Make Ends Meet: Handling a 401(k) in a bear market

Make Ends Meet: Handling a 401(k) in a bear market
Published: Nov. 14, 2022 at 8:47 PM EST
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LOUISVILLE, Ky. (WAVE) - Many are looking forward to retirement, but how many have properly prepared for it?

People who have a 401(k) may already know we are officially in a bear market.

When people talk about their hard-earned cash, emotions come into play. Often fear and panic also get mixed into the conversation.

Everyone knows people can run the risk of losing money in the stock market. Stocks go up and stocks go down.

The stock market is simply going through a down period right now, and that hurts, especially when it’s personal investments that are plummeting.

“The economy it ebbs and flows,” financial advisor Marcus Warren said.

Warren is the founder and CEO of Warren Wealth Management and Tax Planning Inc. For almost two decades, he’s been helping people come up with strategies for building wealth and managing financial risk.

Right now, experts say the health of the U.S. economy is suffering from high inflation, tight labor markets and the lingering effects of the COVID-19 pandemic.

“We do have inflation at 40-year highs, interest rates are going up, and the market is down; so it’s this trifecta if you will of a perfect storm that has a lot of people concerned and worried,” Warren said.

Many are concerned, worried and wondering what the current economic climate will mean for their investments and their 401(k).

Some advice is only check a 401(k), one to two times a year if comfortable with what’s been selected. Someone who is nearing retirement, the game is different.

“We’re officially in a bear market, and that basically means that the market is down more than 20% from its high,” Warren said.

It can be stressful or downright alarming to watch helplessly as your portfolio slowly declines in value.

There’s not much a person can do about either the stock market or the economy, but they can try to make adjustments when they can.

“When you find yourself in a down market and you’re not close to retirement, you should just hold tight,” Warren said.

The stock market has proven it will bounce back eventually. Warren believes the most important thing an investor can do during a bear market is to wait it out if they are not retired or close to retirement.

Also, don’t focus on daily declines but on long-term goals.

“For those who have a longer time horizon, basically, don’t make any changes,” Warren said. “Keep on doing what you’re doing because it should pay off in the end.”

If retirement is in the near future, changes to a 401(k) plan should be made as soon as possible.

“If you find yourself in this turbulent market close to retirement and losing money, then you might want to make some reallocation changes,” Warren said.

As someone gets closer to retirement, they should be shifting their portfolio toward more conservative investments. Those funds will have less growth potential, but they will also be less volatile.

“Do most people know what investments they have and unfortunately the answer is ‘no,’” Warren said. “That’s why as people get closer to retirement, they should be taking a lot of that risk off the table. You just can’t afford to go into retirement with less money.”

Withdrawing money early from a 401(k) can result in hefty IRS tax penalties. In the long run it’s probably not worth it.

Once a person turns 59 1/2, they can withdraw any amount from their 401(k) without paying a penalty. Consider talking to a financial advisor about investment strategies and protecting a 401(k) especially near retirement.

Also, as a person nears retirement, shift to safer more conservative investments. Until then, stay the course, what goes down comes back up.