It's better to own broadly diversified mutual funds or index funds that track a broad basket of stocks, such as the S&P 500. The fixed-income portion of your portfolio, which consists of bonds, money markets, CDs, and other cash equivalents, will act as a downside buffer against a steep stock market decline.
Money market accounts come with an interest rate that guarantees returns, but it can change over time. A 401(k) account invests money in funds, stocks, and bonds, and returns are not guaranteed.
401(k) Rollover
The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Can You Stop Your 401(k) From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, which are safe but provide little to no return. (They may not even keep up with inflation.) This, however, is not typically advised unless you are nearing retirement.
Key takeaways
Disadvantages of money market accounts may include minimum balance requirements, monthly fees and transaction limits. Also, you might be able to find better yields with other deposit accounts.
For example, a 62-year-old with $800,000 in savings and a monthly Social Security benefit of $2,600 can reasonably expect an annual income of $63,200 in retirement. However, this figure can vary greatly depending on your individual circumstances.
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.
In terms of where you can roll a 401(k) to, the options can include: Another 401(k) or qualified retirement plan if you're changing jobs. A traditional or Roth IRA. IRA CDs or money market accounts.
Shifting more of a portfolio's allocation to bonds and cash investments may offer a sense of security for investors who are heavily invested in stocks when a period of extended volatility sets in. That can be a key component of trying to protect your 401(k) from a stock market crash.
The reality is that stocks do have market risk, but even those of you close to retirement or retired should stay invested in stocks to some degree in order to benefit from the upside over time. If you're 65, you could have two decades or more of living ahead of you and you'll want that potential boost.
In a recession, it's smart to preserve your capital by investing in safer assets, such as bonds, particularly government bonds, which can perform well during economic downturns.
Since they're a type of savings account that invests in low-risk securities, money market accounts rarely lose money. They're also insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per account type per financial institution.
The average money market rate is less than 1 percent, but you can probably do better. Let's say you put $10,000 in an account that earns a full 1% APY. After a year, your balance would earn about 100 bucks. Put that same amount in a money market account with a 4% APY, and it would gain just over $400.
Bottom line. Money market accounts are an attractive option to consider if you're seeking a savings product that earns interest, offers more withdrawal options and is insured as long as you're within federal insurance limits and guidelines.
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. How much you choose to allocate to different investments depends in part on how close you are to retirement.
If you withdraw from your 401(k) before age 59½, the money will generally be subject to both ordinary income taxes and a potential 10% early withdrawal penalty. (An early withdrawal penalty doesn't apply if you stopped working for your former employer in or after the year you reached age 55, but are not yet age 59½.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
If you're looking for the safest place to keep your money, look no further than a savings account. Your money will be insured by the FDIC, and you'll have access to it at any time via an online transfer or a debit/ATM card, depending on the policies of your bank.