How Safe Is Your Retirement Fund?

Your 401K fund is an instrument that was developed for regular working people — employees like you and me — who’ve been harboring the impression (or the expectation) that the stock market would keep returning superior gains over time relative to ordinary safe haven savings vehicles. Sure, times have been rough for our 401Ks in recent times, but they’re still a great place to keep our long term funds for reasons we’ll discuss here.

How Safe Is Your Retirement Fund?

As an employee, you determine how to distribute your money. Your retirement accounts are there to cover you in retirement and are likely to serve you well over time because stock markets eventually do recover. The people who may have some concerns at this time are those who are thinking of retiring anytime soon. In this case, if you’re unlucky enough to be in this boat, then you may have to think of Plan B to address the gaps you may be seeing in your investment portfolio (care of recent stock market setbacks). But if you have a long term investment horizon ahead of you, by all means, do not fiddle with your 401Ks as you are bound to get whipsawed by the markets if you decide to sell now.

As it is, millions of Americans are going to be relying on their 401K accounts to support them well into their old age once they decide to retire. We never know how Social Security will be evolving over time. But let me repeat for good measure: our 401Ks and retirement plans will remain safe even if the company behind them gets into trouble. Why? Because the money you have in your retirement accounts are never mixed with your company’s assets — they are in fact, held separately. According to financial experts, not even bankruptcy courts can touch your money.

The questions remain though, about how safe 401Ks are, especially when we rely upon our own judgment to invest the funds we have in here in any way we so choose. Conventional wisdom has taught us to invest our retirement money in equities that are inherently riskier than our standard stable savings accounts, but as we have seen in recent months (or since our current economic recession started), this hasn’t turned out to be the best approach to take, especially for older savers and investors.

The key here is to be prudent with how to administer to our own 401Ks. We know that there is no issue about the safety of our funds even when employers or underlying companies go bankrupt. But we need to ensure that our 401Ks are safe from our own faulty decision-making. We should be careful to distinguish our truly long-term funds from those that are more appropriately considered as short term funds. We need to keep a balanced and well diversified portfolio so that we are not caught unprepared by difficult economic situations like the one we are experiencing today.

I’d make sure that I have enough of a cushion made up of short term, safe, secure funds ensconced in a stable bank or financial company that can last me a comfortable while (the older you are the bigger this cushion should be). The rest of my long term funds will be in my retirement funds, waiting for the day they can start growing again. But yes, the key is always balance and moderation, especially when it comes to the risk we take as investors.