A struggling economy can have both instant and longterm consequences. When the economy is suffering, consumers tend to spend less in the short term while making financial decisions that affect them over the long haul.
One of the biggest quandaries men and women face during a recession or economic downturn is how to approach their retirement accounts, most notably a 401(k). When the economy begins to struggle, men and women may notice their 401(k) plans are struggling right along with it, losing money that most were counting for their retirements. This can induce a certain degree of panic, as account holders worry about their financial futures and how they are going to get by should the recession last and their retirement accounts continue to shrink.
But such panic might be unwarranted. According to the investment management firm Vanguard, participant saving and investing behavior had returned to prerecession levels by 2010, and participant account balances actually rose 13 percent between 2005-2010, despite the considerable market shock that occurred during the recession of 2008-2009. Those figures illustrate that even during a particularly bad economic swoon investors will return to their typical behavior sooner rather than later. Therefore it pays to avoid overreacting at the onset of a downturn and maintain your peace of mind.
While some people manage to maintain a cool head during times of economic struggles, others may lose sleep when the next recession or downturn rears its ugly head. To avoid succumbing to such stress, consider the following tips to protect your retirement accounts should the economy once again take a turn for the worse.
• Pay attention to your portfolio. Young people just beginning their professional careers are often told to enroll in a 401(k) program as soon as possible, but to avoid making any changes in the near future once the account has been set up. While no investors, young or old, should allow a knee-jerk reaction after a bad financial quarter to dictate how they manage their retirement accounts, that doesn’t mean you should ignore an account entirely. Pay attention to your portfolio, examining it at least once per year so you can make adjustments to your investments if need be. Just don’t allow a sudden reaction to a bad quarter dictate these adjustments, which should only be made after a careful examination of your retirement account’s portfolio and its performance. If you’re happy with the performance, don’t change a thing.
• Reduce your risk as you age. Financial experts can often predict when the economy will thrive and when it will struggle. But unless you are such an expert, avoid playing with fire. As you age, reduce your risk with regard to your investments. Young people can afford to take on more risk because they have more time to make up for a risk that doesn’t work out. Men and women age 50 and older have no such luxury and should reconfigure their retirement accounts as they age so their investments are less risky and more conservative. This strategy should be put to use even if you lost a substantial amount of money during a previous recession or downturn. It might be tempting to try to make up for lost money, but that strategy carries considerable risk, and you might end up depleting your retirement savings a second time.
• Spread the money around. When contributing to a retirement account such as a 401(k), the standard is to deposit 6 percent of each paycheck into that account. If you’re depositing more than 6 percent into your retirement account, consider decreasing your retirement contribution to the standard amount and depositing the extra money into a high-interest savings account. The savings account won’t put your deposits at risk, and if the economy is faring well, you will still be doing well with your 401(k) while ensuring some of your money won’t suffer should the economy suddenly take a turn for the worse.
• Don’t cash out too early. When the economy struggles, many investors have discovered they simply don’t have the stomach for investing. That’s perfectly understandable with certain investments, but a retirement account should not be one of them. Cashing out a retirement account too early could incur substantial penalties that, if your retirement account was affected poorly by a bad year, may only further deplete an account you likely spent years building. Avoid the temptation to cash out early if your retirement account is struggling. It’s often not worth the steep price.
Investors age 50 and older should begin to reduce the risks associated with their retirement accounts, choosing more stable investments as they age.