We're in a recession. That may not be news to you, seeing as how unemployment is still through the roof, but it could impact the way you approach your 401(k) plan. Here are a few strategies it pays to employ during the latter part of 2020, especially as our economy remains sluggish.
1. Contribute enough money to snag your employer match
When recessions strike, employers tend to cut corners in an effort to save themselves money, and that could mean taking away the 401(k) match they normally offer to those who participate in their retirement plans. But if your employer match is still in play, then it definitely pays to take advantage of it, especially if your income is holding steady.
For the current year, you can contribute up to $19,500 to a 401(k) if you're under 50, or up to $26,000 if you're 50 or older, but to snag your full match, you generally won't need to come close to maxing out. Make sure you understand what contribution on your part it will take to claim your match so that you don't pass up free money at a time when it could really come in handy.
2. Keep your investments diversified
A diverse 401(k) is a retirement plan that's well-position to withstand volatility. That's especially important if you're close to retirement and may need to start taking withdrawals from that plan in the next year or two.
First, make sure your 401(k) is invested in a manner that aligns with your tolerance for risk -- keeping in mind that that tolerance should wane as retirement nears. If you're younger, feel free to go heavy on stock investments, because they'll generally deliver better returns than bond funds. But if you're closer to retirement, a more substantial chunk of your 401(k) should be in bonds.
Then, you'll want to diversify within each asset class. For example, your 401(k) will likely offer different stock-based funds, and it pays to aim for a mix. That could mean buying some large cap funds, some small cap funds, and some international funds.
3. Don't make rash decisions when your plan balance declines
The purpose of a 401(k) is to serve as an income source during retirement, so if that milestone is years away, don't let a drop in your savings balance mess with your head. It's never settling to see the value of your 401(k) decline on paper, or on screen, but if you stay calm and avoid swapping investments the minute things go south, you'll be less likely to actually lock in losses in that account.
Even if you're close to retirement, don't get impulsive when your balance declines. Given our current recession, that could happen in the coming months, but if you sit tight, you may find that your 401(k) recovers in a relatively swift fashion.
Managing your retirement savings is important at all times. During a recession, even more so. Take these tips to heart to make the most of your 401(k) during these uncertain times.