How to Manage Your 401(k) in a Market Downturn — for Investors at Every Stage of Retirement

Jul 26, 2022


Employer-sponsored tax-deferred 401(k) accounts are the most common way that most Americans own stocks. Wall Street’s nosedive is concerning for anyone with investment accounts, but those who are retired or nearing retirement are most affected.

Unlike younger colleagues, they don’t have decades ahead to keep contributing to their accounts and ride out market volatility. Historically, stocks always recover lost ground and then some — but that can take several years.

“The biggest concern is having to sell to raise cash to live on when the markets are down,” said Nevin Aams, chief content officer at the American Retirement Association, in an email. “That’s why it’s generally good to have a liquid cash cushion handy, just in case. So you can spend without having to sell ‘cheap.’ Definitely avoid selling while the market is at a low point if you can avoid it.”

There are actually three categories of retired or near-retired people, and advice for each is slightly different.

• Nearing retirement: It may be a bitter pill to swallow for some, but experts suggest continuing to work during this market downturn. “If you have any flexibility and control, this is a good time to postpone retirement,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Keep working and keep contributing so you’re buying stocks at relatively low prices.”

She recommends an extra two or three years of employment. “If you can’t, you can’t,” she said. “That may be a lot for some people. But even if you can only work a year (extra), that’s great.”

• Retired but younger than 72: If at all possible, try to tap other income sources before turning to your 401(k), said Munnell and others. Even if you already started taking out 401(k) money, you can stop doing so.

“That’s a group that should try to postpone withdrawals,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. “That allows them to take advantage of the long run (in which) stocks outperform any other investment vehicles.”

• Retired and older than 72: At this age, you must withdraw 401(k) money or face severe tax penalties. Most providers will let you choose where within your 401(k) (or IRA if you’ve rolled it over) to take that money. Start by tapping any cash allocations, then tap your bonds (although they are also having a bad time), and only then should you cash out equities, Munnell said.

Copeland suggests that people who don’t need the withdrawals for living expenses could reinvest it to compensate for what they’re losing by having to sell at a low point.