Why is My 401(k) Losing So Much Money?
Even though 401(k)s are considered an effective means of retirement saving, seeing your account balance decline can still be alarming – particularly during periods of market instability.
However, several key strategies can help you invest with confidence during periods of loss. Here are a few: 1. Stay the course.
Inflation
If your 401(k) balance is declining, inflation could be to blame. Inflation refers to the gradual devaluation of money over time as prices rise and purchasing power dwindles – an issue faced by many countries around the globe; central bankers have even become known as “inflation hawks”, while politicians campaign on promises to combat it.
Inflation can arise due to various economic circumstances, including an unexpected increase in demand (like after a lockdown when people stockpile basic necessities) or when factories stop producing due to lack of production capacity without infecting workers; economists and policymakers typically view some inflation as beneficial. A small increase is generally considered beneficial.
The Federal Reserve, which sets U.S. monetary policy, generally targets inflation of 2 percent or below; however, inflation levels well beyond this benchmark have become an increasing burden to American families.
Fees
Fees can be difficult to track and quantify, yet they’re an integral factor that threatens retirement savings. Service fees associated with 401(k) plans like recordkeeping and investment management often pass directly on to participants as either flat or percentage-based charges.
As part of their retirement plans, many retirement accounts pay fees to remain part of a plan. These “outside asset” fees typically consist of both an annual fee and expense ratio charges on assets held within the fund (such as mutual funds).
Rollover of 401(k) savings into IRAs may result in an unexpectedly substantial increase in retirement account fees, according to studies. This routine practice shifts billions each year between 401(k), which offer lower fee institutional shares, and higher fee retail shares purchased via an IRA – an amount equalling an erosion of savings amounting to billions annually.
Market Volatility
Seeking out ways to protect your retirement account balance can be disheartening, yet market volatility – or its tendency for investment prices to fluctuate widely – is an integral part of investing. High periods of volatility often reflect investor unease caused by world events, political issues and economic developments as well as any changes to monetary policy such as an interest rate increase from the Federal Reserve or changes to interest rate calculations by various central banks.
Your long-term investment plan was likely designed with market volatility in mind, so it is wise to remain patient and not make hasty decisions that could damage your savings. Consult a financial planner to see how your portfolio could be adjusted so it better handles market ups and downs – they may suggest adding bonds, cash values in life insurance policies or home equity lines of credit to help diversify it further.
The Bucket System
Bucket strategies divide your investments into various “buckets” depending on when they will become necessary for use, with an eye toward protecting retirement savings from market swings by restricting short-term withdrawals to just what is necessary.
Short-term buckets typically consist of cash or liquid assets like FDIC-insured money market funds and laddered certificates of deposit. Medium-term buckets should contain assets to cover expenses up to two years out and may include safe assets like investment-grade bonds and bond funds, yield-focused stocks or alternative investments like real estate investment trusts (REITs).
Long-term investments should consist of higher-risk but potentially higher-return investments. You should diversify across domestic and international stocks with strong growth potential and a long time horizon; consulting a financial professional might help in selecting an ideal mix for your retirement buckets.
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