Ive been meaning to open mine after getting my job I just haven’t yet. And now the market is sinking further. I understand that it helps you grow what you already have, but I don’t understand how my money is supposed to be safe for retirement if it can be taken away during a crash.
Comments
Because it usually isn’t. Because the market isn’t usually crashing. The same thing can be said about anything. Why workout if you can get hit by a bus? Why get a dog if it can get sick and die?
It’s a risk but a fairly low risk. You should get a 401k if your employer is matching your contributions especially.
Because the markets, over the loooooooooong term, almost always go up. With these kinds of investments, you’re not going to retire for 20-30+ years, so the idea is that you don’t sweat the market fluctuations and in lengthy timeframe your money will grow.
Many aspects of life require faith. This is one of them
Zoom out on the chart. Trump has been horrible, but we’re still up 5% over the last year.
There will always be ups and downs in the market. Realistically, the market going down is a good thing for your 401k assuming that you aren’t close to retirement, because it means you can buy at a discount.
Hopefully if you are close to retirement, then this ~10% drop over the last month won’t be the end of the world because you’ll have more than enough saved anyways
The generally accepted advice for a 401k is, when you are close to retiring, move your money to “safe” assets, like bonds. If US bonds are invalidated, there’s no retirement on the planet that will be safe so it’s as safe as you can get. If you are far from retirement, the idea is the market will recover (and so far, it always has and the only way it wont is, again, a global crisis worse than anything before)
The money you put in a 401k is meant to be used in retirement, presumably decades from now. If there’s a stock market crash that is so long or so deep that you get a negative return even decades later, well, then you probably have bigger problems than funding your retirement.
That may sound glib, but the general idea is that so long as the stock market grows on average a long-term investment will also grow, even if from time-to-time it shrinks instead.
It won’t be wiped out unless you sell during a crash.
Even in a crash what has lost value is the shares you own, you still own as many shares, so when the market recovers you value comes back too.
Yea, it’s bad if there is a crash right as you’re ready to retire, but crashes are rare, so the probability of that effecting you is low.
You invest in risky assets early, as you are hoping for larger returns and have a long time to recover from downturns.
As you get closer to retirement, you start shifting your investments to lower risk areas that don’t have high upside, but also won’t drop in a downturn.
401ks are one of the safest investments. They are supposed to be very diversified low risk investments, so even if one part of it fails the others will average a net positive over decades. Market crashes only cause you to lose money if you sell before the market recovers, and a 401k is not meant to be cashed out early. If a market crash lasts for decades you have bigger problems.
When you get close to retirement, you change your investments to less risky options so a large hit to the stock market doesn’t wipe it out as much. When you are younger, you want higher growth and the downturns won’t matter because the market will eventually recover (or at least it always has in the past).
Markets periodically crash, then recover. And the stock price only matters on the day you sell.
If you’re some ways from retirement, a crash actually helps you. Every month, when you add more to your 401k, your contribution will buy more at the lower price than if there had been no crash. So in the long run, once the market recovers, you’ll have more than if it had never crashed at all.
You don’t actually lose anything until you start taking money out of your 401k. What’s in there right now is a mishmash of securities that is worth a certain amount right now. You aren’t losing the securities. Nothing’s being taken from you.
Economic calamity is pretty common in the securities market. That’s why you diversify your holdings and take a long view. People who build robust retirements for themselves do so because they keep saving in good times and bad, and eventually outlast the bad. They don’t spend much thought on today’s account balance if they’re not going to be withdrawing for another 20 years.
a 401k is intended to be a long-term investment. Over time, it should (like the stock market) perform better (5-10% annual return on average) than traditional savings, especially so during the past 15 years or so when the prime rate was down around 2-3%.
Of course, all of that was before we had the greatest economist in human history in the White House, who knows more than anyone about trade, tariffs, the stock market, nuclear physics, molecular biology, haute cuisine cooking, and any number of other things that he is the expert in.
We’re in unprecedented times.
It won’t be wiped out. It may dip for a while but that’s normal. You invest for the long haul: 20, 30, 40 years depending on your age – not for what may happen in the next few weeks or months.
The basic theory is that stocks will go up in the long run (over a span of decades) because humanity keeps advancing. This has historically been shown to be the case, but we’re talking about the average here, so you want to own a very wide distribution (stocks from many countries and industries) rather than trying to predict which ones are going to hit. The only way that bundle doesn’t go up in the long run is if our species collectively stops developing new things, or completely abandons capitalism.
Now, I keep emphasizing “the long run” here. Stocks obviously fluctuate wildly from day to day, or whenever certain people open their mouths. This is because the value of the market isn’t really based on fundamentals like they would have you believe, it’s based on vibes – it’s a measure of the collective confidence in the theory I’ve outlined above. What this means in practice is that money that you think you will need right now or very soon should not be in stocks, because you might have to sell during a downward period (and remember, you only actually make or lose money when you sell, also known as “realizing a gain/loss”). We can be pretty sure that our globally diversified portfolio of stocks will be worth more 30 years from now than it is today, but we don’t know if it’ll be worth more or less next week. Therefore, as you get closer to your retirement age when you’ll need to start converting that 401k to cash, you’ll probably want to move it from stocks to something more stable (but with less growth potential), like bonds.
Somewhat counterintuitively, the best thing to do is to buy more when the market is crashing, because it will either recover in the long run and you’ll have bought at a discount, or society will collapse and you’ll wish you had bought bullets instead of stocks anyway.
> I don’t understand how my money is supposed to be safe for retirement if it can be taken away during a crash.
Look at inflation. 20 years ago, bread cost $0.99, now it’s what, $4? In 30 years when you retire, bread may cost $20. You need to invest your savings so that the amount GROWS along with inflation; if you simply keep a whole bunch of $100 bills in your house, in 30 years you may not even have enough to buy food with it. Investing money is necessary to grow it along with the increased inflation.
So what about crashes? Crashes are hard on everyone, but if you HAVE to invest your money (as explained above), what would you rather do:
Trust some fund managers whose sole job is to understand the economy and finances and to make everyone’s money grow as much as possible, or
Go
investinggambling with your money yourself, not knowing WTF you’re doing, and possibly losing all of it?Because over a long period of time the stock market has always out performed bank interest amounts and loss of purchasing power due to inflation. But you have to be in it for the long haul.
Markets contract and occasionally crash. But you should be thinking in 40-50-60 year terms. On those timescales, even with the crashes, the value of the market has continued to rise at 7-10% yearly on average. Granted, past performance is not a guarantee of future returns, but based on historical trends, intermittent crashes are just a part of the system.
This is very important, you only lose something if you sell. Nothing is lost during a downturn because it’s potential value not hard value. It will come back and be stronger than before like it always does, do not panic sell or let it stop you from investing. investing during a market down turn is a great opportunity to make more money.
You are investing for the long term.
In 1987 on “Black Monday,” the Dow Jones Industrial Average fell by 22.6% in a single day.
Within about 5 years it had recovered, and it has since exceeded that level significantly: Dow Jones – DJIA – 100 Year Historical Chart | MacroTrends. And this chart is inflation-adjusted already, so it’s not about the change in value in money over that time.
If you need money in the short-term (5-10 years), investing is terribly risky. But over a long time frame, it provides reasonable, steady returns even though it WILL have shocks like today.
Lastly — you don’t actually lose money UNLESS YOU SELL. In fact, another way to look at these drops is that stocks are on sale.
Because it’s your only option. It sucks and it’s rigged, but it’s where rich people put their money so you know it can’t suck forever. It will eventually go up. It’s a better option than putting it in a savings account or under a mattress where inflation will definitely devalue it. At least on the market, there’s a chance that it will eventually grow instead of it only ever shrinking.
In short: it isn’t “truly” safe. But if you’re worried about the ultimate crash and money being worthless, you’re better off using every dime you have to buy food, weapons, ammo, and medicine then becoming a prepper in the woods somewhere.
Now, assuming you’re willing to play the game of civilized society…
…a retirement account like a 401(k) or IRA is relatively safe over the long term, not because it avoids crashes, but because it rides them out. The idea isn’t to avoid losses—it’s to give your money enough time to recover and grow beyond them. Historically, markets have always rebounded after downturns, even ugly ones like 2008. If you’re young, a crash now isn’t necessarily bad; it’s a chance to buy into the market while it’s “on sale.”
You’re not supposed to pull your money out in the middle of a crash—that’s when people lock in losses. (Until you sell a stock, you haven’t actually lost or gained anything.) Instead, you invest consistently and patiently over decades, ideally in diversified index funds or target-date funds that match your retirement horizon. Then you taper risk as you get closer to retirement age.
It’s not a perfect system, and yes, it requires some faith in society not collapsing. But if we do get full collapse? Well, no amount of money anyone has is going to matter anymore, so who cares how much you did or didn’t have.
—————-
Bonus thought:
If you missed just the 10 best days in the market over the past 20–30 years, your returns would be way lower than if you just stayed fully invested the whole time. Like, we’re talking cut in half kind of difference. And the kicker? Those “best days” tend to happen right around the worst ones—when things are scariest. So if you bail during a crash, you’re statistically likely to miss the rebound too.
Moral of the story: time in the market > timing the market.
I mean, this, combined with destroying social security?
It’s on purpose, not on accident.
But, yes, you are correct – you could lose money on your 401(k) which is why a pension plan is the better of the two when it comes to retirement funds.
Of course as everyone on this board knows, in “the old days”, companies offered pension plans (where companies paid 100% of the contribution), which promised workers a certain amount of money when they retired (this is a simplification). Yes, pension plans can go bankrupt but it’s also true there were stop-guards to keep this from happening and most pension plans were guaranteed by the government.
Pension plans went away because companies didn’t want to commit to paying retirees for many years (decades) into the future. It was a liability on their balance sheets.
So they switched to offering 401(k)s (which were funds contributed to by employees, often-times with a match by the companies), which, yes, they also paid into in most cases but the companies could always lower the amount they contributed (in bad times) or stop completely, and there weren’t any liabilities because the money in the 401(k)s was already paid for by the companies (and the employees) now vs. a date in the future.
Again, 401(ks) aren’t as “secure” as pension plans because the money in the 401(k)s are invested in the stock markets (and bond markets, etc.) and those fluctuate over time.
Similarly, in my opinion, Social Security is a “guaranteed” amount, or at least it has always been seen that way. The payments have been steady for more than 80 years and go up (or down) each year based on things like the Consumer Price Index (or something similar). So, it’s “safe” in that sense, although no one could live comfortably in retirement off just their Social Security (nor were they expected to, when originally established).
It may not seem wise to invest in a 401(k) right now but looking back, I’m sure glad I did because over 30 years it’s built up a nest egg I wouldn’t have otherwise.
If you can afford $100 2-times a month, that will grow into quite a lot of money, especially if you have a company match. Even better, you’re buying at a low point in the markets and I’m pretty confident it will go up in the next 10-20-30 years.
So do it!
Your first sentence sums up most people. Everyone plans to do things, most just don’t follow through. Over the long term (decades), a properly managed 401K account will increase in value despite many short term (years) loses.
A 401K is a good tool to get people to save for retirement with un-taxed money straight from their paycheck. Otherwise, once it hits their checking account it will be spent on other things. Over time
Does your company work with any account advisors or education to help employees understand the benefits available to them? If not they should.
Does your company offer a match? If they do, open your account yesterday otherwise you are losing out on free money.
Assuming you have a few decades until retirement crashes are effectively a massive sale on stuff you would be buying anyway. Closer to retirement youe meant to switch some of your portfolio to more stable assets to avoid being forced to sell stocks during a downturn.
You’re money will predictably be taken away by inflation. Stocks go up on average, at a pretty healthy pace. You can always diversify some to other deflationary assets like gold and real estate if being too heavily in the stock market doesn’t feel safe for you
Unless you’re investing in specific companies that become insolvent your money doesn’t really get “wiped out” at all. The value of the shares you hold can go up or down, but those prices are always going up and down – some swings are just larger than others. You only truly lose money if you sell during a downturn – assuming you hold on and don’t sell, the value of the shares is likely to recover and continue increasing over time. On a long timeline the market has always trended up, with some dips along the way. If it truly crashes and never recovers, we have much bigger problems to worry about.