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Are 401K Investments Safe in a Recession?

By
Elizabeth

Last year, CNBC found that only around half of Americans are eligible to access a 401(k) through their employers. If you’re one of the lucky roughly 50% of Americans who pay monthly into this unique company-sponsored retirement account then you might find yourself currently asking the question, “Are my 401(k) investments safe in a recession?”


With markets crashing, millions of people filing for unemployment and a recession looming around the corner, things might seem pretty dire. At least, that’s what you might think if you’re glued to the news all day long. However, there’s some good news amidst all of the uncertainty surrounding the coronavirus!


You can now receive more financial assistance from the government, certain stocks might prove to be profitable if you buy them now, and your 401(k) investments are going to be okay for the most part. Here’s what you need to know.

Are We in a Recession?

Most people seem to think that a recession only has to do with a decline in the stock market. And, that’s simply not true. The real definition of a recession is when an economy goes through two consecutive quarters of negative GDP growth. It’s usually accompanied by a lack of consumer confidence, job loss, and weak production.


So, while the stock market does usually take a hit, it’s less dependent on the performance of the stock market and more dependent on the economy as a whole and how the nation’s growth domestic product fairs (which is a direct measure of the market value of all of the goods and services produced in a specific time period).


How does that relate to investments and investing in stocks? Recessions tend to cause panic. Instead of learning how to save money or downloading the best investing apps, people tend to focus only on preserving their current cash flow and protecting their emergency funds. However, when it comes to your principal 401(k) account, you shouldn’t worry.

Recessions and 401K Investments

People who’ve invested in stocks and who have put money back into a retirement account seem to worry that they’ll lose all of their cash if they don’t withdraw it immediately. Or, on the flip side, people tend to experience economic hardships and need to withdraw cash from their 401(k) account to pay for expenses or do things like pay off a mortgage.


One study conducted at the Wharton School found that almost 40% of 401(k) participants borrowed from their retirement accounts on a regular basis. But, during the last major recession in 2008 and 2009, the overall rate of borrowing decreased. And, financial analysts note, that this is because it’s actually better to contribute more to your 401(k) account during a recession if you can.


They also noted that while the market, in general, is declining, view this opportunity as a chance to “buy up more stock.” In this sense, they mean that you should contribute more to your 401(k) and continue to do so as the country moves further into an economic recession (if you can). You’re essentially buying up cheap stock now and when the market rebounds you’ll reap the benefits.

Other Alternatives to a 401K

If you don’t currently contribute to a 401(k) account through your employer or aren’t eligible to then you might have a few other options. As mentioned, right now is a good time to think about bulking up your savings, so here are other alternatives you might be able to think about.

Roth IRA

This account is very similar to a 401(k). It’s short for “individualized retirement account” and it works similarly to a 401(k) when it comes to taxes. When you make contributions to your IRA you can deduct that on your tax return. But, instead, you’re investing your after-tax dollars, which means you’re growing your investments tax-free.

SEP IRA

If you’re self-employed, you can still pay into an IRA as well! This also includes those who are small business owners or who work as freelancers. This is an especially great option at the time as many people invest their time and effort into side hustles in order to make extra cash easy. Last year, you were able to invest up to 25% of your total income up to $56,000.

Investing In Your Own Savings

If a retirement account doesn’t sound like something you can do right now, you can begin to take small steps in order to increase your emergency savings fund at the moment. And, no, it doesn’t require you to move cash around, alter your budget or really do much of anything that you wouldn’t normally do.


Signing up for the Cheese debit card ensures that you’ll not only be able to unlock savings in the form of $0 in overdraft fees and other standard charges, but it also ensures that you’ll be able to unlock the kind of savings you only typically see with a high-yield savings account and cashback.


If that’s piqued your interest then we’re here for you! Check out the details and sign up today to invest in your own savings and future.

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