A 401(k) plan allows United States workers to save for retirement. The greatest benefit of these retirement plans is deferred income tax. Until the money is withdrawn, it is not considered taxable income.
Since 401(k) plans are usually composed of money market investments, stocks, and bonds, there is some risk involved. In 2008, the stock market took a dive. Many hardworking Americans saw their retirement savings decreases, some at an alarming rate. If you were one of those individuals, you may wonder what to do. Should you change your investment strategy? Should you move your stocks around? Honestly, it all depends who you ask
Turn on the television or the radio and listen to an “expert,” in the field of money management and investing. Some experts claim you should move your investments around while others say the stock market has nowhere to go but up. That will however, take time. By pulling out of your investments or making the switch from stocks to money market accounts or bonds, you lose money. Stocks are nearing all-time lows. You paid more than their current value. Pullout now and you lose money.
For most individuals, it is best to ride out the storm. As previously stated, many financial experts expect the economy and the stock market to bounce back. This has happened in the past. It may take five years before it is fully back on its feet, but it will happen. If you are in your 20s, 30s, or 40s, you can weather this storm. The stock market will improve before you need to retire. The stocks you invested in should increase. Depending on when you need to retire, you may not make a lot of money, but at least you will recuperate your current losses.
Although it is a good idea to wait and ride out the poor economy, this is not advised in some instances. If you are in your late or early 50s, did you originally opt for stocks and then forgot to make the switch? You may retire in 5 years or less. As previously stated, the economy may bounce back in five years, but there are no guarantees. It may take longer. Don’t pull out of all your stocks, but start making the switch to low risk investments, like bonds or money market accounts. Of course, you don’t want to take a loss, but now it is important to focus on retirement and the money you do have. Save it and protect it.
Many individuals are concerned with their retirement savings and rightfully so. Although it is best to ignore the financial news, especially if you intend to wait it out, don’t ignore obvious problems. This is important if you are invested in the retail industry, restaurant industry, and auto industry. These companies are suffering right now. Some may not last long enough to survive the upturn. It is hard to gauge internet postings online. Some are nothing more than rumors. With that said, always research the stocks you invested in. Do you hear rumblings online that the company may go under? If that company collapses and you are invested in their stock, you lose your money. You won’t have the chance to recuperate it. Consider getting out while you still can.
In short, when it comes to riding out the stock market, your 401k choice should depend on a number of factors. They are your age, the risks you want to take, and the long-term strength of the companies you invested in.