If your 401(k) plan incurs fees that limit investment growth or provides limited investment options, direct rollover to an IRA could be the right move for your retirement savings. This method transfers them without incurring taxes or penalties on either end.
Shifting your 401(k) assets from stock funds to bond funds may help protect them against market crashes or an economic slowdown as you approach retirement; however, this strategy may not be suitable for younger investors.
When leaving an employer, it’s essential to plan where your money goes when leaving their employment. Options available to you could include moving it directly into a bank account (which could trigger income taxes and a 10% early withdrawal penalty if under 59 1/2), directly to another employer’s plan if offered, or rolling your old 401(k) into an IRA so your retirement savings remain in one place with lower fees, investment options and services typical of employer sponsored 401(k).
Moving away from cash should not be your goal, however. Cash returns are negligible and could lose purchasing power with inflation. Furthermore, many 401(k) accounts use target-date funds that gradually switch their allocation of assets toward less risky investments such as bonds as you near retirement age; so moving to cash might not be best solution for most people.
As you near retirement, bond funds offer the most secure investment strategy. While bond funds don’t generate high returns, they provide steady income while protecting against stock market crashes.
Individual government or corporate bonds as well as mortgage-backed securities may provide excellent returns, with low fees and stable prices being key factors when investing. Moving your 401(k) funds towards bonds may be wise, however it’s advisable to discuss this plan with a financial professional first.
As another way of protecting your 401(k) savings from market volatility, another effective method of diversifying is investing them into an annuity. Although they typically come with a one-year lockup period, an annuity can protect you from market fluctuations by offering returns over time – making fixed annuities an excellent solution for retirees looking to keep some savings in cash but still earn returns from their investment portfolios.
Stocks provide investors with the best potential for long-term capital appreciation (share price increases). But stocks can quickly lose value as witnessed in the Great Recession when its market experienced a 50-50% drop from peak to trough.
Dividend-paying stocks provide income that supplements their investment returns for retirees who may require income in retirement. Value stocks – those with low price relative to earnings – tend to outshone growth stocks with greater expectations for future performance.
Target-date funds are becoming an increasingly popular offering from workplace retirement plans, providing investors with an automatic transition from stocks to bonds or less risky assets as you near retirement age. This helps prevent panic in volatile markets while taking advantage of long-term gains that come with more long-term investing horizons.
Stable value or fixed accounts are generally regarded as safe investments because they offer steady rates of return with minimal risks associated with stocks. If you are an extremely conservative investor, stable value/fixed accounts could provide the perfect way to meet your retirement savings goals.
Fixed Index Annuities
Index annuities have recently received much negative press, yet they still rank among the safest ways to invest your 401(k). They offer guaranteed minimum returns based on positive changes to an external index – meaning your principal remains protected during market downturns.
Annuities also provide tax deferral, which enables you to save on taxes as your savings grow significantly, saving money in taxes over time and potentially saving a substantial sum over time.
Before selecting an annuity, it’s essential that you carefully read its contract and understand its behavior during both up-and-down markets. Also be mindful that any withdrawal of funds may incur taxes or penalties which should be discussed with a qualified tax advisor for more details. Approach Financial, Inc. 2018. All rights are reserved by Approach Financial Inc. This content should only be taken as general advice rather than investment or legal advice.