How To Recession-Proof Your 401(k), According to Experts

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As the stock market drops, economic output declines and interest rates rise, many Americans worry that the country is headed for another recession. Both President Biden and the Federal Reserve say that we’re not experiencing one yet, pointing to a strong labor market. The National Bureau of Economic Research — the organization responsible for officially declaring recessions — hasn’t made the call either.

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One thing is certain, though: There will be another recession in the future, whether it’s a few weeks or years from now. And as anyone who’s lived through previous recessions can tell you, retirement savings tend to take a hit.

So how can you protect your 401(k) — or any other investment account — from recession-related downturns? Here are a few tips.

Stay the Course

Though it can be tempting to react to market fluctuations and pull your money out, it’s important to stick with your original plan, according to Heather Winston, a CFP and director of financial planning and advice at Principal Financial Group.

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“In recessions, it can feel counterintuitive to keep investing,” she said. However, if you don’t put your money at risk, it won’t have the opportunity to grow. A sound retirement savings strategy will account for market downturns, which are a normal part of the economic cycle.

“The markets will ebb and flow throughout your lifetime, but your risk tolerance will remain relatively constant,” Winston added. “Don’t react to the current economic environment by making rash changes to your investment portfolio.” Playing the long game is critical, especially for Gen Z and millennial investors.

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Try Dollar-Cost Averaging

One strategy that can help you stick with your retirement savings plan is buying a fixed dollar amount of the same assets every month, regardless of what the market is doing.

“In the short-term, your portfolio could continue to drop in value,” said Eric Phillips, a CFA and senior director of partnerships and strategic insights at Human Interest. “But what you’re really doing is taking advantage of ‘dollar-cost averaging,’ a strategy intended to help investors grapple with changing stock prices and volatile markets.”

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Phillips explained that compared to lump-sum investing, where you put a large portion of investable cash in the market all at once, dollar-cost averaging allows you to invest at a steady pace. “If you are steadily investing $100 at a time, what you can get for that $100 in today’s market is almost on sale compared to a few months ago,” he said.

Look Into Alternative Investments

Another option is to invest in assets that aren’t typically correlated with the public markets using a self-directed IRA, according to Eric Satz, CEO and founder of Alto Solutions Inc.

“A self-directed IRA provides far greater flexibility, allowing you to invest in things like art, crypto, startups, real estate and more,” he said.

This doesn’t mean you should stop making contributions to your 401(k) or investing in stable, reliable securities, he added. “It just means you shouldn’t only invest via your 401(k).”

Diversify Income Sources

If you are closer to retirement age, you can hedge any potential losses by adding other sources of income. Winston said you could consider a side hustle, or working for an additional year or two to capitalize on Social Security benefits. 

Retire Comfortably

Cutting back on expenses is another way to feel like you have more income now. For example, if you’re worried about a recession, you could focus on paying down high-interest debt or downsize your living space.

“Immediate comfort can help ease long-term fears,” Winston said.

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About the Author

Casey Bond is seasoned editor and writer who has covered personal finance for more than a decade. Currently, she is a reporter for HuffPost covering money, home and living. Previously, she held editorial management roles at Student Loan Hero and GOBankingRates. Casey’s work has also appeared on Yahoo!, Business Insider, MSN, The Motley Fool, U.S. News & World Report, Forbes, TheStreet and more.
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