Is Your 401K at Risk? How the Latest Interest Rate Hikes Could Impact Your Portfolio (2024)
The Federal Reserve’s recent interest rate hikes, coupled with Chairman Powell’s latest comments indicating that this is not the end, sends a clear message that until the inflation target of 2% is achieved, the cost of borrowing money will continue to rise, putting increased pressure on liquidation. Unfortunately, this increase in interest rates can impact various investment types, including bonds, stocks, and mutual funds, which can have a ripple effect on your 401K portfolio.
Let’s take a closer look at how the Fed rate hike can impact your 401K portfolio through these investment types. First, bonds are fixed-income investments that offer a steady stream of income to investors. However, when interest rates increase, the value of existing bonds decreases, as new bonds being issued will have higher interest rates, making existing bonds less attractive. If you have bond funds in your 401K portfolio, the value of those funds may decrease when interest rates rise. For instance, a bond fund with an average duration of 5 years and an average yield of 2% worth $10,000 may decrease by around 1.25% or $125 if the Fed increases interest rates by 0.25%.
Secondly, stocks, which represent ownership in a company, can also be negatively impacted by rising interest rates. This is because an increase in borrowing costs can reduce corporate profits, leading to a decline in stock prices. If you have stock funds in your 401K portfolio, the value of those funds may decrease when interest rates rise. For instance, a stock fund with an average return of 10% per year worth $10,000 may decrease by around 2.5% or $250 if the Fed increases interest rates by 0.25%.
Lastly, mutual funds, which pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets, can also be affected by rising interest rates. As we discussed earlier, the value of existing bonds in the mutual fund may decrease, and some mutual funds may hold stocks in companies that are sensitive to interest rate changes, such as financial institutions. If you have mutual funds in your 401K portfolio, the value of those funds may decrease when interest rates rise. For instance, a mutual fund with an average return of 8% per year worth $10,000 may decrease by around 2% or $200 if the Fed increases interest rates by 0.25%.
In conclusion, it’s essential to keep in mind the potential impact of the Fed rate hike on your 401K portfolio. Diversifying your investments and reviewing your portfolio regularly can help you weather market volatility and achieve your long-term financial goals.
Rixtrema’s Portfolio Crash Test application enables individuals to evaluate their exposure to different potential market situations, such as Fed rate tightening, and to analyze the impact on their investment portfolios. The application is designed to assist advisors and investors in being better equipped to manage and evaluate risks for different market scenarios. To arrange a demonstration of Rixtrema’s Portfolio Crash Test application, please click on the following link.
Continuing to invest in a 401(k) during periods of higher inflation can offer some protection if you hold investments that move in tandem with rising prices.
One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions. In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.
If the dollar collapses, your 401(k) would lose a significant amount of value, possibly even becoming worthless. Inflation would result if the dollar collapsed, decreasing the real value of the dollar when compared to other global currencies, which in effect would reduce the value of your 401(k).
It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.
It is possible to lose money in a Roth IRA depending on the investments chosen. Roth IRAs are not 100% safe, but they offer the potential for growth over time. Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money.
You might also be able to max out a traditional or Roth IRA; the limit this year is $7,000 for those under 50, but you can bump that up by another $1,000 as a catch-up contribution if you're older than 50. By age 50, Fidelity suggests you should have accumulated a multiple of six times your current salary.
The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.
Certain strategies, such as continuing to contribute to retirement accounts, can reduce the higher taxable income for someone older than 73. Depending on specific circ*mstances, workers over age 73 can still contribute to an IRA, a 401(k), and other retirement accounts.
While being more aggressive can make a lot of sense if you have a long time until retirement, it can really sink you financially if you need the money in less than five years. To reduce risk, investors can add more bond funds to their portfolio or even hold some CDs.
Can You Stop Your 401k From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, that are safe but provide little to no return. This, however, is not often advised (unless you are already nearing retirement).
You can choose that as an investment within your 401k or your Rollover IRA. However, the interest rate is usually far below what you could get in another investment within the retirement account. Yes, if that option is available within your investment selections. Nearly all employers have a money market or cash option.
Asset allocation is the key. Your money should be diversified between stocks and bonds to help you ride out market storms, though the allocations will vary with factors like your age and risk tolerance.
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).
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.
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