Can Your 401(k) Withstand Market Volatility?

Seven ways for retirement savers to survive the market's ups and downs.

It’s no secret that volatility has returned to the stock market. From October 2018 through January 2019, the S&P 500 monthly returns were -6.84%, +2.04%, -9.03% and + 8.01%.

Given that most savers have 401(k)s as the main source of their retirement income, the onus is on each individual to maintain the course in their investment strategy. This isn’t always easy for many 401(k) participants, because their account balance (and feeling the pain) is often a click away. For pre-retirees, the challenge is even more daunting, because retirement is much closer.

Although equities have historically outperformed fixed income investments over the long term, investors typically have to stay in the market to reap the rewards. Exhibiting the right behavior in managing your 401(k) is critical to your long-term success.

Here are some considerations for pre-retirees to help them weather times of market volatility, while staying the course.

Like the lottery, you have to be in it to win it.

Several studies have shown that much of the long-term gains generated by the stock market occurred on its “best days.” Many of these best days occurred in periods of market volatility. If you sell out of equities, you not only lock in losses, but you might not be back in the market to benefit from the big gains experienced on certain days from time to time.

Social Security should not be ignored.

Keep in mind that Social Security will be there for you to generate retirement income and is backed by the faith of the U.S. government. Therefore, it can be viewed like a bond backed by the U.S. government. You can solve for the approximate present value of your Social Security retirement benefits by logging into your My Social Security account online and finding the projected value of Social Security at your full retirement age (e.g., 66).

You can then use the Internet to find an immediate annuity quote to solve for how much it would cost to purchase a similar annuity at age 66. For example, to generate a similar annuity benefit for a $2,600 per month Social Security benefit for a man, the cost can be estimated to be around $425,000. To account for the value of the inflation adjustments that will increase your payments as you age, increase that amount by roughly a third. Therefore, the value of a $2,600 monthly Social Security check is approximately $565,000.

When you consider Social Security’s value as part of your retirement portfolio, temporary 401(k) market value losses might not feel so bad.

Use other types of annuities.

If you like the idea of having secure retirement income like Social Security, you can purchase private annuities as well. There are many types of annuities available which are dependent upon your protection goals, and you don’t have to wait until retirement to purchase one if you have investable assets outside your 401(k).

Remember to diversify.

Having a large amount of your equity investments in a single stock increases your risk, even when it is your own employer’s stock. In fact, keep in mind that your human capital — your ability to generate income through your job — is also tied to your employer.

Consider diversifying out of your company stock to minimize the risk to your portfolio. Many readers likely will have accumulated a lot of company stock over the years if their employer contributed their employer 401(k) matching contribution in this form.

Declining markets create opportunities as well.

It should provide comfort that you will benefit from a declining market. If you are a pre-retiree, chances are you are still investing into your 401(k) plan, and you likely are investing more in pure dollar terms than at any point in your life because your income is peaking, and you might even have lower household expenses as you become an empty nester.

In a declining market, these dollars are buying more shares, as you are buying as values dip. In the end, when the market rebounds, these additional shares will create greater long-term wealth than if you bought ”high” when the market was higher.

Retirement can last a long time.

The latest actuarial tables from The Society of Actuaries indicate that the life expectancy of a 65-year-old man is an additional 20 years and for a woman, 22 years. These are averages, and Kiplinger readers will know they need to account for the distinct possibility they will live longer than the average American. In addition, real interest rates are still rather low. In other words, most individuals will need to stay at least partially invested in the stock market to improve their chances that their retirement savings will last longer then they will.

Cash is still king.

Pre-retirees near retirement may want to consider keeping cash on hand to cover one to two years of their living expenses beyond what Social Security, their pension, 401(k) or IRA may cover. This will help them stay invested through ups and downs if their near-term needs are assured.

In a 401(k) world, it’s up to you to stay the course, even when the seas get rough. Your investing behavior will dictate not only your lifestyle in retirement but whether or not you and/or a spouse runs out of income down the road. Don’t keep logging on to see your daily balance, but rather let the markets do what they will. If history is any gauge, in the end, you should be fine.

About the Author

Vishal Jain

Head of Financial Wellness Strategy, Prudential Financial

Vishal Jain is the Head of Financial Wellness Strategy and Development for Prudential Financial. He is responsible for defining Prudential's financial wellness strategy and partnering with a wide range of stakeholders across Prudential in developing and delivering financial wellness capabilities and solutions to the market. For more information, please contact Vishal at

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