My 401(k) is Back to Pre-recession Levels – Now What?

Workplace savings plans such as 401(k)s and 403(b)s, have become a popular way to set money aside for retirement. As individuals carry more responsibility for their financial security in retirement, paying close attention to how that money is invested is particularly important as retirement draws closer. 

Workplace savings plans have received some criticism in recent years given that many individuals suffered significant losses in the two dramatic market downturns that occurred between 2000 and 2009. But since then, many retirement savers have seen their portfolios bounce back, fueled by the stock market’s recovery. Of course, your own experience may be different, but hopefully the state of your workplace savings plan is better today than it was just a few years ago. Yet many remain cautious about becoming too invested in the stock market. 

Think long term

Even if retirement is close at hand and you’re tempted to make big changes to your investment portfolio, workplace savings dollars should be managed with the long-term future in mind. Retirement is not, in reality, a single goal, but a series of goals. You aren’t using all of your savings in the first year of retirement, but actually funding many years of income needs after you leave the workforce. No matter what stage of retirement planning you consider yourself to be in, here are some things to consider as you watch the amount in your 401(k) fluctuate: 

5 or more years from retirement

Consider keeping your money actively positioned in a well-diversified portfolio, consistent with your long-term objectives and risk tolerance. There is time to overcome short-term market fluctuations, so it may make sense to put your money in market based investments that can vary in value. While past performance is not a guarantee of future returns, historically, assets like these have generated returns that outpace the rise in the cost of living. Other investment alternatives can play a beneficial but modest role in any portfolio mix. Avoid excessive risk that can occur by putting too much money into a single investment, such as company stock, a hot mutual fund or highly promoted investment. 

Most important is to keep adding to your retirement plans and contributing to a savings account for emergency expenses. Those who are 50 or older can make “catch-up” contributions to workplace retirement plans. That means their annual contributions can be higher than what is allowed for younger savers. 

5 years prior to retirement up to retirement

This may be one of the most sensitive times for retirement savers. By this point, you are ideally on track to achieve your retirement goals without taking undue risks. In most cases, a portfolio should remain actively invested, but it may make sense to scale back more aggressive positions in your asset mix. This could mean modestly reducing exposure to equity markets, for example. But most investors can’t afford to completely refrain from investing in assets like stocks and bonds. Two-to-three or more decades of retirement may lie ahead, so your money should be positioned to grow to keep pace with inflation over that time. This is also the last opportunity to invest more money in a workplace plan, providing a final boost to your financial security in retirement. 

Retirement and beyond

There are advantages and disadvantages to keeping your investments in your workplace plan after you retire. If it’s right for you, money from workplace plans can be rolled to an IRA, and retirement distributions can be managed from a primary account. 

Too many investors make the mistake of moving all of their money out of the market when they reach retirement, but it’s important to continue to find ways to leverage the growth potential of the market but with increasing consideration to how to preserve what you’ve accumulated over the years. This strategy allows a percentage of your savings to continue to grow. Such growth is critical because the nest egg you’ve accumulated will ideally generate an increasing stream of income over time to keep pace with the rising cost of living. 

The investment environment of recent years has given those heading into retirement reason to be more protective of their hard-earned dollars. But remember that even when you reach retirement, you still need to invest with a long-term perspective in mind to protect your financial security throughout the entirety of your years in retirement. 

Rob Davis lives in University Place with his wife Lorri and sons Wesley and Parker.  He is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Tacoma, Washington.  Rob specializes in fee-based financial planning and asset management strategies and has been in practice for 35 years.  He is licensed/registered to do business with U.S. residents only in the states of Washington, Idaho and Arizona.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. 

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