Near retirement and panicked about your 401(k)? Do this instead

The stock market has been climbing like a roller coaster car creeping toward the top of a steep hill. And also like that sometimes scary ride, speculation about and then the details of President Donald Trump’s tariffs have sent it tumbling downhill on what for some could be a bumpy ride.

In the last few weeks, global stock markets have wiped out $6.4 trillion in value.

When day after day the stock market is down, it doesn’t feel like great news for folks invested in a 401(k), though most people have plenty of time to recover from a market that’s been volatile before and will be so again.

But what should you do if you’re at or getting close to retirement age and that fund is the foundation of your hopes and dreams for a happy, employment-free future?

“The last couple of weeks, we’ve seen really heightened market volatility,” said Brad Herdt, a certified financial planner at Deseret Mutual Benefit Association. “We’ve seen a lot of downs recently and for people who are approaching retirement or getting close to needing to start using their retirement savings, that can be a little nerve-wracking, because those ups and downs are a little bit more consequential now.”

Still, he said, don’t panic. He suggests thinking about what your goals are and whether you already have financial plans in place to accomplish them. “What’s the plan? Market volatility is not a reason to abandon the course.”

“If you look at history, there’s never been a bear market that wasn’t followed by a bull market. Ever,” adds his colleague, Shon Eckert, also a certified financial planner at DMBA.

“It is completely normal to feel uncomfortable during market duress. The key is to remain as unemotional as possible. Any decision someone makes, whether it is during periods of euphoria or pessimism, are generally not the best decisions, nor lead to the best overall outcomes,” said Kevin Townsend, a Williams, Townsend & Stout wealth management partner of Raymond James & Associates.

If you have a well-diversified, professionally managed portfolio, which most people with a 401(k) do, stick to the plan, Herdt said — especially if retirement is looming. “Ideally, we should already be positioned in a way that we’re going to weather the storm.”

Those most at risk are those who haven’t planned and have simply decided that the stock market is doing great, so they opted to go all in and were too aggressive. He called that a two-edged sword, with the potential for big gains but also for big losses.

Herdt said those folks may need to decide if they want to make changes to diversify now and accept what they’ve recently lost so they can sleep at night and craft a better strategy going forward or if they prefer to ride out what will hopefully be a short downturn and then make sure they create a more solid financial plan.

Eckert calls to mind the housing market crash. “When the real estate market crashed in 2007-2008, did you run out and sell your house? No. That’s absurd. When the market goes down and your shares are lower in value, why would you go sell those?”

Diversify investments

As people get older, it’s usually a good idea to put more of the investments in bonds, instead of just focusing on stocks, Herdt said. Many with fund managers have a target-date fund that automatically adjusts as people get older to see that the mix of stocks and bonds are appropriate. That means someone who is 10 years from a planned retirement will have a higher share of bonds in their portfolio than someone who is 30 years away. And the share of bonds goes up more as retirement nears.

According to Townsend, for those close to retirement, “now is the time to make sure your portfolio is properly balanced between growth and stability. Individuals close to retirement should have enough cash or short-term, stable assets to cover essential expenses for the next few years. This will help avoid selling assets in a down market that you might otherwise want to hold long term.”

The longer someone has before they’ll need their funds, the less important a market downturn is, he said. Herdt cited statistics that suggest that a 10% market downturn from top to bottom — “what we call a correction” — usually takes a few months to correct. And they happen every year or so.

“Usually, the lower it goes, the longer it takes. But even on the very long end, we don’t really see them last longer than a few years,” he added.

What history says

Townsend said markets can feel chaotic in the short term, but history shows that they recover. “The key to success is to have a solid plan and sticking with it through the ups and downs; that is how wealth is created. A great financial plan is built for storms, not just sunshine.”

There’s no magic viewing device to see the future. The scope of the tariffs that Trump announced are unprecedented. But the markets have ridden out other so-called firsts.

While the past doesn’t predict the future, that’s all we have to go on. And it’s a hopeful story.

Herdt said we hadn’t seen a global pandemic in the past 100 years, and the stock market plummeted. “People forget we hit what are called circuit breakers, where they literally stopped trading on the stock exchanges; it was going down too fast. We don’t have that now. Look back even further, we had a great financial crisis. We had never seen that before. We never had the housing market collapse, but we got to the other side of that and a patient investor was rewarded.”

He added that “while this time may look different, we have no indication that a unique market event results in a different market outcome for a long-term investor.”

Opportune time

Age and even retirement aren’t the issues. Rather, what matters is when you’re going to start needing that money, Eckert said: “When you’re starting to spend the money in earnest and what your life expectancy is. If I’m retiring in a couple of years but I’m going to be retired for 20 or 30 years and I don’t really need to start (using) my 401(k) for another 10, my timeline is 10 years instead of two at a minimum.”

If someone pulls out of their 401(k) either in a panic or because they put their money in a money market or stable value spot to eliminate volatility and earn a little interest, Eckert said the earnings may not keep pace with inflation, as opposed to continuing to grow in a diversified portfolio.

“The idea is you’re probably supposed to stay there for the rest of your life in spite of short-term volatility to at least be able to garner the long-term average return that you need to outpace inflation,” Eckert said.

“Those who are young, mid-career or even in late career but who won’t need the money for a while should embrace the market downturn,” Eckert said, because it can actively contribute to your financial future. He calls it counterintuitive but true that when stock prices go down, those making the investments buy more of them. So those who stay in benefit by having more of the stocks later when one hopes their value has risen.

Townsend also said that for long-term investors, “market corrections are often opportunities to buy future growth at a discount.”

“Don’t run from it,” Eckert said of the market’s slide. “Actually embrace the opportunity, because that is what’s going to deliver your best long-term return over time: the investments you made when the market was down.“

Take a thoughtful approach to change

Herdt noted that when people are worried, they may also be vulnerable to those who would take advantage of their fears.

“It’s biological to freak out when markets go down. There are bad actors in the financial services industry who are going to prey on that,” he warned, urging people to be cautious and skeptical before making big moves.

Townsend and Herdt both suggest consulting a financial advisor who can consider your individual situation before making big decisions about investments, including what to do in the current volatile market.

And the trio note that they’re talking about trends, not giving individual advice in this story.