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5 Ways to Protect Your 401(k) During Recession

401(k) is the ideal way to building a retirement fund. Optimize it for maximum returns and reduced risks from market volatility. . zapp2photo/stock.adobe.com

401(k) is the largest investment vehicle for a majority of US households and is deemed as the ideal way to build your egg nest. You must've observed how your 401(k) asset value decreased over the past months due to the market crash. The grim situation has compelled many to withdraw from their 401(k) funds, affecting their retirement goals.

We tend to get emotionally swayed watching our life-long savings shrink due to market volatility, often forgetting the age-old rule that you don't lose money if you don't sell. Retirement planning is all about patience and not getting jolted every time the market nose-dives. Your money stays invested for decades and events like the current pandemic shouldn't get you shaky. The market trend is a cycle and has always seen a positive trend over the decades.

But, have you ever wondered how your 401(k) funds are invested, and the ways to protect it against recession? Did you know that artificial intelligence can save you thousands of dollars on investment fees? Before we delve into it further, here's a snapshot of why 401(k) is so important for you.

  • 401(k) funds are not subjected to tax until withdrawn.
  • You can take a hardship loan of 50% with the maximum amount being $50,000.
  • You repay loans with interest that gets added to your funds.
  • The power of compounding can give you high returns.
  • Flexibility to customize your funds.
  • You can start withdrawing without any penalties as early as 59 ½, unlike Social Security.

The pandemic has threatened the retirement security of millions, and the under-preparedness has forced us to take a hard look at our finances. Most of us aren't aware of the small details, when tweaked, can safeguard your 401(k) assets, and maximize returns.

Diversify Your 401(k) Funds

diversify retirement funds
Diversification will fortify your 401(k) funds against market crashes. Always put your eggs in different baskets. Pichsakul/stock.adobe.com

Many have heard about how diversifying investments can protect your assets from recessions and ensure steady growth. Well, this is Investment 101 for all.

Your employer makes the 401(k) investments on your behalf but not in your best interests. Understanding your budget, risk-tolerance, and goals are essential before you invest in a fund. If you have 30 years to retirement, an aggressive portfolio with a focus on equity can be favorable. Investing in a mix of stocks and bonds spreads out the risks and creates a buffer against market crashes.

Fundamental knowledge of 401(k) mutual funds can safely help you create a balanced portfolio in alignment with your goals.

Avoid High Investment Fees

Experts believe that an individual can save thousands of dollars by investing in the right funds. Each fund in your 401(k) comes with an investment fee, which if not taken care of can grow with your portfolio over time.

Also, there are online services, which offer to invest for you but charge a small percentage of your portfolio. The problem here is that their fees grow with your portfolio too, even if you are not using extra services. Let's paint a picture of how much you can save on investment fees:

Consider a scenario where an individual is 20 years from retirement with a current 401(k) balance of $20,000, and make annual contributions of $5,000. With an expense ratio of 0.75, you can approximately save around $29,898 on investment fees!

The expense ratio is the investment fee for each fund, calculated as a percentage of your total assets.

Rebalance Your Funds Frequently

Optimize 401k funds
Frequent rebalancing keeps your funds within budget allocation for steady growth. xyz+/stock.adobe.com

This is a proven technique to keep your investments within the original investment allocations and is recommended at least once a year.

Rebalancing involves buying and selling shares to balance out the allocation percentages for each genre of stock. A simple example would be to sell a particular stock that grew in value and use that liquid money to buy more of a stock that saw a decline. Regular investors use this strategy of "selling high and buying low" for steady growth.

Early Withdrawal Should be the Last Resort

Though the CARES Act is allowing people to take hardship loans from their 401(k) without the usual 10% penalty charge, we suggest that you keep the 401(k) intact unless absolutely necessary. As with every loan, withdrawals from 401(k) require you to pay back the amount with interest. Also, you lose out on the power of compounding interest that can affect your long-term goals.

Increase Your Contribution With Pay Hikes

You have a goal in mind and know the exact steps to build a solid 401(k) account. But if you want faster growth, try to increase your contributions with pay hikes from your company. This requires financial discipline but works best when done carefully. The average 401(k) value is just above $100,000, which is approximately the nursing home cost for seniors. This is worrying!

robo-advisor for 401k
Use a Robo-advisor powered by AI to select the right funds for your 401(k) account. sdecoret/stock.adobe.com

In case you think this is a lot to handle or if you can't afford the services of a financial advisor, you can check out the only Robo-advisor that will tend to your 401(k) account. The Kansas-based firm called Blooom, founded by fiduciary advisors uses artificial intelligence to fine-tune your 401(k) account. They also handle other retirement accounts like IRA, 401(a), 403(b), 457, and TSP.

Blooom deploys AI bots to rebalance your funds, invest in low-fee funds to avoid high investment fees, and diversify your portfolio within the budget allocation. Being a fiduciary, they are legally bound to work in your best interest. They are handling over $3 billion in assets.

The Standard subscription comes with all these features and virtual access to a fiduciary advisor for any finance-related questions at $10 a month. Usually, an in-house financial advisor can charge you above $2,000 for creating a complete financial plan.

All information exchange such as linking your 401(k) account occurs through a secure channel with 256-bit encryption and bank-level protection.

If you find this interesting, try out their free analysis that'll paint a clear picture of how your ideal 401(k) account can look like with the right funds.

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