If you’ve been following the stock market, you’re no doubt aware that the second quarter of the year had its fair share of turbulence. And so, not shockingly, many 401(k) savers are seeing lower balances for Q2 of 2022 than they were seeing a year prior.
Last quarter, the average 401(k) plan balance was $103,800, reports Fidelity. That’s down a jarring 20% from a year prior and down 15% from the first quarter of 2022.
Coping with losses
If you’re seeing a lower 401(k) balance, you may be stressing out over it — and understandably so. But one thing you must realize is that the Q2 balance you’re looking at represents a single moment in time. Stocks have already been rallying in August, so if you were to check your plan balance right now, there’s a good chance it’ll be higher than it was at the end of June.
But even if that’s not the case, try to remember that saving for retirement is a marathon, not a sprint. And if that milestone is many years away, there’s really no need to stress excessively over the state of your 401(k) right now.
Stocks have a long history of recovering from downturns and rewarding investors who don’t sell them when their value drops. So, if you leave your 401(k) alone (meaning don’t dump your investments), there’s a good chance your plan will recoup that lost value in time.
Should you cut back on 401(k) contributions during periods of market volatility?
Absolutely not. For one thing, many companies that sponsor 401(k)s also match worker contributions to some degree. If you stop funding your 401(k), you’ll give up that free money. Plus, if you’re saving in a traditional 401(k), you’re getting a nice tax break on your contributions. Halt that practice, and you might owe the IRS more.
Also, investing during a market downturn isn’t a bad thing because you might get a chance to add to your portfolio at a time when investments are more affordable. Now, employer-sponsored 401(k)s don’t let you buy individual stocks but rather limit you to different funds. But you might still benefit by loading up on broad market index funds in your 401(k) while the market is down.
Don’t play it too safe
In the wake of the last quarter’s events, you may be inclined to shift some of your 401(k) investments away from stocks and into bond funds. But try to resist that urge. Bonds may be less volatile than stocks, but they don’t tend to deliver the same strong returns. And if you go heavy on bonds, you could end up stunting your 401(k)’s growth — and wind up short on cash when retirement rolls around.
Remember, saving in a 401(k) plan is something you might do over the course of 25, 35, or 45 years — so try not to let the events of the past quarter get to you. Instead, focus on doing what you can to pump more money into your 401(k), all the while keeping your eyes on the big picture — setting yourself up for the comfortable retirement you deserve.
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