How to Protect Your 401K from Market Crash
The pandemic has clearly shaken all of us on many levels. But that doesn't mean there aren't ways to invest in your retirement today.
“In any crisis situation, whether it's a pandemic or a personal medical problem, the best approach is to have a comprehensive financial plan already in place," said Sylvia Garcia, vice president and senior financial advisor with City National Securities, City National Bank's wholly-owned brokerage firm that provides a full range of investment capabilities to clients. “The plan should be written and measurable, and then the crisis serves to show you how aligned it is with your risk preferences."
In fact, Garcia's clients were “remarkably calm" during 2020, she said, a testament to how proactive planning provides a buffer against insecurity.
While Ben Goetsch, senior analyst of investment solutions with City National Rochdale, the bank's investment advisory organization, says a full economic recovery is expected to take at least two years, such uncertainty only serves to highlight the importance of planning for retirement now.
Here are four ways you can begin effective planning around risk in all markets.
Be Proactive About Your Long-Term Plan
Long-term investors understand that even though they're going to experience significant stock market volatility, they'll miss out over time and not meet their goals if they sell when the market takes a dive.
“As a long-term retirement saver, the worst thing you can do is make short-term decisions based on emotional reactions to what you see in the stock market," said Goetsch.
The longer you stay invested, are committed and are consistent, agreed Garcia, the greater your chance of success.
“Preparing people for the unexpected is what a financial plan is for," said Garcia. “I tell clients that the average return on investment is about 7 percent. If you're getting a 30 percent return on your investment one year, just know your return will drop at some point, and it won't feel good. But it will feel better if you've planned for that day."
Look for Opportunity
Another way to maximize the outcome for retirement savings is to understand the opportunities available for investing.
“Most clients feel safer with cash and want to keep more of it, but if you have appropriately planned and have an emergency fund of six to nine months' of living expenses, then you should be investing the rest for retirement," said Garcia.
Otherwise you're actively losing purchasing power when the inflation rate is greater than your interest rate, she said.
Most people think about retirement plans within their company, such as a 401(k), but a financial advisor may provide more creative solutions.
“For instance, there are avenues to contribute to a ROTH IRA, alongside your 401(k) at work. And business owners often know about a SEP IRA only, but there are other plans - such as cash balance plans - that can greatly increase contributions and reduce your taxable income," Garcia said.
Reassess Your Tolerance for Risk
Your choice of investments of course will depend on your retirement timeline and your tolerance for risk.
“For instance, in 2020 we were looking at large cap stocks that hadn't fully recovered and that were benefiting from the particular nature of the pandemic, such as internet-based companies that do well when everyone was staying home," said Goetsch.
Goetsch recommends that long-term retirement investors avoid riskier investments during the pandemic.
For Those Nearing Retirement
This is a good time to consider speaking with your financial advisor.
Even during retirement, it's important to remember that you'll have near-term spending needs and longer-term goals. Don't assume you're cashing everything out at age 65 and make decisions based on that type of thinking, Goetsch said.
“The most important role we play as advisors is to temper the natural behavioral impulse of investors," said Goetsch. "And if you are one year away from retirement, 2020 goes to show the susceptibility of those heavily invested in stocks at this time of life."
Sometimes financial advisors strive to tamp down an overly optimistic investor who expects double-digit returns to continue forever. In other markets, like 2020, an advisor reduces anxiety, keeping investors focused on the horizon as opposed to the daily highs and lows of the markets.
In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals today to ask questions and receive help with your wealth planning needs.
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City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Brokerage services are available through City National Securities, Inc., a registered broker-dealer, member FINRA/SIPC, and a wholly owned subsidiary of City National Bank.
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