Parents lost money in 401... put 401k on HOLD?

[ABC1234]

Background: Me and my parents are all in the medical field, we know very little about 401k. My only experience with 401k was picking the investment options when I filled out my wifes 401k application (even then I was really guessing at what might be "safe")

back to the problem

parents told me last night they lost 15k combined in their 401k over the last 4 months.

is there any way to "freeze" these funds... like I know they can stop contributions but how can they put the whole thing on hold where they wont lose (or gain) any more money....

Is this even an option? Is it a good option?


Being that my wife just started her 401k as well I'm not too worried because there is so little money it in right now.

Please advise.

[disneysteve]

Welcome. You haven't given nearly enough information for us to answer your questions.

Regarding your parents:
How old are they? At what ages do they plan to retire? How much do they earn? How much do they contribute to their 401k plans? Is there a company match? How are their contributions currently allocated? What retirement assets do they have outside of the 401k accounts? Any pensions? Roth/IRA?

Regarding your wife:
Pretty much the same questions.

Investing in an account that you "know very little about" and "guessing at what might be safe" surely isn't a good plan. One of the most basic rules of investing is to never invest in anything that you don't understand. Take some time to educate yourself about the investment options in the account. If you don't have a target asset allocation for your money, you need to develop one and then invest accordingly. There are lots of online sites to help you do that, as well as folks here who can help.

I will answer one of your questions with the understanding that I'm not recommending or advising they do this. They could shift their 401k funds from whatever investments they currently hold to a money market fund. Their principal would be safe and they'd earn some small amount of interest going forward. Again, not saying that's a good idea but it is a possibility.

The fact that they lost 15K is meaningless out of context. How much did they start with? If they started with 150K, they're doing quite well to have only lost 10% when most of us have lost 30-40%. If, however, they started with 20K and lost 15K, that's a much bigger problem.

[autoxer]

If you freeze the funds, then they won't be able to go back up when the market recovers.

There are things you can do, like change the allocation to a higher percentage of bonds, but the amount of risk you take should be based on how long it will be until you retire and need to spend those funds. If your parents are retiring in ~5 years, then they should have more money in bonds than stocks, because that will be more stable. If you have 30+ years until retirement, then you can leave it in stocks that will fluctuate up and down, because over a long time period, stocks are more likely to have higher returns.

Stopping contributions because the market dropped is not a good idea. I just added more money to my IRA, because the market was low and I was buying shares at a discounted price.

[ABC1234]

will talk to my parents ASAP and get the answers to those questions and post again

thanks in advance

[Goldy1]

I wish I could go baCK A YEAR OR SO AND "FREEZE" OUR INVESTMENTS. At this point we are so far down, I don't want to bail out into a money market fund. I have time on my sid ein my 30's but I will never invest the same. I will be far more conservative.

[autoxer]

Originally Posted by Goldy1

I wish I could go baCK A YEAR OR SO AND "FREEZE" OUR INVESTMENTS. At this point we are so far down, I don't want to bail out into a money market fund. I have time on my sid ein my 30's but I will never invest the same. I will be far more conservative.

I choose not to let the short term market fluctuations affect my long term portfolio decisions. Before the market dropped, I had a plan to invest with a stock heavy portfolio, because of my long timeline until retirement. My portfolio has dropped 50% over the past nine months, but I continue to contribute to both my 401k and Roth IRA. I will have a more conservative portfolio when I get closer to retirement, but this recent recession hasn't had any affect on my longterm investment plan.

My longterm plan is to gradually become more conservative. Even when you retire, you will have short term money (to be used within 5 years) and longer term money (that you won't use for 15 years). So each portion of the portfolio will have an appropriate level of risk to match the expected timeline.

[AlligatorBaby]

$15k not so bad. Add $100k to that and you have the amount that my parents lost.

[disneysteve]

Originally Posted by AlligatorBaby

$15k not so bad. Add $100k to that and you have the amount that my parents lost.

We've also lost over 100K. That's why I said we really need to know the context of that number and how much they had to begin with.

[swanson719]

My in laws lost $56K out of what was $350K. They decided to work for another couple of years before retirement - but being 57, it's not such a bad gig to work until social security anyway.

[Goldy1]

IT just seems it will take so long to recover, let alone get in the plus with our 401K's. I mean we are down after investing for over 10 years so if all I hope is to recover what I lost before retirement, I sure feel duped b/c all the time I spent reading financial books and not going on nice vacations etc won't really pay off.
At least my freinds who didn't bother to invest had fun getting thier drink on and going on vacation.

Ok I am being too emotional. I am past the anger phase of it all, and just counting my blessing. I just plan to live a litte more from now when me and dh start making more money.

[LivingAlmostLarge]

Goldy, why did you put living on hold?

[Goldy1]

I guess I can't say I really put my living on hold per se, but I was a little more frugal than I needed to be esp with vacations.

I have not been on a weeklong vacation since my honeymoon 8 years ago. I planned long weekends each year. Things like a 3 day trip to Chicago or to a beach town in northern Michigan on the cheap meaning bidding online for the hotel and eating at sandwhich shops.

I have a child on the way, and kind of regret not travleing more when w/o kids. I do plan to take trips with the kid when he gets a little older. My parents took me on trips, and I remember them fondly.

OTher than travel, I can't say I really went without;I bought a big screen tv, did some home improvements albeit not huge, and ate at restaurants.

I just don't get why I was reluctant to travel with my emergency fund in place and no cc debt.

My dh got laid off and for the first time I looked at how much money we had coming in when he was working, and it was a lot more than our fixed expenses than I thought.
Funny thing is it is all relative b/c people making more are paycheck to paycheck.

[autoxer]

Originally Posted by Goldy1

I sure feel duped b/c all the time I spent reading financial books and not going on nice vacations etc won't really pay off.

You are still in a much better position than the friends that took vacations instead of investing in their future. Your balance may be down, but you still have just as many shares. When the market turns around you will be able to retire years before all of your friends.

[disneysteve]

Originally Posted by autoxer

You are still in a much better position than the friends that took vacations instead of investing in their future. Your balance may be down, but you still have just as many shares. When the market turns around you will be able to retire years before all of your friends.

True, though had we put our money in a CD or money market fund, we'd still have our principal intact plus interest. Of course, there was no way to know that back then or that's what we all would have done. The assumption has to be that over time, stocks will outperform fixed-income investments.

[GREENBACK]

Time horizon may be the biggest factor here. If they are still 10-15 years out I wouldn't freeze anything. If they are losing that much and are close to retirement they are invested way to aggresively. I know of no way to "freeze"a 401k other than to take your money out(terrible penalties and taxes).
If you have lost significant value in your retirement investments, dropping out won't help. It puts you that much further behind. By the time you realize the market is recovering and decide to get back in you will have missed all the upside of the recovery. You really should take the attitude that this is an incredibly cheap buying opportunity. In your 401k you are buying shares of stock. The dollar value on your statement won't matter til you cash in. Right now you are buying more shares because they're cheaper per share. As things recover you own many more shares with a higher value. You can't replicate this dynamic in any other way I'm aware of.

[yorkinvestmentreport]

Risk tolerance is also a huge factor here. If they can't sleep because of the volatility, they should be in less risky investments to begin with.

[jIM_Ohio]

This is not a good time to be selling any investment.

The best decision is to do nothing and let market recover, unless retirement is literally within 5 years. Even then I would advise waiting and taking other steps.

I advocate contributiong 15% of gross pay to a retirement account and another 5% to a cash account every month and every year.

One of the reasons for this is 25% of "new money" goes to cash and reduces volatility. Few people understand volatility well. The 10-11% returns people quote on stock market returns over 20 year periods comes with a volatility (standard deviation) of 14. This means a person is as likely to see a -4% return per year as they are a +24% return. That is a 28% swing 75% of the time. If a person "needs" the 10% return, they need to accept the volatility, then find other ways to lower risk (paid for mortgage, spend less than they earn, bank 5% of every paycheck to cash).

[snafu]

I doubt that retirees cash out their retirement a/c when they stop work. They are more likely to draw down sums monthly, according to their needs. Individuals who are 5 years from retirement need to invest in lower risk instruments and s-l-o-w-l-y adjust equity to bond type programs BUT this isn't the time to do that if it results in excessive loss. Typically equities offer higher returns than money items and retirees will need to support themselves for much longer time frames than in the past.

Don't expect instant fixes but the equity market will recover. If you [your mutual fund] bought stock in good quality, well run businesses, that have been beaten down because of the illegal or borderline legal shennanigans of the financial marketplace...your investment will recover.