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Help! My 401(k) is Losing Money!

by Ryan Guina

This past week my workplace was abuzz with conversations regarding how much money people lost in their 401(k) plans. I’m sure similar conversations were going on just about everywhere. With the recent difficulties in the market place and the worldwide economy, it’s almost inevitable that you lost some money in your retirement accounts. I’ve lost quite a bit! But I’m not overly concerned about it right now (partly because I have about 30 years until retirement). I know that corrections and even major drops like this will happen. I plan on staying the course and continuing to invest for my retirement. I

What you should do with your 401(k) in this market

Don’t panic. Panic is never a good thing. Panic causes people to make irrational and often detrimental decisions. Look at your situation and assess your options.

Look at your asset allocation. If your retirement holdings are properly allocated, you are in a good position to weather the storm. Generally, the closer you are to retirement, the more conservative you want to be with your investments. The further out you are, the more flexibility you have in regard to risk. You may find that you need to make a few adjustments after the dust settles, but maintaining a good allocation will make it easier to get your portfolio back on track.

Don’t withdraw your funds. Even though you may have lost money in your account, it’s  better to leave your money in your 401(k) plan, otherwise you may face stiff early withdrawal penalties that will compound your current losses. Rebalancing your portfolio now and moving assets from equities into fixed return assets could be a case of selling low – which is the wrong thing to do.

Continue your contributing to your 401(k). If you are uncomfortable putting your money into the stock market right now, then consider making your contributions into a cash or money market fund if you have one available. You can also consider maintaining your contributions in their current funds. Remember, with dollar cost averaging you will buy more shares when prices are low which is a good thing when it comes time to sell. It’s true that the markets may continue to drop, but you never now when or how much. The more money you get in at lower prices, the more money you can potentially make when the markets increase.

I’m holding steady

I’ve lost quite a bit of money in the last few weeks – and it hurts to look at accounts that are 40% lower than they were just a couple months ago. But I’m looking at my 401(k) account (and my IRAs and other accounts) for what they are – retirement accounts. I have 30 years before I will be eligible to make withdrawals and I know that between now and then the markets are bound to recover. My job now is to make sure I stick to my game plan and maintain a solid asset allocation. The more money I pump into my retirement accounts now, the easier my life should be when I reach retirement age. And I know that old me will thank young me for sticking to the game plan, even when it looked like the sky was falling.


Published or updated October 10, 2008.
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{ 36 comments… read them below or add one }

1 Pinyo

Great article Ryan. It’s troubling what’s going on right now, but you’re right. The day we need money is a long way off and the best course of action is to stay the course. That’s what I am doing and that’s what’s a lot of my readers are saying they are doing.

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2 Dividend Growth Investor

Great article. Rebalancing from stocks to fixed income might not be a good idea right now however. Maybe the other way around. :-)

If you have at least 20 years to retirement, then why bother selling and locking in capital losses when the likelihood of the market increasing over the next 2 decades is pretty high..

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3 Miranda

Thanks for this measured, practical post. We need more thoughts along this line. It’s time to stem the rising tide of panic.

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4 Ryan

DGI, Very good point. I think putting more money in equities is an opportunity right now. But it is certainly better to keep the funds in a retirement account instead of withdrawing the funds as cash.

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5 Chad @ Sentient Money

I couldn’t disagree with you more on:

“It’s OK to rebalance your funds or move some of your holdings from equities to a cash or money market fund if you are risk averse and the market scares you.”

If you are making this decision now, you have made a huge mistake. You have to make this decision when you initially put your cash in. Making it now is like running the Boston Marathon, taking the pain, and then pulling out at the 25 mile mark. Why experience all the pain, but not experience the euphoria of finishing. You have experienced 80% to 90% of the pain now, just leave it in. Selling of this type signals a bottom. Don’t buy at the top and sell at the bottom.

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6 Ryan

Chad, You’re right. I don’t think I should have written it that way. My thought behind that statement was that it is better to keep you money in your retirement account instead of withdrawing funds and taking penalties. I think exchanging equities after they have lost a lot of value is selling low and doing the exact opposite of what one should do. Thanks for pointing this out, and I will modify the article to reflect that.

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7 Chad @ Sentient Money

I agree with that. No one should take this loss and then take a penalty by removing money from their 401k early.

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8 Alisa

Very sound investing advice. I agree that it will pay off in the long run to hold steady. Why take a loss, when, chances are, your portfolio is due for a rebound. Even if it takes some time. And also, why take on the penalties that go along with cashing in early? It’s not easy… but as it was mentioned… this may be a good opportunity to increase shares at a lower price.

Be well.

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9 Dan

It amazes me how many otherwise very intelligent people I know are looking to pull their money out of their 401k’s now. They believe they’re cutting their losses, but as everyone else mentioned on this thread, what they’re really doing is guaranteeing a negative return. And they look at me like I’m nuts.

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10 Mary

Great advice, actually addressed most of my concerns. I was almost pulled into withdrawing since I lost so much in my 401K. I’m not ready to retire no time soon, and feel that things will get better in the long hall.

Thanks to everyone, we need more positive post like these.

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11 Ryan

Mary: Glad to hear you decided against withdrawing your funds! You have plenty of time to recoup your investments, and over the long haul, I think you’ll be happy you left the money in.

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12 frannie

I have lost over 40K during this rollerball stock market. I am over 65 and have less than 150K left. I am so scared. What are my options?

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13 vern miller

The advice of the threads are good,but one question is at hand,just for kicks and giggles what if the world we live in doesn’t get any better in the future?.What if the smart investors take the risk and REMOVE their 401k money and invest in a more secure market.I sometimes think cutting your losses in a crazy “no one knows what the future will bring world” is not a bad thing.

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14 Ryan

Vern: It’s always good to ask “what-if?” But be careful taking money out because not only will you lock in losses, but you may incur stiff early withdrawal penalties. If you are concerned with the direction of the market it would be better to leave the money in an IRA, 401(k), or other retirement account, and transfer the funds from equities to cash equivalents that are guaranteed – such as a CD or government bonds. That way you do not incur penalties and earn a guaranteed return. When/if you feel better about the market you can move more money back into equities. But the problem with doing this is that you may lock in losses now and not move your money back into equities before prices go back up.

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15 Rita

All of your advice sounds wonderful for those of you who have 20 years to wait for the investments to come back. My husband and I are 70 years old. We don’t have 20 years to wait. I’d like to have advice for our age group. We are losing much of what we saved.

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16 Ryan

Rita: I focus my writings primarily on the issues younger people are experiencing because I am part of that generation and it is what I know the best.

The most important thing at this stage of your lives is wealth preservation, and normally the best way to do that is through proper asset allocation. If your investments have dropped precipitously in the last few months, now may not be the best time to rebalance your assets because you would be locking in losses. Unfortunately, no one knows when the markets will turn around.

I cannot recommend any specific actions other than speaking with a professional financial planner, and the sooner the better. I wish you and your husband luck.

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17 Scott

2 questions:

What if the government decides to follow FDR even further and simply takes our savings to apply towards their debt (war or other social debts)?

Also, what if the government takes our retirement money and invests it in social security? The option has been brought up by more than one person in congress.

Does it then make sense to remove your money now? I am 34 and had over $170K last year, now I am around $60K I am thinking of buying gold/silver an land to live on if it keeps getting worse. What are your thoughts on those two points?

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18 Robert

My concern is if your 401k is your only retirement vehicle …then why do you have all of your eggs in one basket ? Withdraw a portion of your 401k and put it into an insurance product not subject to market losses that guarantees you interest and bonuses upfront on you deposit.
Robert /Michigan

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19 Robert

Chad, I know many employees and retirees that have worked for the big 3 that have already lost some or all of their 401k to the market . So if they would have had some of their funds in another retirement vehicle their chance of losses would be reduced.

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20 Ryan

Robert: Robert,

The losses people have experienced has nothing to do with the retirement vehicle, but rather the equities and other investments that were held in the retirement vehicle. People with insurance products have also lost money, as have people with 401k’s, IRA’s, and other similar retirement plans.

Many insurance products invest in bonds and other forms of investments that are typically “safer” and less volatile than stocks. That doesn’t mean they can’t lose money (unless they are in government bonds or CDs, which are pretty much the only guaranteed investments). But these investments are also available in 401k plans, IRAs and other retirement investment plans.

For those who lost some of their investments, it could be because their asset allocation was too heavy in stocks, especially if much of it was in their own company’s stock and their company has lost a substantial market value.

Insurance products have their place as investments, but I would caution you or anyone else before withdrawing some or all of your 401k plan and putting it into an insurance vehicle. There can be early withdrawal penalties associated with early retirement fund withdrawals, and the insurance product may not be the best investment vehicle for your needs. Some of these plans are full of fees and restrictions that limit your access to your investments. I recommend doing your research before making a move like this.

To put it more simply: “the 401k is not the issue – it is what is in the 401k that matters.” You can substitute IRA or other retirement plan for 401k.

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21 Robert

Chad, “All” to a retiree is when they had $73k and now they’re down to under $4k . My aunt is one of the people I’m talking about . She’s retired and is 59 years old . I should have phrased that a little differently …needless to say her 4k she has left won’t buy a whole lot these days… much less get her through the long road ahead that many of us our facing . I still believe that putting your funds into several retirement vehicles is much better than having only one to rely on for your entire life.

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22 Chad @ Sentient Money

@ Robert
That doesn’t make you any safer. All you did was move your stocks/bonds to another company. Another company, that itself, could easily go bankrupt. Just because they “guarantee” a return, doesn’t mean you will get it. All you have to do is look at AIG or Travelers to see how close thousands of people were to losing these investments.

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23 Chad @ Sentient Money

@ Robert
You don’t know anyone who has lost all of their 401k in the market. 401ks by nature force you to use funds, not buy individual stock, which makes it almost impossible to go to zero. Even financial sector funds aren’t at zero.

If they are already retired it might be an ok idea, but if they are 6 or more years away from retirement then all this would do is lower their return. Yes, they wouldn’t have lost as much, but they won’t make nearly as much when the market recovers over the next 2-5 years.

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24 Chad @ Sentient Money

Our disagreement is who controls your money. I can’t believe people still trust others to manage their money when 80-90% of the financial industry proved they are not trustworthy over the last year.

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25 Lily

i just cashed out my Vanguard Roth IRA & Rollover IRA. I couldn’t bare anymore loss from my investment accounts. More than 40% loss is a lot of money. I rather pay the penalty than losing more money. Paying off all my debts and holding cash are the best option in this market.

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26 Dan

Lily – oops.
Please don’t make mistakes like that again, for your own sake.

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27 Lily

yes i did it before i read this blog!!! but my thinking was i rather pay the penalty than losing all my money!

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28 Ryan

Lily: I know it’s too late now, but a better course of action would be to keep your money in your 401(k) or other tax deferred retirement account, but transfer your equities (stocks and mutual funds) into something more stable like a money market account, cash CD, or something that involves less market risk.

That way you don’t lose out due to penalties and taxes, and you can still keep your funds in a tax deferred retirement plan. My recommendation now would be to start saving again for retirement, but if stocks seem to risky for you, then try putting them into something less risky, like the items mentioned above. Best of luck to you.

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29 Randy

Chad makes some excellent points on watching your investments. I believe you should always be aware of your investments in your 401k plans and stay abreast of the state of the economy. During the slump in the early 2000’s of which I suffered major losses during the market correction by leaving everything alone, I chose to invest heavily in High risk funds to regain those losses rapidly with the thought I would now watch closely and be prepared to move into a safe haven. I did that last September reallocating 90% of my High risk assets into a Money Market Fund. Final damage to my 401k portfolio is a one year overall loss of 6.6% instead of 39.8% had I left it alone. In my case there was no method to determine this transfer of funds besides just watching the economy and a gut feeling. I am now poised to invest the 90% again when the market shows some stability but I do have my 401k contributions investing into the same High Risk funds I pulled out from only now at discounted rates. I had declined to pay for a 401k Management service offered through our company plan and am glad I did. Those that chose to use it were not protected in the least. It was not in the Funds best interest for individuals to reallocate and therefore did not happen. Can you imagine what would have happened if everyone had pulled out. Can’t say that myself and every other person I have spoken to haven’t thought about cashing out like Lily did and paying everything off but since penalties are placed as a deterrent to leave the money alone it does serve its purpose. The moral to all of this is to remember that it is your money and is in your best interest to keep an eye on it. Your portfolios will recover, it will just take time.

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30 Ryan

Randy: It sounds like you did an excellent job with your 401k. Unfortunately, many people (including me) didn’t do that. Thankfully, I haven’t cashed out and have increased my contributions to purchase more at a discounted rate. I missed out on a good opportunity though and wish now that I would have done what you did!

Great tips, and thanks for sharing.

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31 Lily

Thanks for your advice. Vangard accounds were too late but I still have my 401k at my current employer which I haven’t withdrawn yet. I will follow your advice to reallocate it to the money market funds. I think it’s a great idea that I wish I thought of it before withdrawing my vanguard rollover & roth IRAs.

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32 Lily

Oh and i used my money from vanguard accounts to pay off my car loan. YAY!!! :) debt-free in this market is a bliss…just my thoughts

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33 Ryan

Lily: Glad to hear you didn’t liquidate everything. I think you might have regretted that later on. Paying off your debt was a good use for the money though, and will give you more cash flow to use how you see fit. You might consider using that same money to pay off other debt, or increase your retirement savings to make up for the money you withdrew.

Final note: Placing your money in a money market account may make you feel better because you won’t see any more major losses in your funds, but you are locking in the losses that have already happened.

Even though my retirement accounts have experienced large losses, I plan on keeping my money in those accounts so I don’t lock in those losses. I have many years until retirement, and I hope to make up for those losses when the markets turn northward. Best of luck!

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34 Chad @ Sentient Money

@ Randy
I did much the same thing and have been slowly getting back in this year, which has caused me a little higher loss. I can see the market still getting hammered from here, but I can also see it hitting bottom sometime this summer early fall. Thus, I’m slowly putting it back in on drops, as the bottom isn’t as clear as the top was.

Anyway, I think the most important point to make, that you said better, is that everyone needs to be an ACTIVE investor. I’m not necessarily saying everyone needs to try market timing. I’m saying that everyone needs to take responsibility for their investment choices. No one cares more about your money than you do…not even the people you pay to care about your money.

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35 Paula Knight

I retired 5 years ago and was living on my retirement funds up until the stock market problems and now 1/2 of my retirement funds are lost. I no longer contribute to the fund and now almost all of the money is gone. What do I do now? I worked all my single life and saved what I could and now it’s gone. All I have is social security and no income. What now?

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36 Dan

Paula,

Since the crash, the market has somewhat rebounded, so your 401k should have partially recovered. Did you cash out your 401k right after the market tanked?

Also, what’s your 401k allocation? The closer you get to retirement, the more you should move away from stocks and into safer investments like bonds and short-term securities.

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