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A feeling of fear and disappointment comes when witnessing a recession for the first time. The fear and disappointment come from the fact that you will be looking at your retirement investment portfolio shrink before your eyes.
When a recession hits, most forms of investments depreciate; this is particularly true with 401k plans, as these are largely invested by default in stocks and shares. It is heart-breaking to watch the value of your retirement savings decrease weekly.
For some workers, a 401k plan is their first exposure to investment. Hence, it can be thrilling to see the money you contribute to your 401k retirement account grow. However, you will also know that your retirement investment portfolio can go down if you have been through recession periods.
Some people who have been through a recession believe that the best way to act is not to make decisions based on fear. They believe that real investors must learn to hold on to their investments.
The truth is that investors that believe in holding onto their 401k investments are not wrong. One advantage is that when you stay invested in the stock market, you can always purchase lower-priced shares and fill your investment bags because the market is down, and investors will sell their shares at bargain prices.
For investors who hold on to their shares during a recession, history has shown that their investment value will always bounce back.
But is that the best course of action to take? Should investors hold on to their 401k assets during an economic recession? Is there another recommended way to handle your 401k in a recession? If these questions or related ones are in your mind, read until the end of this review article to find answers.
Before we dive into the best cause of action during a recession, it will help us if we understand the WHYs of a recession. Why does a recession happen? What are the triggers? Here are three basic things that cause recessions:
As we progress more into 2023, consumers and financial experts are scared that recession is looming, and it is close. According to financial experts, the actions of the Federal Reserve to reduce inflation by increasing interest rates may bring the economy into recession. Here is how it works; consumers will spend less when the Federal Reserve increases interest rates. The reduced spending, in turn, will lead to the contracting of most sectors.
The reduced spending and economic activities will prevent some businesses from shutting their doors. When that happens, they will lay off some of their workers, increasing unemployment. Finally, it will lead to a decline in asset prices, including your 401k investments.
A 401k is a retirement plan sponsored by employers. Many companies in the private sector offer this type of retirement plan. In the public sector 403b or 457b plans are often used as an alternative to a 401k. The impact of a recession is broadly the same regardless of the type of retirement plan you hold. These plans allows employees to defer money from their paychecks to their retirement accounts.
The money you contribute to your 401k from your paycheck can be pre-taxed or post-taxed. For pre-tax contributions, your taxable income will be reduced for that year. In addition, your investment will increase tax-free in your 401k retirement account. Then you will pay the regular tax when withdrawing your money from a 401k pre-taxed account. This type of 401k is called a traditional 401k.
For a post-taxed account, you will pay taxes on the contributions you will make into your 401k from your paycheck. Then, the investment in your 401k account will grow tax-free. Unlike the traditional 401k, you will not pay taxes when you want to withdraw your funds from your 401k account. This type of 401k retirement plan is called a Roth 401k retirement plan.
Currently in 2023, the IRS permits up to $22,500 as contributions into 401k retirement accounts every year. Investors who are above 50 years can add $7,500. Some employers can also contribute specific salary percentages as matching contributions to their employees’ 401k accounts.
Immediately after you have invested some portion of your salary into your 401k, you can start making investments using the options your employer provides. Mutual and target-date funds are the most popular investments in many employers’ 401k investment menus.
Your funds will most likely be moved to a target-date fund if you contribute to your 401k without making any choice of funds. Usually, target-date funds are straightforward investment solutions having a mix of asset allocations that gets more conservative as they get closer to the target date for employees’ retirement.
There will be a recession when there is a prolonged, considerable, and significant downturn in a country’s economic activity. Here is a simple rule for recession; when there is negative growth in the GDP (Gross Domestic Product) of a country or economy for two consecutive quarters, then a recession will follow. There are more complex ways to know when a recession will hit, but this rule is a rule of thumb for knowing if a recession is close.
The NBER (National Bureau of Economic Research) economists use other indicators like retail sales, industrial production, and nonfarm payrolls to measure and predict recessions. They tend to go beyond the simple negative GDP growth for two consecutive quarters rule.
According to the NBER on Recession, “There are no fixed rules about what measures contribute information to the process or how they are weighted in our decisions.”
For a downturn to qualify as a recession, it must be long-lasting, pervasive, and deep. However, you still cannot rely on these measures to accurately pinpoint that a recession is coming or has begun.
Since the industrial revolution, many economies have witnessed steady growth with various exceptions of economic contractions. However, recessions are still not rare. According to the IMF (International Monetary Fund), from 1960 to 2007, 21 advanced economies of the world witnessed 122 recessions of up to 10%.
From 2008 till 2023, we have also witnessed fewer recessions, which were not long-lasting.
A downturn must be deep, pervasive, and lasting to qualify as a recession by the NBER’s definition. Still, these calls come after knowing there is no precise formula to identify a recession as soon as one begins.
The increased unemployment rate and reduced economic output that these recessions bring can be self-perpetuating. For instance, companies must lay off some of their staff when consumer demand declines badly. This action will negatively affect consumers’ spending power and further weaken consumer demand for goods and products.
In the same vein, a recession often comes with a bear market. A bear market refers to a period of continuing decline in the prices of security assets. During a bear market, the prices of these assets fall from their ATH (All Time Highs) to 20% or even lesser. Investors will become pessimistic and negatively sentimental about their investment assets when that happens.
The bear market that follows a recession can reverse the effects of wealth. It reduces the wealth of investors and further reduces consumption. The opposite of the Bear Markets is Bull Markets.
From the time of the Great Depression (1921 to 1941), world governments started adopting monetary and fiscal policies to prevent the recession from growing worse. Most world governments used automatic stabilizing factors like unemployment insurance to reduce the further occurrences of worse recessions. This insurance allows the government to give employees who lost their jobs money. The other measure that most governments take to curb the occurrences of recessions needs specific actions like reducing interest rates to trigger investments.
While we have mentioned that some world governments have put some things in place to prevent recessions in the past, we have also mentioned that there seems to be a coming recession on the economic and financial horizon because of the increase in interest rates by the Federal Reserve.
We also mentioned that a recession comes with a bear market and will negatively affect the prices of stock market assets including stocks, bonds, mutual funds, and ETFs (Exchange Traded Funds). Primarily, 401k portfolios accommodate these investment assets. Hence, a bear market will mean that the prices of your 401k investments assets must decline.
The big question at this point will be, “What will happen to my 401k balance when a recession hits?” Let’s see some facts and figures from previous events. An investment research firm, CFRA Research, said, “The S&P 500 has lost an average of 8.8% of its value during the four huge recessions since 1990.”
Hence, if you had $100,000 in your 401k before the recession, that money would be worth $91,200 at this time.
The truth is that all recessions do not have the same characteristics. At the peak of the 2008 Great Recession, the stock market dropped by at least 38%. If you had assets in your 401k, then the impact of the recession would be evident.
You must never lose sight of this fact; once the government declares a recession, know that the economy has been going down for some months before the declaration. Hence, you probably have seen losses in your 401k before you knew that a recession had hit. At this point, we think that a fundamental question to ask would be, “How Do I Protect My 401k From Being Affected by A Recession?” We will also provide answers to this question. Just keep reading till the end of this document.
According to Vanguard, an investment management firm, “Stock recoveries may begin soon after recessions commence. Over the last half-century, the earliest recessionary recovery in stocks began just two months into the brief economic downturn of 2020,”.
We have mentioned that the economic downturn that comes with a recession can be very scary, primarily when you have invested your 401k saving in securities and stock market investments. But also, remember that these downturns are temporary. Since the 20th century, the United States Stock Markets have always bounced back from each downturn or recession it faced.
According to professional financial advisors, knowing when the market will start recovering can be tricky. However, you will also be betting against the odds if you keep your funds on the sidelines. Hence, you will always hear financial advisors or financial planners telling you to remain in the market for the long term.
You will always run a 'lose money' risk whenever you invest your money in the stock market or other investments. Even when you make informed financial decisions, things may not always go as you plan. In addition, you may unconsciously allow emotions to influence your investment decisions sometimes because what is at stake here is important (your retirement).
However, regardless of what we have discussed in the first paragraph of this section, there are simple and complex strategies to cut down on the risks your 401k can get into during a recession. For instance, if you spread your assets into more than one investment type and invest in market areas with low volatility, you can preserve your 401k to some extent.
We all have short-term expenses that come up periodically. For instance, you may need to fix your car, buy back damaged house equipment, or pay medical bills.
Now, let us look at some of the most effective strategies you can employ to reduce losses even when a bear market comes due to a recession. We must warn you that you cannot eliminate the entire risks associated with recessionary marks.
When you give in to the panic and fear that comes with a recession and withdraw your money early, you will pay colossal tax penalties that will not favor you in the long term. If you are a younger worker, you should learn to ride the markets lows during a recession and gain the recovery rewards that will come.
Even if you are nearing your retirement age, your portfolio recover from the crash before you make the first withdrawal from your 401k account.
Using the 2020 stock market crash caused by the COVID-19 pandemic, you will see that the Dow Jones Industrial Average in February 2020 met an ATH of 29,551, but it fell to around 19,000 in March. After one year (April 2021), the average rose to 34,000.
If you had invested your retirement savings in 2020 and pulled out your money in March during the bear market, you would have missed out on the bull run (the opposite of the bear run) that took the Dow Jones Industrial Average to new ATHs after one year. To top it all, by January 2022, Dow Jones witnessed a newer ATH of 36,585. People who did not pull out their money from the market during the recession caused by the COVID-19 pandemic in 2020 enjoyed a massive bounce back of their investment portfolios after one year.
If you want to protect your 401k from a crash in the stock market due to a recession, you must learn how to allocate your assets properly. Investors know that stock market investments come with many risks and rewards. The highly volatile nature of stock market investments makes them more rewarding than other investment types. Bonds are less risky than stocks, but they do not offer returns as much as stock investments will.
Diversifying your 401k funds and investing in mutual funds, stocks, bonds, and other asset classes like self-directed IRAs (Individual Retirement Accounts) is an investment strategy that can shield you from losing money during down markets. In addition, the amount of money you wish to put into various types of investments should depend on your financial goals, income, and how close you are to retirement. The truth is that if you are not close to your retirement age, there is a high chance you will recover from recession and market downturns.
Hence, if you are a 401 k owner in your 20s, you can put heavy amounts in stocks. However, if you are nearing retirement age, you should put less money in stocks and more in other lower risk or even a stable investment like a gold IRA.
Putting a part of the money from your 401k, 403 or 457b retirement plan into a gold IRA will help shield it from declining even when there is a recession or a stock market crash. Throughout the years, gold has saved investors funds from stock market crashes. The commodity seems to have an inverse relationship with downturns in the stock market. When the stock market and stock prices are witnessing a downtrend, the gold market and prices always witness an uptrend.
If you are still curious about how much of your 401 k you should invest in stock and bonds, here is a general rule of thumb for finding that out. Take away your age from 110 years. You should invest a percentage of that number in stocks. If you are a high-risk-tolerant investor, you can use 120 years; if you are less risk tolerant, use 100 years.
As much as this rule of thumb can hint at the investment percentage, it is too basic and can limit you. Typically, some situations may be unique to some investors and will not allow them to invest optimally if they follow this rule of thumb.
We recommend a more comprehensive method to determine what percentage you want to allocate to stock and bond investments.
The factors you should consider before deciding the percentage among others are;
You can also seek the professional services of an expert financial advisor or financial planner to aid you while making the financial planning for your portfolio allocation.
Another crucial thing you need to do if you want to protect your money from recession is to rebalance your portfolio. When you sense a recession is coming using the indicators we mentioned above, the next thing to do is to ensure you change the percentage distributions in various investment assets. Again, depending on how close you are to retirement, this singular action can save your retirement savings from declining in value when the stock market crashes.
Overtime, some investment types in your portfolio will do better than others. The growth in some of these better performing investment types will increase the percentage of the money you have invested in them and potentially expose your portfolio to more risks.
Portfolio rebalancing helps you to re-allocate the percentages the way you originally planned out when you drew your 401k investment plan.
Investing in target-date funds is one way to ensure that your portfolio keeps being rebalanced. These funds are a mix of investments specially designed to mature when you are approach your retirement year. These funds will rebalance your investment automatically by moving your portfolio to safer assets as the maturity date draws closer.
It is wise to check and rebalance your 401k investment option selections, at least once yearly. Some financial advisors recommend rebalancing portfolios once every three months. Rebalancing and checking you have the optimal selection of assets classes and the correct amount of money invested in each asset class is even more important as you approach your desired retirement age.
Please note that rebalancing your portfolio differs from withdrawing money after selling your gained positions. The selling off some of your assets after gains and buying other alternative asset investments must happen within your 401k to be called a portfolio rebalancing. This way, you will not pay taxes.
Hence, another effective way to rebalance your portfolio and reduce the possible impact from such things as inflation is by investing some of your retirement funds in a precious metals IRA through a gold- IRA rollover. Usually, when you do that, you will keep some of your money in a more stable investment while reducing the risk of investing more in the highly volatile stock market.
Most financial experts recommend that those who retire or are planning to retire should hold cash amounts or equivalents that can cover living expenses for as long as three to five years. Truthfully, when you have cash reserves, you can pay for expenses you did not prepare for. Sometimes this cash can help you sort expenses that fixed incomes will not cover.
Having some ready liquid cash will help you eliminate the risk called “sequence of returns.” This risk is the danger of early retirement withdrawal when the market is down. Such withdrawals will permanently reduce your retirement portfolio longevity. You will shorten the longevity of your portfolio when you sell low.
However, when retirees have enough cash to sustain them for three to five years, they will withdraw less or no money from their 401k when there is a decline in the market because the cash at hand should be able to sort out their daily living expenses.
You will protect your 401k from recession and stock market volatility by contributing money to your 401k account. When you quit investing in assets because of the stock market decline, you will miss the opportunity to buy investment assets for low or discounted prices.
Similarly, you must maintain your 401k contributions when you have exceeded growth on your investment assets even above expectations. No matter the condition of your investment and the market in general, being constant with your contribution will save your retirement funds from losses and shield you from volatile markets in the future. Ultimately, you will enjoy the dividends that come with the market corrections.
Every type of investment has some level of risk associated with it. Those with high risks bring high returns, and those with low risks bring low returns.
First, you need to know that there is no best retirement plan. We only have safer retirement saver or saving options. Of course, these plans will generate less profit than high-risk plans or investment assets. Hence, we would always recommend a balanced and well-diversified portfolio. This type of portfolio should include stocks, bonds, and gold investments through an IRA.
A gold IRA is a retirement investment plan that allows anyone to hold physical gold and other precious metals in their retirement accounts. 401k retirement plans do not allow for the inclusion of these investments except for their paper types like gold stocks, gold mutual funds, and gold ETFs.
Throughout history, gold and silver have been observed to perform so well amid recessions and other market slowdowns. During or when a recession is about to hit, the demand for precious metals increases, and that high demand causes the prices to go up. For instance, in March 2023, when the Federal Reserve hiked the interest rates after Signature Bank and Silicon Valley Bank collapsed, the price of gold increased by 1.54% while silver increased by 2.97%.
This scenario is not the first time investors have turned to gold and silver assets to shield their wealth from market crashes. For many years, gold and silver have proven to be a formidable store of value that can shield investors’ savings from inflation, recession, and other market crashes affecting stock market investments.
Hence, while there are various retirement investment vehicles, gold investments are one of the best, most stable, and safest for protecting your 401k retirement savings.
However, you cannot directly invest in gold using your 401k funds or add physical gold to your 401k portfolio. Suppose you want to invest in gold using your 401k. In that case, you must open a gold IRA and perform a 401k to gold IRA rollover. This rollover allows you to invest or buy gold, silver, platinum, and palladium bullion coins, rounds, and bars for inclusion in your retirement portfolio.
If you need to learn how to open a gold IRA and roll over funds from your 401k account into your gold IRA account, please read the next section of this article.
The following section contains five reputable companies in the USA that have helped thousands of employees in the country to open their gold IRAs, rollover funds, and select the best and most profitable gold and silver investments. These companies are experts in precious metals and setting up gold and silver IRA plans that help protect your wealth.
Please click the relevant links in the next section to download these companies’ gold investment guides. These guides will show you all you need to know about the company and gold IRA investments.
This company is the absolute best precious metals IRA firm in the U.S. today due to Augusta’s transparency, pricing, dedication to education, and extraordinary attention given to customers. We highly recommend that everyone take advantage of their free web conference that helps you understand the economy, threats to your retirement, and the precious metals buying process (designed by their in-house Harvard-certified economic analyst). They even share tips for avoiding gimmicks and high-pressure tactics in this unregulated industry.
This gold precious metals specialist company was chosen by Money magazine as “The Best Overall” in its Best Gold IRA Companies list for 2023. It is the only gold IRA firm with ZERO complaints on the BBB website since 2012. It has an outstanding track record proven by consumer watchdog ratings and tons of the best customer reviews, including endorsement by hall-of-fame quarterback Joe Montana, whose advisors found Augusta for him. We are thrilled to recommend Augusta as our #1 gold IRA company!
To start investing with Augusta Precious Metals, please click this link to download its 2023 gold investment kit for free.
Established in 2006, this company has an excellent solid record and is our top recommendation for people looking to invest over $25,000 in a gold IRA. We consider this gold trading online platform the 2nd best Gold IRA Company in The USA Today.
To start investing with Goldco, please click this link to download its 2023 gold investment kit for free.
One of the most trusted Gold and Precious Metal brokers in the United States is American Hartford Gold. This family-owned company is endorsed by Bill O’Reilly and America’s Mayor, Rudy Giuliani.
American Hartford Gold is great for gold and palladium IRA and purchasing physical Gold, Silver, and Platinum.
To start investing with American Hartford Gold, please click this link to download its 2023 gold investment kit for free.
Since it was established in 2003, the company has delighted customers and provided excellent customer education. Birch Gold Group’s one-on-one interactions with customers are a fundamental advantage for those who want to make vital decisions impacting their financial future.
To start investing with Birch Gold Group, please click this link to download its 2023 gold investment kit for free.
The truth is that Noble Gold has not been around the scene for a long time, but it has, in the shortest time possible, made huge impacts on the gold IRA market. Since its inception, the company has captured customers’ hearts via its vast educational resources gallery, a wide range of investment options, and low investment requirements. The company’s commitment to customer service also has high ratings on third-party rating sites like BCA and Consumer Affairs.
According to the agent we spoke to, Noble Gold gives customers a committed account manager from the first day they decide to open a gold IRA account with it. The knowledgeable professionals will also give the customers all they need to know about how a gold IRA works and the setup process. In addition, they offer a smooth buyback process to their customers.
Noble Gold works with Delaware Depository and Brink’s Global Services to provide storage services for its customers. In addition to these storage companies, Noble Gold owns its depository in Texas. Hence, customers can choose to store their metals in any of these three depositories.
To start investing with Noble Gold Investment, please click this link to download its 2023 gold investment kit for free.
You cannot control when and what will trigger a recession as an individual, but you can prevent the recession from eating deep into your retirement portfolio. In this article, we have provided details on how you can protect your 401k retirement savings from the bear market and recession. If you take the actions we mentioned above, you will mitigate many risks associated with 401k and periods of recession.
Finally, suppose you want to enjoy investment stability no matter how bad or prolonged any recession gets. In that case, you must put your 401k into investment vehicles that have proven they can beat recessions. One of those investment vehicles is a gold IRA.
We believe the best thing to do now, ahead of the looming recession signalled by the recent Fed’s interest hike, is to balance your retirement portfolio as quickly as possible using gold and silver investments.
Like we always say, prevention is better than cure. You can stop your assets from declining even when the recession hits by investing a significant amount of your 401k retirement savings in gold and silver through an IRA.
To get started, even if you are new to the gold IRA investment world, please click the links in the previous section to download 2023 gold investment kits from our top 5 gold IRA companies in the United States.