It has been 10 years since the 2008 stock market crash. While the market eventually made a full recovery, a major drop could certainly happen again. Retirement savers with a significant 401(k) balance have a lot to lose if the stock market crashes. If you invest in the stock market within your 401(k) account, you’re vulnerable to market changes and could lose money if the investments you select decline in value. Here’s how to keep your retirement savings safe:
[Read: How to Cope With Stock Market Declines in Retirement.]
Carefully select investments. The risk of your 401(k) plan varies based on the investments you select within the account. Most 401(k) plans provide a short list of investment options. Many of the fund choices will expose you to the volatility of the stock market, which offers the potential for big returns and the possibility of significant losses. But most 401(k) plans also offer more conservative investment selections, such as bond funds, which are less volatile and generally produce more modest returns.
Decrease volatility by diversifying. Diversifying your assets can help protect you from losing money, because different asset classes are unlikely to all decline at the same time. Instead of investing all of your retirement savings in the U.S. stock market, you can spread your money across other areas, such as bonds, foreign stock and real estate. For example, international stock index funds add diversification to your portfolio because the stock markets in various countries don’t move in absolute tandem. And bond funds are less likely than equities to experience a steep decline in value.
[See: How to Max Out Your 401(k) in 2018.]
Know your risk level. The younger you are, the more risk you can take on in your portfolio. As a general rule, young people can put a larger percentage of their savings in stocks. As you get older, it’s important to shift some money into bonds, which are a safer, less volatile option.
Shift to more conservative investments over time. The closer you are to retirement age, the more conservative your funds should be. If the market crashes when retirement is only five years away, it could be devastating for your 401(k) balance. Younger investors don’t have to worry as much about a potential market crash, because they have years of recovery time before they will need to spend the money.
Consider delaying retirement. While early retirement sounds nice, one way to reduce your risk of running out of money in retirement is to work longer. If you work another several years and stash away half your salary, you will solidify your retirement savings and have fewer years of retirement to pay for. Even a part-time job can give your existing assets more time to grow and cover some of your immediate bills.
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
Keep short-term money safe. Once you enter retirement, you will need more readily available assets. The money you need for living expenses in the next few years should be kept out of the stock market. Determine how much you will need to cover your typical costs, and put that money in an account that has no risk of losing value so it will be ready for its intended purpose. This amount should include necessities as well as the things you want to do, such as travel during retirement.
Even though a market crash could affect your 401(k), you can allocate your funds to safeguard against a big hit. If you diversify your portfolio, perhaps with the help of a financial planner, you should be able to weather any market conditions.
Jacquelyn Pica is a staff writer at The Penny Hoarder.
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How Safe is Your 401(k)? originally appeared on usnews.com
