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While contributing a portion of every paycheck to your employer-sponsored 401(k) plan is undoubtedly a smart way to save for retirement, it can be quite worrying when you see your balance dropping.

First of all, know that this situation is completely normal. The money in your 401(k) is invested in the market, which means it’s exposed to daily fluctuations and can both earn and lose value based on stock market performance.

“As investors in publicly traded consumer stocks, you probably have broad exposure through your 401(k) and there will be periods of time when you go through declines, like we did. since markets began to correct in late 2021,” Austin Winsett, CPA and financial advisor at Exencial Wealth Advisors, told Select.

Although 401(k) balances can see declines, the good news is that most plans are designed to protect your funds from any significant loss. They are also naturally diversified, meaning your 401(k) money is invested in things like mutual funds, index funds, target date funds, and exchange-traded funds versus individual stocks. , so your risk is more spread out.

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Here’s what to do when your 401(k) loses money

Generally, the best decision to make when you see your 401(k) balance dropping is to do nothing at all.

These tips generally echo the advice of investment experts when one of your investments is affected by market declines. Investing is a long-term game – you take the short-term downside in exchange for the long-term potential growth, which history has shown us is what happens. Although past performance does not predict future performance, historically short-term losses have generally been offset by greater long-term gains.

“Over the long term, stock prices are how the world assesses the value of underlying companies,” says Winsett. “In the short term, prices can be chaotically random, but over time, prices are firmly anchored in the real value of real companies whose products and services we regularly, even daily, use.”

Making an impulsive move like panicking by selling your 401(k) investments or withdrawing from your 401(k) early would have serious consequences. If you sell only to get back into the market later, you risk timing it incorrectly and missing a rally or big rally gains. Staying invested means the market recovers, so does your account balance. Meanwhile, tapping into your 401(k) funds before you reach age 59.5 carries a 10% early withdrawal penalty in addition to taxation.

If you are younger in your career

Your best bet is to leave your 401(k) account alone and continue making contributions as usual. This guidance is even more important for young 401(k) savers who still have a long way to go before retirement and therefore have time to wait out any market downturns – their accounts can recover and bounce back long before they do. are entering their non-working years.

“For investors with long leads ahead of them, market declines can present great opportunities,” Winsett points out, suggesting there are a few things young investors should consider. If you have fixed income securities or excess cash, this can be a great opportunity to rebalance capital into equities (i.e. stocks) at discounted prices. Or, if you regularly contribute to your 401(k) through your paycheck, you might want to consider raising your contribution rate so that more money can be deployed during a market downturn.

If you’re young and still worried, make sure you know where your 401(k) money is invested to make sure the risk is something you can afford to take, as employers usually automatically assign a 401(k) portfolio ) based on your age and target retirement date. Remember that you can always consult your 401(k) plan provider for assistance.

If you want more control over the contents of your retirement account, consider opening a traditional IRA or a Roth IRA. These accounts offer tax advantages, but also give you more choice in what you invest in, including individual stocks, bonds, mutual funds, index funds, and ETFs. Select ranked Charles Schwab as Best Traditional IRA and Best Roth IRA.

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If you are nearing retirement

For those who are approaching their non-working years and don’t have the same timeline ahead of them to see their portfolio recover, it may make more sense to shift more of your 401(k) money to investments. more stable.

“If you are older and potentially need to generate cash flow from your 401(k) for the foreseeable future, we recommend that you maintain at least five years of cash flow need in older assets. stable assets such as fixed income,” says Winsett. “That way, when market corrections happen, ideally you don’t have to sell stocks at an inopportune time.”

Fixed income investments include government and corporate bonds, CDs (certificates of deposit), and money market funds, which are different from money market accounts. These investments are generally low risk, offering a steady stream of income and the promise of paying you interest over time and eventually repaying your principal at maturity.

Although CDs offer fixed interest rates – meaning your money grows without the risk of your interest rate dropping – they also guarantee a stable return despite stock market volatility. However, keep in mind that you cannot access your funds until the end of the CD term. Some of the best CDs offer interest rates more than double the national average, are FDIC insured, have no monthly maintenance fees, and low minimum deposits requiring $1,000 or less to open an account. Depending on how close you are to retirement, Select recommends the following:

“We believe it is extremely important for investors to maintain a ‘war chest’ of cash, fixed income or other stable investments so that they are not forced to sell to meet their short-term goals. Winsett said.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.