diversified portfolio that includes an appropriate mix of stocks and bonds. If you aren't sure how to accomplish this, a target-date fund is a great place to start.
Your 401(k) is invested in stocks, meaning your account's value can go up or down depending on the market. If the market dropped, you could lose money in your 401(k). This is why it's essential to diversify your investments and not put all your eggs in one basket.
No investment is entirely safe, but there are five (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities) which are considered the safest investments you can own. Bank savings accounts and CDs are typically FDIC-insured. Treasury securities are government-backed notes.
When it comes to generating income, there's nothing safer or more reliable than FDIC-insured bank accounts and certificates of deposit (CD). 3 While this strategy won't produce much income when CDs and savings accounts pay 2% or even less, it can be a fine option when interest rates rise to more attractive levels.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
If you're invested in a target-date fund, your investments should already be reallocated to less risky funds, like bonds, the closer you get to 65. If you're invested in index funds or mutual funds, you'll need to move your money to safer investments yourself.
Your 401(k) can absolutely lose money. Your 401(k) funds are invested in various funds like mutual funds, index funds, and target-date funds. Because these funds are invested in the stock market, either entirely or partially, they can gain value and lose value based on the performance of the stocks they're exposed to.
In the longer term, the economic collapse would likely cause many firms to file bankruptcy in which case your 401(k) shares would essentially become worthless.
Simply put, you can't freeze a 401(k), you can only terminate it. This is because, in order to continue in effect, there have to be annual contributions. When you terminate a 401(k), employees become immediately vested in their full account balance.
Bond Funds
Federal bonds are regarded as the safest investments in the market, while municipal bonds and corporate debt offer varying degrees of risk. Low-yield bonds expose you to inflation risk, which is the danger that inflation will cause prices to rise at a rate that out-paces the returns on your investments.
The Bottom Line. Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time.
For more than 200 years, investing in real estate has been the most popular investment for millionaires to keep their money. During all these years, real estate investments have been the primary way millionaires have had of making and keeping their wealth.
Do not place all of your contributions in cash. If watching your investments decline causes you heartburn, it's better to move some money from stocks into bonds. If all, or a vast majority, of your 401(k) is invested in company stock, think carefully about this move.
Recessions typically go hand in hand with higher unemployment, and finding a new job may not happen quickly. Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts, suggests keeping 12 to 24 months of expenses in cash.
What should a 70-year-old invest in? The average 70-year-old would most likely benefit from investing in Treasury securities, dividend-paying stocks, and annuities. All of these options offer relatively low risk.
Guaranteed Retirement Accounts (GRAs) are universal, affordable, and portable accounts that provide workers with a monthly paycheck in retirement that lasts the rest of their lives.
You'll Owe Taxes and Possible Penalties
In general, you should not cash out your 401(k). Instead, roll it over into an IRA. When you calculate how much money you would lose by cashing out the account, the choice will become clear. Use an early-withdrawal calculator to help you see how much a withdrawal will cost you.
What Is the Safest 401(k) Investment? The least-risky investment in a 401(k) would be either money market funds or U.S. government bonds (known as Treasuries). However, these investments will typically offer a very low rate of return and may not keep up with inflation.
Diversify plan investments
During periods of higher prices, diversification can also help with minimizing inflationary impacts on your 401(k). For example, you may choose to allocate more of your investments to mutual funds holding stocks that rise with inflation.
If you're younger in your career
This guidance is even more important for younger 401(k) savers who still have a long way to go before retirement and therefore have time to wait out any market dips — their accounts can recover and bounce back long before they enter their nonworking years.
Investor takeaway. There are a lot of better choices than holding cash in 2022. Inflation will deteriorate the value of your savings if you decide to stash your cash in a bank account. Over the long run, you'll be better off investing now, even if expected returns are lower than they've been historically.