Protecting your retirement savings from a stock market crash | Kohrman Jackson & Krantz LLP

Markets have been choppy for months, making investors nervous with good reason. Already this year, the stock market has plummeted and wiped out more than $3 trillion in retirement savings. Alicia Munnell, director of the Center for Retirement Research at Boston College, calculated that 401(k) participants have lost about $1.4 trillion from their accounts since the end of last year. Additionally, people with IRAs that are mostly 401(k) rollovers have lost an estimated $2 trillion this year.

This market downturn is the most severe since March 2020, when the Covid-19 pandemic began. Typically, 401(k) investments take two years after such a market decline to recoup those losses. The fall in the markets reflects investors’ worries about inflation and the growing risks of recession. However, many Wall Street professionals believe last year’s surge was a bubble and investors were looking for a place to park fresh cash. Maybe these losses are just erasing the gains that happened from 2020 to 2021 and people aren’t actually worse off than they were before the pandemic? But when investors see an increase, it is permanent for them and makes losses painful.

IS IT POSSIBLE TO PROTECT YOUR 401(K) FROM MARKET VOLATILITY?

It is possible to prepare for market declines in advance. Just like gambling your money, investing your money in the stock market or any other investment can be risky. Often retirement decision making is emotional and even with informed decisions, we cannot always predict the outcome.

However, there are many strategies for mitigating risk – both simple and complex strategies. You should treat your retirement savings the same as short-term expenses like medical bills and long-term expenses like your mortgage. This means that you must continue to contribute in your retirement to ensure that the funds continue to grow over time.

In addition, it is important to diversify assets across different types of investments and market sectors and avoid maintaining concentrated investment positions. Maintaining the right asset allocation is necessary to protect your 401(k) from a crash and to maximize returns. Asset allocation should depend on your age and when you plan to retire. The more time you have before retirement, the more time you have to recover from market dips and even crashes. Financial advisors specialize in asset allocation to include a holistic approach that includes goals, risk tolerance and time to retirement.

ABSTAIN FROM EARLY WITHDRAWAL

Never panic and withdraw money too soon during an economic downturn. Withdrawing money earlier from a 401(k) will result in IRS Tax Penalties. Even if you are approaching retirement age, the market could rebound sooner than expected. Nervous investors who took money out of the market in March 2020 missed the bull market which followed with highs in November 2020.

Plus, choose the right accounts for your money. Retirement accounts are popular because they offer tax advantages that taxable brokerage accounts do not. You get tax relief every year if you contribute to a 402(k) or a traditional IRA. You will pay taxes on withdrawals; however, you can choose a Roth IRA that won’t give you a tax advantage for contributions, but retirement withdrawals are tax-free. Also, don’t put money in a retirement account if you plan to spend that money until you’re 59½. The IRS imposes a 10% early withdrawal penalty in most situations. If you want to receive distributions before age 59½, you can convert your account to a Roth IRA. You’ll avoid required minimum distributions (RMDs) and income taxes, but you’ll pay taxes on the amount you convert that year. For tax planning, you can decide at the end of the year whether or not to convert to a Roth IRA and you can also plan to spread your Roth IRA conversations over several years to help minimize taxes.

ALWAYS HAVE A PLAN

Finally, be sure to plan for what will happen if you become disabled or die. It is important to have durable financial power of attorney documents in place to ensure that someone you trust can make these important decisions on your behalf if you are no longer able to do so. Additionally, there are steps you can take to avoid probate when you’ve died, including naming beneficiaries on accounts and creating trusts to hold assets and control what happens to assets when you’re gone.