So Your 401(k) Has Taken a Hit: What You Should Do Right Now

• Author: Monica Jackson
• Posted: 2024-05-26

Ever since the WWII era, employer-funded pensions have gradually gone into obsolescence in favor of 401(k) plans. Unlike pensions, it is the employee's responsibility to fund these pre-taxed accounts, often with a match up to a certain percentage by the employer.

However, the rapid shuttering of businesses throughout the country as COVID-19 continues to spread has caused many stocks to plummet. While some are hit harder than others, stocks in the hospitality and tourism industries have by far suffered the most. Many investors are immediately tempted to sell these stocks that hit an all-time low since 1990 before surging back up a bit in response to some optimism about a nationwide bailout plan.

Here are some critical factors to consider before you sell off those stocks within your 401(k). Remember, the Great Depression of 1929 was caused by precisely this: economic fear driving mass stock sales.

Age Matters

The rule of thumb is that one's investment strategy should become increasingly conservative as he or she approaches retirement age. Within the ten years before retirement, your portfolio should be mostly low-risk, low-yield investments. The reason for this has been exemplified by the current economic crisis. It's difficult to predict when a big crash like this will occur.

If you are someone younger than 40, there are few scenarios where selling off your low stocks would pay off. Even if these stocks remain dwindling for a decade, they will likely go up in value once the Coronavirus crisis has been solved. Panic-selling could essentially destroy your retirement plans for no good reason, and it doesn't make sense at these ages. Even if your portfolio looks like it's worth 10% of what it was a month ago, don't worry. Remember that taking money out of a 401(k) right now is sort of like selling your car for 10% of its value.

For Those Approaching Retirement

If you're between 40 and 50 years old, your strategy should be based on individual needs. However, most in this age group don't expect to retire until their mid-60s at least, giving plenty of time for a rebound. This is the age group that has been noted to be selling their stocks off in a panic at the moment. Unless you need to withdraw money from your 401(k), such as a hardship withdrawal as defined by the IRS, you should avoid doing so.

For those over 50 and under 60, it's time to look at your investment portfolio. You will likely benefit from consulting a personal finance professional on this, but there's almost no case where your account manager should have been investing most of your money in stocks. If you're only invested in mutual funds, just allow the wheels of the system to turn. However, if you had an "aggressive" strategy, you may need to consider selling stocks that are unlikely to return to normalcy before you turn 65.

Taking an in-depth look at a 401(k) portfolio is most critical for those who have hit 60. Yes, it can be tempting to not even look at your current portfolio, but it's critical for your best chances of retirement. Many feel they have been decimated if most of their investments were in stock. There are many ways around just selling stock outright; however, you'll need to talk to a financial professional to get this done.

The Bottom Line

Whatever decision you ultimately make should be based solely on facts and projections by qualified professionals. If you aren't facing retirement age very soon, the best action may very well be no action at all. Regardless, every person who has a 401(k) or IRA or similar account should look at their portfolios and watch for correspondence from the companies managing them.

Remember that the last thing you need to do is sell off stocks while they are still at record lows. Unless you are literally planning on retiring tomorrow, a plan that may need some re-evaluation, you should immediately send correspondence to either your account manager or the company through which you manage your retirement money. They will understand the importance of your retirement finances, will give you only factual information, and ultimately help determine what the best course is that is most likely to meet your financial goals with the current situation.