Market volatility is something that affects every investor. If your 401(k) plan is losing money, you may ask, “What do I do now?”
Rather than risk your retirement nest egg by making rash decisions, it’s vital that you first learn what’s causing your account to drop. When you know what the root cause is you can better respond to the situation.
What’s causing the drop in your 401(k) account value?
While a 401(k) is a relatively safe place for your money, it’s not immune to changes in the market. This type of plan isn’t a savings account. Rather, it’s an investment option that will grow and fall over time. In fact, a recent Fidelity Investment’s study found that the average 401(k) account balance in 2022 was down 23% from the prior year.
If you constantly check your invested money, it may seem like your account balance is continuously in the red. While it’s normal to have dips in the market every so often, it’s important that you understand whether this is an organic decrease (i.e. a normal dip in the market) or if you need to make adjustments to your investment allocation.
There are a few different reasons your 401(k) may be losing money:
The stock market
The first factor that may be the root cause of your decreased savings is a down period in the stock market. These periods may be referred to as “dips,” “corrections,” “recessions,” or “market crashes” depending on the severity and timing of the down period. Your investment will lose or gain money based on the success of your account’s asset allocation. When the market drops, your investments will follow, and vice versa. It’s important to note that the Federal Deposit Insurance Corp. (FDIC) is an independent federal agency that insures deposits in U.S. banks to protect organizations and consumers in the event of bank failures. Because the FDIC doesn’t insure 401(k) plan assets, the growth of this asset isn’t guaranteed.
Investor behavior
Volatile markets and a stream of ominous headlines can put investors on edge and have them questioning their long-term investment strategies. While market volatility is an inevitable part of investing, markets have generally rewarded investors who maintain a long-term investment strategy instead of reacting to cycles of turbulence in the markets. Staying the course on your investments can make a big difference in the long run—even if things seem difficult in the short term.
Read more about market volatility.
Expensive fees
The last factor that can have a materially negative impact on your 401(k) balance is high fees. Some 401(k) plans have large administrative and management fees that can burn a hole in investment returns. It’s important to pay attention to all costs associated with participating in your company’s retirement plan.
How to respond to decreased retirement savings
Before you make a quick decision about your 401(k) plan, it’s important to know what the best response is for your personal situation. We’ve put together some helpful strategies for you as you navigate through your retirement savings plan.
Remain consistent
One of the most essential facts to keep in mind is the market will continue to move up and down no matter what. While it may seem like a good idea to pull out your money and stop investing in down markets, it may not be the best decision for you in the long run. Unless your financial advisor recommends you sell your individual stocks or funds, continuing to invest may be the best move to make.
Educate yourself
Without the right information at your fingertips, it is difficult to make intelligent decisions. Use your employer-provided resources to learn about your 401(k) retirement fund options, how to manage your 401k in a market downturn, or educate yourself on essential retirement savings details.
Seek help from a financial professional
While it’s important to do your own due diligence when making financial decisions, it’s vital that you have a financial professional you can trust. An advisor can help guide you through the world of retirement account savings while keeping your business goals and financial needs in mind.
Talk to your financial advisor
If you're nervous about your 401(k) plan losing money during a dormant period, it's essential to talk to your financial advisor before choosing an economic path. While these tips are helpful, they will know your financial situation better than anyone else. They will help you make the most informed decisions to move forward smoothly.
Marsh McLennan Agency gives employers and employees the proper resources and information to make the best possible investment options and savings choices.
Marsh McLennan Agency offers:
- Individual wealth management
- Employer retirement plan advisory services
- Employer financial well-being programs
Contact a Marsh McLennan Agency colleague to get started today.
FAQs
Generally, you cannot claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see About Publication 575, Pension and Annuity Income.
What should I do if my 401k is losing money? ›
Depending on your situation and investment goals, here are some steps you can take if your 401(k) is losing money.
- Don't Panic. ...
- Investigate the Reasons. ...
- Evaluate Your Risk Tolerance. ...
- Look for Opportunities to Diversify. ...
- Consider Financial Advising.
Generally, you cannot claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see About Publication 575, Pension and Annuity Income.
How to protect your 401k in a recession? ›
How to help protect your 401(k) from a stock market downturn
- Diversification and asset allocation. ...
- Rebalance your portfolio. ...
- Keep contributing to your 401(k) ...
- Stay calm and disciplined.
If your 401(k) is losing money, it's important to understand why, as well as consider how long you have until you plan to retire. If you're years and years away from retirement, you likely have time to regain that money in your 401(k)—remember, it's a long-term investing strategy.
Should I panic if my 401k is losing money? ›
Don't “panic sell” your investments
Staying invested is usually safer than trying to time the market. Selling is how you realize losses in your account. And whenever the market takes a hit, remember that retirement saving is a long-term strategy.
Why am I losing so much money in my 401k? ›
The first factor that may be the root cause of your decreased savings is a down period in the stock market. These periods may be referred to as “dips,” “corrections,” “recessions,” or “market crashes” depending on the severity and timing of the down period.
How much in losses can I write off? ›
You can deduct stock losses from other reported taxable income up to the maximum amount allowed by the IRS—up to $3,000 a year—if you have no capital gains to offset your capital losses or if the total net figure between your short- and long-term capital gains and losses is a negative number, representing an overall ...
What losses can you write off? ›
Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return if the loss is caused by a federally declared disaster.
Can investment losses be written off? ›
The IRS allows you to deduct from your taxable income a capital loss, for example, from a stock or other investment that has lost money. Here are the ground rules: An investment loss has to be realized. In other words, you need to have sold your stock to claim a deduction.
The average 401(k) balance rose to $107,700 by the third quarter of 2023, up 11% from the year before, according to the latest update from Fidelity Investments, one of the largest retirement plan providers in the nation.
Should I be aggressive with my 401k right now? ›
While being more aggressive can make a lot of sense if you have a long time until retirement, it can really sink you financially if you need the money in less than five years. To reduce risk, investors can add more bond funds to their portfolio or even hold some CDs.
Can you freeze your 401k? ›
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
What will happen to my 401k if the dollar collapses? ›
If the dollar collapses, your 401(k) would lose a significant amount of value, possibly even becoming worthless. Inflation would result if the dollar collapsed, decreasing the real value of the dollar compared to other global currencies, which in effect would reduce the value of your 401(k).
What is the average 401k balance at age 65? ›
What is better than a 401k? ›
Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings but your risk may be higher.
What is the average 401k balance for a 55 year old? ›
Average and median 401(k) balances by age
| Age range | Average balance | Median balance |
|---|
| 35-44 | $76,354 | $28,318 |
| 45-54 | $142,069 | $48,301 |
| 55-64 | $207,874 | $71,168 |
| 65+ | $232,710 | $70,620 |
2 more rowsMar 13, 2024
A Pause Gives You More Cash
After all, you'd benefit from increased liquidity, which would provide you with immediate access to cash during periods of job loss, unexpected expenses or inflation. “This cash could act as an emergency fund, which is a key component of a well-rounded financial plan,” Latham said.
How much should I have in my 401k by 50? ›
By age 50, you would be considered on track if you have three-and-a-half to six times your preretirement gross income saved. And by age 60, you should have six to 11 times your salary saved in order to be considered on track for retirement.
