What 401(k) Savers Near Retirement Can Do Amid Market Volatility

The markets are up, the markets are down, tariffs are in, tariffs are out. Egg prices are soaring, inflation is declining. Stay the course, revisit your portfolio, buy on the dip, ignore the news.

For 401(k) savers 50+, the last week has served up a dizzying amount of uncertainty. It’s understandable if you are confused about what to do in the current climate of extreme volatility, especially if you have your life savings invested in a 401(K) and/or an IRA.

Without a doubt, volatility will likely continue given the uncertainty in the markets, but there are some positives potentially coming down the pike, argues Nick Nefouse, global head of retirement solutions and head of LifePath at BlackRock. Those positives include tax cuts in the U.S. and deregulation, both of which tend to bode well for the longer-term outlook.

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“The bull market is about earnings and the bear market is about feelings," Nefouse says. "Over the last two years the market is still up some 50% even with the drawdown."

While everyone’s situation is unique, we polled financial advisers and asset managers to get a sense of what you should be doing if retirement is ten plus years away, is one or two years out or is in the rearview mirror. The key takeaway in every age group — don’t panic but take the time to evaluate where your 401(k) is at.

“It’s time to assess,” says Pam Krueger, founder and CEO of Boston-based Wealthramp, an SEC-registered fee-only adviser matching platform. “The volatility handed you a gift. It’s forcing you to pay attention. You want to make the ship as watertight as you can and the way you can do that is by assessing everything.”

If you are in your early 50s, do this

People in their early 50s are typically still working and saving for the foreseeable future, which means they don’t have to react when markets are whipsawing between huge upticks and steep declines.

“Someone in their 50s still has seven to ten years, if not longer, of working and saving,” says Nefouse. “When you get to retirement you have a 20 plus window in retirement based on life expectancy.”

If the choice is to focus on a week’s worth of trading versus twenty years on the horizon, you have to focus on the twenty years on the horizon, he says.

Don't try to time the markets

Now is not the time to sell stocks and move to cash. After all, timing the market doesn’t pay off. It usually ends with selling low and buying high.

“Fifty percent of the best days in the equity markets happened in bear markets,” says Nefouse. “If you got out of the market Tuesday you would have missed Wednesday.” Nefouse was referring to the 1,000 point plus decline and 2,000 point plus increase in the markets between the two days this week. “It's about staying invested,” he says.

Scott Smith, senior director, advice relationships at Cerulli Associates knows first hand how trying to time the market can hurt your 401(K) and investment portfolios.

In March of 2020, when stocks were tanking in the early days of the pandemic, he decided to sell, betting the markets would keep falling. But they didn’t, they soared, making it hard for Smith to find an entry point back in. “Anticipating the market is really a fool's errand. The only person suffering is yourself,” says Smith.

A better approach is to take a look at your asset allocation and how it meshes with your time horizon and risk tolerance to ensure you are well diversified.

One way to get a diversified portfolio is to consider shifting to a target date fund if you aren’t already in one. A target date fund does the diversification and asset rebalancing for you. It’s geared toward your age and what your risk level should generally be at that point in your career.

If you aren’t in a target date fund but are debating as to whether you want to switch, Sharon Carson, executive director of J.P. Morgan Asset Management, says to use your 401(K) plan’s target date fund as a gauge.

See how the fund is invested, based on your age, and then consider what other sources of income you’ll have in retirement, including Social Security, a pension or your spouse’s pension.

If you will have a lot of guaranteed income in retirement, you may be able to take more risks, which means more exposure to equity markets. It's a good idea to discuss your options with a financial adviser or the plan sponsor, notes Carson.

If retirement is a year or two out

Assessment is the name of the game at this point. Is your 401(K) diversified, is it in sync with your spouse’s 401(K) if you are married, and does your asset allocation jive with your overall retirement plan? These are the assessments you need to make with retirement in the not too distant future, says Krueger.

“Without assessing, you don’t know if you have too much money invested in Nvidia or big tech stocks like Apple and Tesla that are down a lot more than the overall market,” she says.

It's also a good time to assess where other money is coming from in retirement, whether it's Social Security, real estate, a brokerage account or a pension. When you have a good read on what money will be available, compare that to what you think your spending levels may be when you do stop working.

Don’t forget to factor in inflation, debt and potential tax implications when evaluating your current state. That assessment may give you peace of mind or prompt you to continue working if you can.

“It's always better if you can to work more,” says BlackRock's Nefouse. “It is always better to retire in a bull market than into a bear market.”

If you are already retired

Retirement can easily last twenty plus years, which is why financial advisers say you have to stay invested. Selling off your stocks and moving to cash could set you up for shortfalls, or worse — a situation where you outlive your savings.

Smith at Cerulli says to have a cushion of one to five years of expenses in a low volatility vehicle, such as fixed income, high yield savings accounts or CDs. That will give you a buffer if volatility continues, or for the next time the markets go south.

“Don’t forget about Social Security, pensions, annuities and other sources outside of your retirement accounts,” says Michael Liersch, head of Wells Fargo Advice and Planning.

Relying on those sources of income while the stock markets are tanking will give you time for your 401(K) investments to recover, especially if you need distributions beyond Required Minimum Distributions or RMDs.

With the markets down, it may be a good idea to see if there is an opportunity to make some changes in your spending patterns, so as to avoid selling holdings in your 401(k). “Time in the market is people’s friend,” even in retirement, says Liersch.

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