4 steps to protect your 401k

By Kiplinger's Personal Finance Magazine

For many American workers, just thinking about the damage done to their retirement accounts since the beginning of 2008 can be painful.

So what can you do to stem the flow of any more money out of your 401k, 403b or 457 plan?

Let's start with what you shouldn't do: Don't stop contributing to your retirement plan or cash it out entirely.

Sure, relentless talk of a recession is scary. But remember, you're in this for the long run, and even people in their 50s, 60s and 70s shouldn't worry too much. You won't need all your savings immediately, and because retirement can be a 30-year prospect these days, your investments have time to rebound.

"Just because things are happening (with the stock market) doesn't mean you have to take action," says Clare Bergquist, the director of 401k strategies at Charles Schwab. "The action you need to take is: Take a deep breath and assess your plan."

Here's what you should do:

Study your history

"Markets go up, and markets go down, but history has proven that over the long term, they go up," Bergquist says. The Dow Jones Industrial Average has fallen before, including a whopping 47% plunge during the 2000-02 bear market.

After each big drop, though, stocks have rebounded, and markets have reached new highs.

Plus, for long-term investors, a market downturn can be a good thing. "At the point where it's most scary, it seems the most bleak and you're the most depressed, that's the point when there's the least risk and the biggest gains are to be had," says Brent Brodeski, the managing director of Savant Capital Management, a fee-only financial planning firm in Rockford, Ill. You can buy more stocks -- or mutual funds -- at cheaper prices, then reap the rewards as the market recovers.

Study your investment plan

Your retirement account is for buying and holding investments, not for day-trading stocks. But now might be a good time to review your plan based on your personal situation and risk tolerance, Bergquist says.

A solid, long-term strategy that involves a well-diversified investment portfolio should protect your 401k or other retirement account during rough times, Brodeski says. For example, if you have weighted your portfolio too much toward a certain stock or sector, realize you will have to wait longer to see your account recover.

If you don't have a plan, start by testing your risk tolerance. Then figure out how much you need to save for retirement, and calculate how much to set aside each month to reach that goal based on an average annual rate of return. Knowing these things will help you select investments for your retirement account.

If you're young, your 401k portfolio should hold almost entirely stock funds. Stocks carry greater risks but also greater returns than bonds and money market funds. Make sure you diversify, though, among funds that invest in stocks of large, small, domestic and international companies, as well as growth stocks and value stocks.

Even if you're close to retirement, you should have 70% to 90% of your retirement portfolio invested in stocks or stock funds, Brodeski says. You still should have at least 60% to 70% in stocks when you're retired. That's because most of your portfolio should be invested to carry you through your retirement years. Any money you figure you need over the next few years, Brodeski says, should be in cash and safe assets -- an insurance policy for when stocks are down and you don't have to sell at a loss.

For more about creating a diversified portfolio that's appropriate for your time horizon, see our suggested portfolios using the Kiplinger 25 best mutual funds and Build Your Perfect Retirement Portfolio. Or consider a target-date retirement fund, which handles the diversification for you and shifts asset allocations for you as you near retirement.

Continued: Take that deep breath

 1 | 2 | next >