We all have questions about retirement: Where to live, travel, and financial security? How do you know if you’re ready? Reader T. Ferguson asked: “Should I keep money in my 401(k) or should I transfer it to another tax-deferred fund? The last two quarters it has lost over $80,000. Money we will not regain. I am 66.”
The unfortunate reality is this has simply not been a great year for investors. At the time of this writing, the U.S. stock market (as measured by the S&P 500) is on track for its 6th worst year in history. That can be scary for a retiree and it’s understandable that you’d want to “fix the leak” in your retirement savings.
To get a good understanding of what you might need to do, I think there are a couple of things wrapped up in Ferguson’s question that we should separate before jumping to an answer.
Accounts Vs. Investments
First, let’s talk about account types. A 401(k) is an employer-sponsored retirement account that provides a means of saving for retirement with some tax advantages. Specifically, you can deduct your contributions and you won’t owe income tax on the dividends, interest, or capital gains earned on the investments until you withdraw the money from your account.
That’s the account structure. Then, there are investments you hold within the account.
Once you contribute money to the account, either through salary deferral or your employer’s matching contributions, you then need to decide how you will invest it. Your contributions can be allocated to various investments, normally different types of mutual funds that hold stocks and bonds.
It’s your investment choices within the account that influence your investment performance.
When you ask if you should keep your money in a 401(k) or transfer it to another tax-deferred fund, it sounds like you want to move money from the 401(k) to another account — probably an IRA. This is also an account type (not sponsored by your employer) that offers very similar tax advantages as a 401(k).
There may be reasons you should transfer your 401(k) to an IRA, but moving your money from one account type to another has very little direct effect on your investment performance.
Investments Vs. Investment Plans
That means the better answer to your question lies less within the type of tax-deferred account you hold your money in, and more so with your investments.
More aggressive investments generally grow more than conservative investments when the market is climbing, as it did nearly every year since 2008; but they also tend to drop more when the market is falling, as it has this year. I’m sure it seems natural, then, that you’d want to invest aggressively when the market is doing well, but switch to more conservative investments when the market stalls.
Attempting to do so, however, is a very complex guessing game. You may do it successfully on occasion, but it is very likely that trying to do so will significantly reduce your long-term investment performance. Investors often panic when the market declines and then sell after their investments fall, but then get excited when they hear about how well the market is doing during good times and buy after prices have already climbed. This is the exact opposite of what they were attempting to do.
Investors often focus on short-term periods which can also have a negative effect. While you may not be doing that, it’s easy to think that the “money we will not regain.” If you’re properly diversified and have the right mix of assets — so that you can hold your current portfolio for the long term — you might very well recover those losses over time.
You’ll likely be better off in the long term if you invest according to a plan that doesn’t involve trying to guess what the market will do next. You may be happier and more satisfied, too, because you probably won’t feel the need to chase returns anymore.
In the context of retirement, investing with a plan means that you align your investment choices with your goals. This often involves putting numbers to things like:
- An ability to support your desired lifestyle.
- Not paying more than you have to in taxes.
- Managing investment risks so fluctuations don’t derail the plan, or cause you too much stress.
So What Should You Do?
Of course, I don’t know how you are currently invested. You may be invested conservatively, aggressively, have proper diversification, or maybe just own a few stocks.
I also can’t tell you what you should do with your 401(k) without knowing what you want that money to do for you. The first step toward figuring that out is to make sure that you have a plan and know what you want the money to provide for you.
Then, make sure your investments are appropriate for achieving your specific goals.
For more investment advice, read up on our retirement content:
