Stay Calm About Your 401(k) Amid Market Volatility

Recent turmoil in the stock market has sent shockwaves through investor portfolios, with trillions of dollars wiped out during a dramatic sell-off last week, Axios reports.

This has caused a surge in anxiety, especially for those with 401(k) retirement accounts, many of whom have seen the value of their investments decline.

Why it matters: A large number of Americans, including half of the private sector workforce, have money invested in the stock market through their 401(k)s. As the number of stock market investors has risen, especially in the wake of the pandemic, more workers have been saving for retirement in these accounts. In fact, new laws and auto-enrollment provisions have pushed many individuals to invest in their 401(k)s who may not have otherwise done so.

The reality is that the stock market can be highly volatile, and the recent market downturn has left many asking whether they should take action with their 401(k) investments. Some individuals are reaching out for advice on what to do next, feeling unsettled by the market’s swings.

While this situation is understandably unsettling, experts caution against making rash decisions.

“It’s not fun, and a lot of money was lost, but for most people, the current market turmoil doesn’t change the long-term outlook,” says Stephen Kates, a financial analyst at Bankrate.

The impact of market volatility is largely dependent on how far away you are from retirement.

For those still several years from retirement, the recent market dip is simply a part of the inherent risk of investing in stocks, and experts recommend sticking to your investment strategy. One of the biggest mistakes to avoid is panic selling. Selling investments in a downturn often locks in losses and misses the opportunity for the market to rebound over time. Diversification, which ensures your money isn’t entirely reliant on stocks, can help cushion the blow when the market fluctuates.

For those closer to retirement, it may be a good idea to consider rebalancing your portfolio. This could involve shifting some funds from bonds into stocks while prices are low. However, this kind of adjustment should be done thoughtfully, ideally with the guidance of a financial advisor.

Even for those who have already retired, the situation is not as dire as it may seem. For example, someone who retired in late 2023 with a 60/40 portfolio and was withdrawing a steady $2,000 each month would have experienced some decline in their account value. However, even after the recent market downturn, their 401(k) would likely still be worth more than it was when they retired.

This illustrates the nature of retirement accounts—they are long-term investments. Withdrawing a small percentage each month for living expenses leaves the majority of the account to continue growing over time, despite short-term market fluctuations. It’s common for retirement portfolios to experience significant drawdowns at some point, but historically, long-term returns have been positive for most investors.