How to Shield Your 401(k) from 3 Hidden Threats

As you approach retirement, your 401(k) shifts from a savings account into the paycheck you'll rely on for the next 20, 30 or 40 years, making it essential to protect what you've built.

In this blog, we’ll cover three major risks retirees face and the strategies you can use to safeguard your savings and stay on track toward your retirement goals.

Key Takeaways:

• A market downturn can be far more damaging closer to retirement, potentially delaying retirement or forcing budget cuts, so diversifying your 401(k) helps cushion losses in any one area.
• Losses that hit early in retirement can do more lasting damage than the same losses later on. Using a "bucket" strategy and drawing from more conservative investments early helps manage this timing risk.
• Rising life expectancy means retirees may underestimate how much they'll need (especially with inflation and medical costs), so keeping a portion of savings in higher-growth investments helps your money keep pace over a longer retirement.

You probably already know the common non-negotiables of a 401(k), such as maxing out your company match, or increasing your rate of contribution as time goes on. But while you are working hard building up that savings, there are external factors that could eat away at the wealth that you’ve accumulated.

Here are three major factors that pose a risk to your 401(k) and how to protect your future retirement:

Market Risk

When you are in your 20s or 30s, a market decline may seem like an opportunity for future gains, or at least not anything to be overly concerned about. But when you are in your 50s and 60s, those losses become a much bigger deal.

A market decline could derail or delay your retirement plans. You may find yourself needing to work longer or live under a much tighter budget than you originally planned in retirement.

One of the best ways you can protect against market risk is by having a diversified 401(k). By diversifying and spreading your money across different investments, poor performance in one area can be balanced by better performance in another and lessen overall impact.

Sequence of Return Risk

Unlike market risk which refers to how the poor returns themselves can impact your overall 401(k), sequence of return risk refers to the risk you have depending on when those losses occur during your retirement.

For example, imagine someone who just started withdrawing from their 401(k) when the market takes a big downturn. That early loss might hit much harder than it would if the same drop happened later in retirement.

So, what are some ways that you could protect yourself against a sequence of return risk? One way is to divide your overall investment account (401(k) or another individual retirement account) into buckets. Designate one bucket to a much more conservative investment allocation, one to a more moderate investment allocation, and the last one to a more aggressive allocation.

Once you have those different buckets, you could take your withdrawals from the conservative allocation during the early portion of the retirement period, while you wait on the portions of your account that are in more aggressive allocations.

This method provides more protection for the money you need in the early years of retirement, while giving the remaining portion of your savings the potential to grow for your later years.

Longevity Risk

This last risk is all about the risk of living longer than your assets can comfortably cover your expenses or outliving your assets.

It’s no secret that people are living longer than they ever have in the United States. According to the CDC’s National Center for Health Statistics, life expectancy has climbed to 78.4 years in 2023, the most recent final data available, up from around 77 in the mid-2000s.

This is obviously good news overall. But the issue arises when retirees underestimate the amount of money they will need over the course of their retirement because of a longer lifespan.

As you think about those additional years, you should also consider the higher inflation and additional medical expenses that you will likely face as you age.

So, how can you protect yourself from the longevity risk? As much as it is critical to save and protect what you have saved in your 401(k), it’s just as important to have a segment or portion of your 401(k) or investment account in high growth investments that's going to keep up with those additional costs in the retirement period.

Bottom Line

Your 401(k) is one of the most powerful benefits you have for your retirement. It’s an account you’ve been contributing to for years, if not decades. The least you can do is take a few actions to protect your hard-earned money.

Review your overall investment allocation and make sure that the risks, as well as the investments, are aligned with your retirement date and estimated length of retirement. And lastly, make sure you have a proper income strategy to understand where you're going to be taking those early withdrawals from.

Remember, retirement itself shouldn't be the only goal. Having a plan that safeguards your money to make sure it’s there throughout your life is what matters most.

If you want more personalized guidance on your 401(k), or any aspect of your retirement plan, set up a complimentary consultation.