Mar 8th, 2008
401k Recession Fears? Recession proof your 401k – another take
401k Recession. Those two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long term” which is most manifested in the ultimate long term investment – retirement accounts. I have also had a lot of reader emails asking about what they should do if they are this age or that age so Ive gone ahead and broken things down into age groups with specific advice for each age group.
Age group 0-35
At this age you should not be worried about how the recession will affect your 401k, but about how you can dump as much money as possible into it. Now is not the time to think about the short term economic problems because eventually the economy will come out of it – long before you are even thinking about retiring. What we are looking for in this age range is capital growth. In fact, if there IS a recession you will most likely benefit from it in the long run because in effect it will be a big giant retirement sale.
Asset mix: 80% to 100% of assets into an index fund or a mix of low load mutual funds and 0 to 20% in bonds
Age group 35-50
Ok so you’ve been in the party that is the business world for a while now and you should have a pretty good amount setup in your 401k. Its enough to if and when a recession hit it would be a little painful to see the money drop. There is a huge urge to pull out and put your money in something much more conservative. Don’t do it. You still have quite a few years left until retirement and any setbacks that happen right now will balance out in the long term. Your number one goal is still long term capital growth. However, you DO want to be a little less aggressive than your 25 year old counterpart so your mix will be slightly more conservative.
Asset mix: 60% to 80% of assets into an index fund or a mix of low load mutual funds and 20% to 40% in bonds
Age group 50-Almost retired
You should be at the top of your earning potential at this point so its time to really buckle down and save as much as possible, including doing catchup contributions to your various retirement accounts. You are also the one who is most concerned about this recession talk. Now would be a very bad time to lose a lot of your money, but you also still need capital growth because you’re investing to keep yourself with money all the way through retirement. So you need capital growth but you also need to protect your assets that you’ve accumulated so far. Rough balancing act.
I know what your knee jerk reaction is: pull out of your current investments and put it all in bonds. Well, don’t. While bonds most certainly should be part of your portfolio at this point you still want to give yourself a good chance at long term growth as well.
Asset mix: 50% to 70% of assets into an index fund or a mix of low load mutual funds and 30% to 50% in bonds.
Age group-Retired
If you are in this group, there needs to be a large swing in planning. Since you are pulling money out for living on if there is a large market slump you could end up losing money at an alarming rate. You now want to completely balance your portfolio so that you still have enough capital growth to support you for years to come, but enough locked down in bonds to get through any very tough times.
Asset mix: 40% to 50% of assets into an index fund or a mix of low load mutual funds and 50% to 60% in bonds increasing the amount in bonds as you age.
401k Recession. Do not let those two little words scare you. The main thing to avoid is trying to time the market, that is a surefire way to risk losing a lot of your hard earned savings. Next Recession proof your life…
- 10 Comments
- Retirement
[...] 401k Recession Fears? Recession proof your 401k – another take [...]
[...] Original post by Jesse [...]
[...] The Penny Saved talks about making your 401k recession-proof. [...]
[...] youngragingbull wrote an interesting post today onHere’s a quick excerptThose two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long term” which is … [...]
[...] 401k Recession Fears? Recession proof your 401k – another take @ The Penny Saved [...]
I have to disagree. At no time should you have something as tax efficient as an index fund inside of a tax-deferred account. Regardless of a recession, which provides an excellent opportunity to purchase fund shares at a discounted rate. As for that index fund, keep it outside your retirement portfolio because, in the current tax climate, paying 15% on gains is probably much better than what you might gain ten, twenty or thirty years from now.
Inside that 401(k), look for funds that are not only no-load as you suggest, but have low expenses compared to similar funds in the same group and lower than average turnover. Both of those factors impact net return.
Recessions impact everyday life much the way inflation does.
They do not or should not affect how you save for your future.
Thanks for the comment Paul. I am actually not looking for tax efficiency in index funds. Index funds are great for two reasons:
1) Low fees. Most mutual funds have much higher fees than index funds.
2) Long term stable returns. 85% of mutual funds fail to beat the market. Some beat it for 1 year, 5 years, maybe even more but over the course of 20-30-40 years as the case may be its VERY difficult to find a fund that will beat the market – especially once fees are subtracted
[...] Jeremy wrote an interesting post today onHere’s a quick excerpt401k Recession. Those two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long … [...]
[...] Steve Hulett wrote an interesting post today onHere’s a quick excerpt401k Recession. Those two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long … [...]
[...] Moneymonk wrote an interesting post today onHere’s a quick excerpt401k Recession. Those two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long … [...]