Don't panic about your 401(k)
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It's been an awful stretch for stock market investors who've seen trillions of dollars evaporate after the dramatic sell-off last week.
Why it matters: A majority of Americans hold stocks, including half the private sector workforce, which is saving for retirement through 401(k) investment accounts.
- The number of Americans in the stock market surged in recent years, as pandemic-era gains attracted more entrants and new laws pushed more workers into 401(k)s through auto-enrollment.
Between the lines: The stock market can get very volatile. The recent bout of upheaval has led to a lot of anxiety and questions, particularly for those who may not have experienced this kind of rollercoaster before.
- "People are scared. They're emailing me," says Justin Wolfers, an economist at the University of Michigan who regularly appears on TV news. Folks see him on air and send him a line asking what they should do with their 401(k).
The big picture: This feels bad, but it really doesn't change things for most people, says Stephen Kates, a financial analyst for Bankrate.
- "It's not fun," he says. "A lot of money was lost."
- But your perspective on the latest bout of market shock depends a lot on how close you are to retirement.
If you're five years or more away from retirement, the past few days are part of the risk of investing in the stock market, and there's no need to do much. What you shouldn't do is panic sell, Kates says.
- Ideally, folks are diversified, he notes. That means that not 100% of your money is tied up in stocks, so your returns haven't take the same hit as the headline numbers are showing.
If you're closer to retirement you might want to consider "rebalancing" your portfolio, or selling some of the bonds you hold and buying into stocks while it's cheap.
- You might want to get some advice from a financial adviser before you monkey around too much.
If you're retired, you should still be in pretty good shape. Someone who retired at the end of 2023 with $600,000 in their 401(k) would expect to withdraw about 4% of that per year, or $2,000 per month.
- If they had a standard 60/40 portfolio, they would have withdrawn $24,000 by the end of 2024, and would also have had a balance of $654,000 in their account.
- Since then, they would have continued to withdraw $2,000 every month, and their portfolio would also have declined in value. But as of the close Friday, it would still be worth $601,500, more than they started with.
How it works: Retirement accounts, by nature, are designed to be long-term investments. If you withdraw 0.3% per month for living expenses, that leaves the other 99.7% to compound over time.
- Stocks are volatile. Every retirement account will probably see a drawdown of 20% or even 30% at some point.
- That's expected. But over the long term, returns to a retirement account are nearly always positive rather than negative.
The bottom line: Don't panic.
