You’ve spent much of your working life building up your 401(k) and then along comes a market downturn to threaten your retirement plans – what can you do to ensure that your portfolio stays protected?

About 41 percent of Americans say that insufficient retirement funds are to blame for their lack of financial security, according to a recent Bankrate survey. Market downturns can make you feel like you’re even more behind in your savings goals.

“We believe the key thing to do is to keep your 401(k) funds invested. If you take them out of the market, you may lock in losses and could miss out on opportunities for market rebounds.”

— Eric Phillips, CFASenior Director at Human Interest

Here are some other ways to protect your hard-earned 401(k) when the market heads south.

Key retirement planning statistics

  • More than half (56 percent) of working Americans feel they’re behind on retirement savings, including 37 percent who feel “significantly behind,” according to a 2023 Bankrate survey.
  • Americans’ top financial regret is not starting to save for retirement early enough, according to a recent Bankrate survey.
  • 62 percent of women are behind on their retirement savings compared to 48 percent of men, a 2022 Bankrate survey found.
  • 28 percent of women weren’t contributing to their retirement savings in the past year compared to 21 percent of men, according to the 2022 Bankrate survey.
  • About 60 million Americans invest in 401(k) plans that hold a combined $6.3 trillion in assets as of September 2022, according to the Investment Company Institute.

Long-term investing

Experts seem to resoundingly agree that staying the course in your 401(k) is important, even during times of uncertainty.

“You want to keep investing consistently with your goal in mind from the start,” says Anessa Custovic, CIO and investment advisor representative at Chapel Hill-based advisory firm Cardinal Retirement Planning. “Don’t let a recession deter you from adding money into your 401(k). Don’t let yourself make an emotional decision due to a recession or bear market.”

Taking money out of the market during times of volatility can have the opposite effect of what you might be trying to accomplish in the long run.

One good way to align your retirement planning goals with your investments is dollar-cost averaging. This method involves investing a fixed amount of money (or a set percentage of your pay) into your 401(k) each month, regardless of outside market conditions. And for most people participating in a 401(k), this already happens automatically based on how they make their contributions.

“Adding to your 401(k) per paycheck along with any employer contributions is a good way to buy some shares at a lower price to help reduce your cost basis on your investments,” says Dean Elliott, CPFA, CEO of Pentangle Wealth, a Texas-based advisory firm.

This can eventually make your break-even point lower, which can help you to recover losses faster once the market rebounds.

It’s also important to remember that employer matching contributions increase your returns, regardless of market conditions. Matching can provide an instant return, often 25 to 50 percent or more, even if the market is in a downturn. This money is contributed to your account on your behalf, making it all the more important to continue investing despite any bumps your portfolio may otherwise face along the way.

Match your retirement plan with your time horizon

Once you’ve steadied your nerves in the face of a down market, it’s crucial to consider when you’re looking to retire. This step is important, because a 57-year-old nearing retirement will have to approach market downturns with a different strategy from a 32-year-old. Here are some guidelines on how much you should have saved at different ages.

Age Retirement saving goal Emergency saving goal
30 $84,999 $15,976.25 to $31,953
40 $324,528 $19,928 to $39,856
50 $719,598 $20,964 to $41,927
60 $790,344 $17,643 to $35,285

Note: Retirement savings goals are based on recommendations from Fidelity and use data in the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey, 2021. Emergency savings goals are calculated using the average annual expenditure for that age group in the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey, 2021.

Regrets about not saving enough for retirement early on tend to grow with age. It was the top financial regret for 34 percent of baby boomers and 26 percent of Gen X, but just 11 percent of millennials and 5 percent of Gen Z, according to a recent Bankrate survey.

Bankrate’s retirement calculator can help determine whether you’re on track to meet your savings goals.

Investors with less than five to seven years until retirement

Investors who are close to retirement, meaning about five to seven years away, could do well to have a financial plan for their 401(k) beforehand, and then refer to it in times of market trouble. A plan is usually drafted with a financial advisor or a representative from your 401(k) provider.

“It could be something as simple as a one-page summary of all your investments, income and net worth with a sentence or two memorializing your investment strategy and philosophy.”

— Eric Presogna, CPACEO of One Up Financial

These kinds of professional financial plans often take market crashes and bear markets into account, along with many other market scenarios, so when a crash strikes and you’re nearing retirement, you can refer to them and be reassured you’re doing what’s best for you.

For investors who are 59 1/2 years of age or older, a good option might be to roll over your account to an IRA, which will allow for more investment options.

“This opens up virtually unlimited options for your investments and you can find other ways to diversify and protect yourself in down markets,” says Anthony Pellegrino, founder and principal at Illinois advisory firm Goldstone Financial Group.

Stress tests can help gauge how your investment portfolio may perform during various market scenarios such as different interest rate environments, bull markets, bear markets or even a financial crash. Stress tests can be useful for investors of all ages, but are particularly helpful for those close to retirement.

Investors with more than seven years until retirement

For investors with a longer time horizon until they need to begin drawing on their 401(k) assets, the strategy is a little simpler.

“Younger investors are not going to touch their 401(k) for decades, so the fluctuations right now are simply noise.”

— Brian Walsh, CFPSenior Manager of Financial Planning at SoFi

Defined contribution plans like a 401(k) are designed for long time horizons. So the further away you are from your retirement target date, the riskier your investments can be, compared to an investor near retirement. A big mistake is making your 401(k) too conservative.

“Studies have shown that investors who look at their portfolios constantly experience a higher degree of loss aversion, meaning they’re increasingly more sensitive to losses than gains,” Presogna adds.

Concentrating on losses can lead to poor decision-making now, which can only hinder your performance in the future.

Make sure your portfolio is set up for success

The best way to prepare your 401(k) for downturns is to make sure you have a solid investment plan in place before a crash happens. Make sure you build a well-balanced and diversified portfolio to begin with, or assess and diversify now if you have not already done so.

Rebalance investment portfolio

It’s important to rebalance your portfolio regularly to make sure it is aligned with your time horizon and risk tolerance. Portfolio rebalancing involves buying or selling investments to a desired percentage allocation in your portfolio. The weights will change over time as some investments outperform others.

“Rebalancing enables investors to take advantage of buying low and selling high to assure their allocation is where they would like it to be,” says Elliott.

He recommends a yearly rebalancing, if not every six months, to make sure your portfolio is allocated appropriately. You can set up a rebalance of your 401(k) with your advisor or your plan representative, both of whom can walk you through what you’re invested in and make recommendations based on your goals.

Diversify your portfolio

Diversification is a key aspect of an investment portfolio, especially for long-term accounts like 401(k)s. Diversifying your portfolio across different asset classes and markets also helps to reduce exposure to one particular segment of the market.

Additionally, even during market crashes, there are going to be stocks that go down and some that go up. Diversifying your portfolio allows you to potentially catch some of that upside.

“Constructing a retirement portfolio that includes a balanced blend of growth, fixed-income products and safety of principal is a surefire way of creating a longevity plan for your assets.”

— Ryan LarsonWealth Advisor, CEO and Founder of FirstLine Financial

How exactly that mix is selected will be up to you, or you can consult a qualified advisor to help.

Pivot your investing strategies

For years, many experts recommended a retirement portfolio should consist of 60 percent stocks and 40 percent bonds. This balanced the need for growth with the relative safety and income of bonds.

But with interest rates hitting record lows during the Covid-19 pandemic, investors with a 60/40 portfolio were poorly positioned for the rise in interest rates that came in 2022, which saw stocks and bonds both decline by more than 10 percent.

As market conditions shift, you may need to change your investing strategy to respond to different environments. When interest rates are low, holding bonds may not make sense. Now that rates are closer to historic norms, some investors think now may be the time to invest in bonds.

Those with retirement quickly approaching may want to consider rolling any of their old 401(k) accounts into either IRAs (which offer more investment options) or annuities (which can provide a set rate of return during uncertain times).

Certain fixed annuities can provide soon-to-be-retirees with a constant, fixed rate of return. The caveat is that they will lose on the opportunity of potential upside if the market rebounds. But if your main concern is safety, they can be a good idea.

Additional retirement investing strategies and planning resources

Bottom line

For the overwhelming majority of investors, the best thing to do is to make sure you are diversified in your 401(k) year-round, and do not panic-sell in the midst of a declining market. Awareness of your investments is key regardless of age, but those with a long time horizon should believe in the power of time and compounding in their retirement account.

Investors who are quickly approaching retirement will need to be more vigilant in the face of evolving markets. The switch to annuities or IRAs from your traditional 401(k) can help to give you more options or a fixed rate of return depending on what you choose.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.