Why Is My 401k Losing Money and What You Can Do About It?

Why Is My 401k Losing Money and What You Can Do About It?

A bull and a bear are fighting in an area.

Can you guess which animal wins the fight?

bull vs bear

In traditional fights between grizzly bears and bulls, the bears usually won due to their dexterity.

Nowadays, these two animals have come to symbolize the stock market.

In a bullish market, everyone is happy, 401ks are growing, and life is good.

But in a bearish market, as we are currently experiencing, everything seems to be going downhill.

With market volatility, investors may start to wonder: why is my 401k losing money?

In this article, I’ll look at why 401k accounts may lose value and what investors can do to help protect their retirement savings.

Do 401(k)s Lose Money?

As any decent financial planner will tell you, there is no guaranteed rate of return on investment.

This means that, yes, at times, your 401k may lose money.

Awareness of the factors that can lead to a decline in your 401k and having a plan in place can help lessen the impact of market volatility on your retirement savings.

Main Reasons 401(k)s Lose Money

Here are the primary reasons why 401ks may lose money.

Stock Market Crashes

The main reason why 401ks lose money is due to stock market crashes.

When the stock market goes down, the value of 401k accounts usually follows suit.

Paying Too Many Fees

Having something eating into your account balance can impact the overall value of your 401k.

You must ensure you’re paying what you need to.

Lack Of Diversity In Your Portfolio

As far as your investment strategy goes, having a diversified portfolio is essential.

This means investing in various assets, including stocks, bonds, and cash.

Taking Loans Or Withdrawals From Your 401(k) Account

With fees associated with loans and withdrawals, taking money out of your 401k can impact the overall balance of your account.

It’s essential to consider the long-term effects of taking a loan or withdrawing from your 401k before doing so.

How To Stop 401(K)S From Losing Money

While you can’t control a market decline, various decision-making factors are in your hands.

Here are a few things you can do to help prevent your 401k from losing money.

Roll Them Over Into An IRA

Your 401k can be rolled into proper retirement assets known as an individual retirement account (IRA).

This will mitigate risk and ensure your money is invested in a way that best suits your retirement goals.

With precious metals and gold IRA companies being popular options, doing the right company research before rolling over your 401k is critical.

Roll The Old 401(k) Into An IRA Fixed Index Annuity

Your retirement accounts can also consist of fixed index annuities (FIA).

These annuities offer you the potential to earn interest based on changes in an underlying market index but with a guaranteed floor, so you can keep your principal investment.

Consolidate Your Accounts

Depending on your risk tolerance, having an investment portfolio comprised of different asset classes can help you weather the ups and downs of the market.

For example, having fixed-income investments can help offset some of the losses experienced in equities during a market downturn.

Consider Investing In A Target Date Fund

Target date funds are index funds that automatically adjust their asset allocation as you get closer to retirement.

This allows you to participate in market gains while still having some downside protection.

With target-date funds, you don’t have to worry about rebalancing your portfolio as you approach retirement.

Take Advantage Of Dollar-Cost Averaging

Part of your retirement plan should include an evaluation of your current financial situation and whether dollar-cost averaging is still your best strategy.

This refers to investing a fixed sum of money at fixed intervals, regardless of the market conditions.

The dollar-cost average can also help your expense ratio to stay low, as you’re buying fewer shares when the market is high and more when the market is down.

Keep Things In Perspective

While short-term fluctuations in bear markets are expected, looking at everything through the long-term lens can help reduce stress and keep you focused on your goals.

Your savings account and your 401k are both investment vehicles that can suffer from volatility in the short term.

With downturns in the market, it’s important to remember that this is a normal part of the investing cycle and not to make any rash decisions with your money.

Your financial goals should be based on something other than what’s happening in the market today.

Retirement savings need to focus on the long term, so you shouldn’t panic if there are temporary setbacks.

Apply Risk Management Techniques

Actively managed funds taken care of by either professionals or top-of-the-line asset management software can help you weather the storm during a market downturn.

When nearing retirement age, it’s key to focus on preserving your capital.

With expert help, you can ensure your risk is mitigated and your portfolio is aligned with your retirement goals.

Get A Tax Deduction

There are also investment options that can help you get a tax deduction.

This might not always work out in your favor, as interest rates and inflation can affect your returns.

Knowing what specific interest rates and terms apply to your investments is crucial.

Moreover, staying up-to-date on changes helps you make informed decisions about your money.

What To Do If Your Company Goes Bankrupt

In market downturns, company stock movement might affect your nest egg as your account balance and personal finance turn for the worse.

As mentioned earlier, asset allocation and diversification play a huge role in mitigating risk.

With employer-sponsored retirement plans, you might have less control over your investments.

However, there are still things you can do to protect your savings:

  • Consolidate your accounts: Different investment accounts can help you weather the ups and downs of the market. For example, having fixed-income investments can help offset some of the losses experienced in equities during a market crash.
  • Review your asset allocation: Ensuring your portfolio is diversified correctly is crucial in protecting your retirement savings. Reviewing your asset allocation can help ensure you are not taking too much risk.
  • Stay disciplined with your investing: It can be tempting to sell off investments when the market is crashing. However, this often leads to selling low and buying high, which can hurt your long-term returns. Instead, stay disciplined with your investment strategy and refrain from making rash decisions.
  • Consider using stop-loss orders: Stop-loss orders can help limit your losses by automatically selling an investment when it reaches a specific price. This can help prevent you from selling an asset at a loss and can help you weather short-term market volatility.

Why Is My 401k Losing Money – FAQ

What Type Of Emergency Fund Should I Have?

The best type of emergency fund is one that you can easily access in case of an unexpected event, such as a job loss or medical emergency.

A good option is to keep a portion of your savings in a high-yield savings account or short-term certificate of deposit (CD).

This way, you’ll earn some interest on your money while still having it readily available if you need it.

Are Bond Funds A Good Investment For Retirement?

Bond funds can be a good option for retirement investing since they typically offer stability and regular income payments.

However, it’s important to remember that bond prices can fluctuate, so there is a potential loss if you sell during a down market.

Additionally, bond fund managers may charge fees, which can eat into your investment returns.

Do American Retirement Savings Compare Favorably With Other Countries?

Overall, American retirement savings fall short when compared to other developed countries.

One reason is that many Americans (as many as 48% of those aged 18-64) do not have access to employer-sponsored retirement plans, such as a 401(k).

As a result, many Americans rely heavily on personal savings and investments to fund their retirement years.

This can make it challenging to save enough money to retire comfortably.

What Is A Roth IRA?

A Roth IRA is a retirement account that allows you to make after-tax contributions and withdraw the money tax-free in retirement.

Roth IRAs are popular because they offer tax-free growth and income, which can be especially beneficial if you expect to be in a higher tax bracket in retirement.

However, some eligibility requirements exist for contributing to a Roth IRA, so checking whether you qualify before opening an account is essential.

Is An ETF A Good Investment For Retirement?

Exchange-traded funds (ETFs) can be a good option for retirement investing because they offer a diversified portfolio in a single investment.

Additionally, ETFs typically have lower fees than mutual funds, which can help you keep more investment returns.

However, it’s important to remember that ETFs can fluctuate in value, so there is a potential loss if you sell during a down market.

Wrap Up.

Everyone wants to be prepared for retirement.

We want to have enough money saved so we can comfortably enjoy our golden years.

However, many of us are falling short regarding retirement savings.

The above is not the advice of a financial advisor and, therefore, should not be taken as such.

However, I’ll leave you with this.

Researching retirement savings and investing is an excellent first step in ensuring you are prepared for the years to come.

Further reading on AdamEnfroy.com: The dollar is currently losing value, and there is no immediate end to the decline.

Knowing what to do when the dollar collapses is critical for anyone who wants to protect their wealth and their standard of living.

Finally, with various investment apps available today, knowing which ones can help you weather the storm is critical for anyone with their self-interest at heart.

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