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October 2, 2023

Should I reduce my 401(k) contribution when the market is down?

When times are good, it's easy to ignore the money being put into your savings account for the future. But, when the market is down, alarm bells may start ringing, forcing you to wonder if you're doing the correct thing by continuing to contribute to your retirement.

You've come to the right place if you are among the many people curious about what to do with your 401(k) plan in a rough season. The fact that you're asking this question means you're headed in the best direction.

We'll walk through what happens to a 401(k) when the market crashes and how you can respond in the most informed and beneficial way possible.

What happens to a 401(k) when the market crashes?

Many Americans consider a 401(k) a popular retirement savings plan. In fact, the United States Census Bureau found that this type of account is the most common, with 34.6% of retirement account owners putting money into a company stock or retirement plan.

Your money should grow as you contribute to your 401(k) plan. Your investment is put into various asset options, including stocks. The value of those stocks is directly tied to the stock market's performance. This means that when the stock market is up, so is your investment, and vice versa.

The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.

If you lose money in the short term due to a shift in the economy, it will rebound after the country's finances are back in order.

Should you reduce your 401(k) contributions?

When the market drops, many people’s impulse is to sell and escape the situation. This reaction is based on fear, not logic. One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions.

In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.

401(k) contribution options

While you shouldn’t stop investing in your 401(k) during a market downturn, there are some things you can do to help protect your saved cash.

Set retirement goals: Without a plan, going into any extensive life choice isn't a promising idea. The same goes for investing. Better understand what you're attempting to accomplish with your assets to make intelligent decisions. Experiencing a market losing streak without a strategy can make a frustrating situation worse. Ensure you know what to expect with your retirement contribution and identify the best path forward, whether your investment goes up or down.

Setting goals can also determine if your assets are doing well and if you've made suitable investments. If you need help, you can identify areas to improve.

Carefully plan your asset allocation: In addition to setting financial goals, you should know which assets to invest in to help you remain consistent. Realizing your goals is vital in choosing the retirement contribution options that can push you closer to those targets. You can allocate your money in the most beneficial places. Still, it is advantageous to diversify stocks and bonds to help you ride out market storms.

Invest in bonds: Invest in more bonds to protect your nest egg from a stock market crash. This asset type has a lower return rate but less associated risk. Because stocks are influenced by the market, they have a better chance of multiplying your money but are more vulnerable to price shifts.

Don't panic: The best thing you can do in the face of financial turmoil is stay calm. If you react and make quick decisions, you may regret it later. It's OK to proactively secure your investments and diversify your portfolio. It's not a good idea to fall into panic selling. Based on extensive historical records, your potential losses will eventually be recovered once the market gains traction.

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.

Want to talk about your 401(k) plan and retirement savings with a group of specialists? Contact Marsh McLennan Agency today.