how to protect your 401k from a market crash

Is Your 401k Prepared for a Market Crash? Follow these Tips

When we talk about stock market crashes, we often think about stocks, bonds, or mutual funds directly connected to the stock market. But have you ever thought of such investments that are indirectly connected to the stock market but directly impact those investments? One such investment is 401k. If you don't know, 401k is invested in stocks where its value goes up or down depending on the market. For many, it is an essential part of retirement planning, and thinking about a market crash can be scary for them. If you want to know about the 401k Market crash and also want to protect your savings from a market crash, we have shoved it for you here.

Key Highlights

  • A recession is when the economy significantly slows down and the value of your investment in your 401k declines. 
  • By diversifying your 401k investment, you can mitigate the risk of market downtowns and market crashes.
  • By adjusting your asset allocation, you can protect your retirement savings against volatility.

How to Protect Your 401(k) From a Stock Market Crash? 

If you want to protect your 401k portfolio, here are some tips you can apply to stay strong during the market crashes

  • Stay in your long-term investing journey

It doesn't matter how uncertain the market is; experts advise every investor to stay in the course of their 401k journey. Recession and bear market are a part of the economic cycle, which sometimes makes you emotionally decide to deter your investments. But keep your goal in mind and stay focused on your investing journey, no matter how difficult. Taking out your money during a time of volatility can negatively impact you, and you may not accomplish your long-term goal.

You can use dollar cost average, where you invest a fixed amount of money or set a percentage of your pay into your 401k, but some need to do it on their own. When you add into your 401k each month, and your employer also contributes to it, it is a good way to buy some shares at a lower price and reduce the cost of your investment. This method helps you rebound your losses faster as you can lower your break-even point. 

  • Consider when you are looking to retire.

It is an important step because if you are 57, you are on the verge of retiring much faster. Your approach should be different from a 32-year-old. Your retirement saving goals are now different from those of a 32-year-old. It similarly applies to your emergency saving goals. If you are 59 and ½ years old, you must rollover your fund account to an IRA for more financial options. It will help diversify your investment options and protect you in down markets. If you are a younger investor in your 401k, you have ample time to rebound, but if you make your portfolio too conservative, it's a big mistake.

  • Diversify your portfolio

Protecting your 401k from the stock market crash is crucial, and diversification is one of the swords that protects and offers maximum returns. When you invest in stocks, they are risky but also offer higher rewards than other assets. On the other side, bonds that are safer investments usually yield lesser returns. Diversification mainly depends on how close you are to retirement. It means the more time you have for retirement, the more time you get to recover from the market downtown and market crashes and vice versa.

  • Consider investing in defensive stocks.

Defensive stocks are those that perform well during a recession and economic downturn. These stocks belong to the companies within sectors where people must spend money regardless of the economic cycle. It includes companies involved in consumer staples, healthcare and utilities. When the stock market was down, and the S&P 500 index was down year on year by 20% in 2022, the health sector was down only 4%, and the utility sector was up by 1.22%.

Will I lose my 401k if the economy crashes? 

A recession and market crash can badly hurt your 401k balance. Research by CFRA found that the S&P 500 lost about 8.8% of its value during the four recessions since 1990. If you had a balance of $100,000 before the recession, the 8.8% loss means your balance dropped to $91,200. Well, not all recessions behave the same way, and some recessions, like the Great Recession of 2008, fell more than 38%, and their effect on 401k was more noticeable.

One thing about recession is when the economy is about to go into the recession phase, it begins to have a downward trend for several months. It means it signals that you can witness losses in your 401k before you know you are in a recession.

Should I cash out my 401k before the economic collapse? 

When you think of cashing out your 401k during market crashes, it is the worst thing you can do to your 401k contribution. Market downturns and recessions are generally short-term and minimal compared to the following rebounds. To have the best from your 401k, it is good to hold your investment as long as possible, even during a bear market. You don't lose anything, but you get more after the rebound.

What happens to 401k if the US dollar collapses? 

The collapse of the dollar means a decrease in the value of US dollars compared to other currencies. If the dollar collapses, it will bring volatility in the stock market. This volatility can further cause fluctuations in stock prices and ultimately impact the value of 401k investments. When the dollar's value declines, it also decreases the purchasing power of your retirement savings. This means the amount of goods and services you can afford with your 401k may also be reduced.

Another important component of your 401k is that if the dollar collapses, it will affect the bond value and rising interest rate, negatively impacting your 401k. Here, it is important to understand that the impact of a dollar collapse on 401k will depend on various factors like the composition of your investment portfolio and the action you take to protect and diversify your retirement savings.

Can the government take your 401k during a recession? 

The government cannot take your 401k even during a recession because they are protected from government seizures. However, in some circumstances, the government may be able to take a part or all of your 401k savings, but they are not related to the recession- in the event of unpaid taxes and bankruptcy. However, it is also important to note that these circumstances are very rare, and the government or other parties do not access your 401k savings.

Should I move my 401k to a stable fund? 

When you think of moving your 401k to a stable fund, you must understand what stable value funds are. They are a portfolio of bonds that have some insurance guarantee behind them. You receive an agreed interest rate, and they are often laddered to move over a specific time frame. Stable funds are safe as their underlying bonds are of high quality and are held till maturity, and the risk associated with them is quite lower compared to stock or bond trading. 

If you are about to retire, stable value funds can be a great choice if you are a conservative investor. They provide income with minimum risk and can somewhat stabilise the rest of your portfolio. However, you should not see them as long-term growth vehicles because they give a different return than stock funds.


Protecting 401k from a stock market crash is crucial. Here, investors and savers must understand that their 401k also needs diversification to protect it from market volatility. To reap the best from 401k, it is important not to panic during the declining market and rebalance it whenever needed. Most importantly, it is essential to continue contributing to your 401k, whether it is in a bull or bear market.


  • What should I do with my 401k right now, 2024? 

If you look at inflation in 2023, it has cooled slightly, but the inflation rate in 2022 was the highest since 1981. It shows that prices have increased substantially in the last two years, and now, retirees need to either save more or get a higher return for their investment. The first option may be quite difficult for those approaching retirement, but earning a high rate of return is quite visible, but it typically comes with the risk. 

If you look at the future of retirement, lower portfolio growth will likely affect investors in the coming years. The investment portfolio must be adjusted to meet inflation and recession risks. The US economy may avoid the risk of recession in the near term, but higher inflation and interest rates may impact the retirement fund.

  • How much should you contribute to your 401k?

It depends on the circumstances, but you must contribute enough to receive any match your employer offers. In 2024, the employee contribution limit for a 401k plan was set at $23,000, which was earlier $22,500. The simple approach to contribute to your 401k is to contribute early in your career.

Read Also:

  1. How to make Passive Income

  2. How to deal with Financial Worries

09 Mar, 2024


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