If you feel there is an impending crash, adjust where your money is being held in your 401K. You should have the option to put money into high quality bond funds, dividend growth stocks (that usually weather downturns quite well), or other funds that are not simply stock based.
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.
Don't “panic sell” your investments
The stock market historically has bounced back from short-term declines, so pulling your investments could mean missing out on some of the market's best days. Staying invested is usually safer than trying to time the market. Selling is how you realize losses in your account.
Any money you contribute to your 401(k), such as money contributed via payroll deduction, is money you can't lose. That employer can't take that money from you, even if you leave the company entirely. But there is another portion of your retirement plan you may not be able to claim: your vested balance.
Moving your retirement savings to ultra-conservative funds in fear of bear markets is rarely a good idea. Fund types like a money market fund or a stable value fund pro- vide minimal returns, and in most cases, inflation is greater than any return a fund of that caliber will be able to produce.
Treasuries are safe investments because they are backed by the “full faith and credit” of the US federal government. The US government has never defaulted on a debt obligation. One special category of treasury securities is Treasury Inflation-Protected Securities (TIPS). TIPS interest rates are indexed to inflation.
Your 401(k) will make money or lose money based on the strength of the stocks and mutual funds in which you invest. Your balance is likely to drop when the market drops, depending on what funds you've chosen. Since investments are not insured by the Federal Deposit Insurance Corp.
Keep Some Cash on Hand
That's the potential danger of withdrawing money early in retirement during market downturns and, thus, permanently diminishing the longevity of a retirement portfolio. By selling low, the longevity of the investor's portfolio is jeopardized.
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.
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
401(K) LOSSES FROM THE ECONOMIC CRISIS: During 2008, major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37.0 percent for the year, which translated into corresponding losses in 401(k) retirement plan assets.
“As a general rule, dipping into your retirement funds to cover a short-term need could end up costing you more in the long run,” says Walker. “If it's possible, I'd encourage you to consider other ways to access cash that could be more beneficial to your long- and short-term financial goals.”
Fixed annuities offer a guaranteed rate of return on your investment, making them a relatively low-risk option. A fixed-rate annuity can safeguard against a recession by providing a guaranteed income regardless of what the market does.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
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.
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.
You must take your first required minimum distribution for the year in which you reach age 73. However, you can delay taking the first RMD until April 1 of the following year. If you reach age 73 in 2024, you must take your first RMD by April 1, 2025, and the second RMD by Dec. 31, 2025.
If there is no designated beneficiary for a 401k, the account typically becomes part of the deceased's estate. It then goes through the probate process, where a court supervises the distribution of assets according to the will or state law if there is no will.
If you withdraw money from your 401(k) before you're 59 ½, the IRS usually assesses a 10% tax as an early distribution penalty in addition to ordinary income tax. On top of that, your withdrawal may be subject to state taxes, depending on where you live.