Average 401(k) balances are down more than 20% this year. Here’s what experts say you should do to survive the volatile market

Saving for retirement is one of the most important financial tasks, but the journey from zero balance to comfortable savings you can live on for your later years isn’t always linear. According to the latest data from Fidelity, the average 401(k) balance has fallen for the third quarter in a row, and is now down nearly 23% from a year ago to $97,200. Some of the main culprits? High inflation and huge stock market volatility.

“Many 401(k) account balances are decreasing because the larger asset classes (stocks and bonds) are down double digits this year,” says Herman (Tommy) Thompson Jr., a certified financial planner with Innovative Financial Group. “Additionally, economic hardship, including rising inflation and job cuts, has forced some participants to take out loans and dividends at the worst possible time — when markets are down.”

Do’s and don’ts when investing in a volatile market

So how should you deal with the fluctuations that can affect your retirement savings balance? Here’s what the experts suggest:

  1. Hold steady and keep saving. Yes — even when things get bumpy, you should still save for retirement, and most savers take that into consideration. According to Fidelity, the average 401(k) contribution rate, including employer and employee contributions, has held steady at 13.9%. In fact, the majority of workers (86%) kept their savings account contributions unchanged, and 7.8% increased their contribution rate.

    Investing in your 401(k) is a form of dollar-cost averaging, which is an investment strategy that requires you to invest the same amount over specific periods of time, no matter what. One of the main benefits: This approach removes emotion from investing and ensures that you don’t make any sudden moves that could end up costing you more. “Near-term weakness is better not to panic: it gives the long-term investor the opportunity to invest his future contributions at lower prices,” says Carl Farmer, CFA, Vice President and Portfolio Manager at Rockland Trust. Another perk for staying the course: employer contributions. By continuing to invest consistently over time, you can be sure to benefit from your employer’s contributions and increase your balance.

  1. Do not borrow money from your 401(k). If you can help it, you should try to avoid borrowing from your 401(k). While only 2.4% of savers started a new loan in the third quarter, major changes in your credit or changes in your financial situation in a difficult economic climate might make you consider leveraging your 401(k) money. Most experts agree that this is not the wisest long-term plan. Borrowing from your future self comes with its own set of risks, such as taxes, penalties, exorbitant interest rates, and the loss of potential growth you would have seen if you left your money alone.
  2. Avoid making any rash changes to your asset mix. You may want to hold back from making major changes to the mix of assets you invest in. “Retirement plan savings should be managed like 401(k) accounts with an eye on the long term,” says Thompson. “Reducing risk after your portfolio has already suffered a double-digit downturn usually results in not having enough risk in the portfolio when the markets recover.”

Takeaway

If your investments are making you uncomfortable, take a break. Focusing on daily market fluctuations in the short term can cause you to act impulsively and make a move that you will later regret. Keep saving for retirement and check your portfolio periodically to monitor your progress.

“At least every year or in volatile markets, investors should check their allocations to make sure they are still in line with their goals,” says Farmer. For example, many investors had the opportunity in the spring of 2020 to reduce exposure to bond funds and return to weak equity allocations. Rebalancing should take place at least annually.

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