at this rate I'll have a downpayment for a nice shack in hooverville left.
September 17, 2008 8:12 PM   Subscribe

I've lost 5% of my 401K in THREE DAYS. What to do?

Please don't tell me "stick it out." I was planning to use this money for a downpayment on a house in less than a year... at the rate I'm going four years of contributions won't see this Halloween. I'm not looking at 40 years from now, I'm looking at a few months, so long term strategy won't do.

I'm with fidelity (401k.com specifically). What should I do to at least keep it no losses? I don't even care if I miss out on earnings at this point, I just don't want to see the money I put in vanish.
I'm tempted to pull it all out now and stash it in my savings account (or, at this rate, in a hole cut into my mattress), but I'm hesitant to do so given that I'm still going through the approval process for a mortgage and I'm assuming I won't close before the new year which would mean a major tax hit.
posted by Kellydamnit to Work & Money (32 answers total) 3 users marked this as a favorite
 
I am not a financial adviser. You can move it into bond funds, which are generally considered low risk.

A professional may want to correct me, but if you were planning on using your 401(k) for short-term money (which I wouldn't do, assuming you're not at retirement age, even though you're allowed to use it for a house), you should have been in the lowest-risk investments in the first place. The high-risk stuff (index finds, international stocks, etc.) is for long-term investment.
posted by Airhen at 8:18 PM on September 17, 2008


My 401k has a money market fund option. You shouldn't loss money in that type of fund.
posted by bottlebrushtree at 8:19 PM on September 17, 2008


Ironically, a good part of the reason your stock is down is because other people are selling to get into safer investments.
posted by smackfu at 8:22 PM on September 17, 2008


Well, if you don't want to lose any more money, you can put it in safer funds. Of course, that means that it will take a long time to earn that money back, even if the market rebounds. And historically, the market has pretty much always rebounded. Eventually.
posted by meta_eli at 8:29 PM on September 17, 2008


similar question from yesterday.
posted by jessamyn at 8:30 PM on September 17, 2008


With all due respect to jessamyn and meta_eli, the "just wait!" advice here and in yesterday's thread isn't helpful to the OP, because she needs her money for a down payment within a matter of months, way before we could realistically bet on the market having rebounded.

Basically you want to immediately shift it all into money market accounts. Yeah, you'll take a hit, but you'll secure what you have left and stanch the bleeding.
posted by Tomorrowful at 8:34 PM on September 17, 2008


I actually did see the question from yesterday, but figured since I do plan on needing this money in the next six months that answers would be different than if I had a few decades left.
posted by Kellydamnit at 8:34 PM on September 17, 2008


Thanks, Tomorrowful. I don't believe I have a money market option, but it looks like they offer two bond options I may look at. If the market was going to rebound next week that's one thing, but it could be ages. I was told "just wait' on Monday and took another hit today because I did.

Oh, and I know it's generally not a good idea to spend your retirement fund, but in my case I'm still in my 20s, it's only about 4 years of savings- most of which at half my current income, and I live in one of the few cities in the US where owning is about half the cost of renting. (and I figure property's bound to go up sometime, which makes now a good time to get in on it)
posted by Kellydamnit at 8:39 PM on September 17, 2008


No one really knows what to do, remember days like this when you smack your head in a year thinking I should have bought that stock then when it was so low. Moving your 401k to a money market fund or a bond fund should limit losses but I've been through so many downturns in the market and have lost 5 10 even 15% of the value of my 401k over certain time periods yet it has always come back from those depths to gain profitability. Don't forget in 87 the market lost 20% in one day but made back all that ground in 12 months. The problem is that no one knows how far it will fall and more importantly no one knows when the market will come back. There's a good chance that you are selling at the bottom and you will get back in too late to catch the profitable rebound. But then again, every time something like this happens it always feels like the end of the world. The smart investors have a list of stocks in their back pocket waiting for an opportunity like this to get in. While we run for the exits they are picking our pockets. But of course, they play with house money - not rent or mortgage money.
posted by any major dude at 8:41 PM on September 17, 2008 [1 favorite]


any major dude, if it was a year from now and I was saving for retirement typing this from my house I'd agree. But, I have a little more than I need right now for closing costs, first property tax payment, first homeowners insurance, etc. If I wait that could mean 12 more months of paying my landlord's entire mortgage and then some and having only my obscene heating bills due to her 100 year old windows to show for it.
posted by Kellydamnit at 8:46 PM on September 17, 2008 [1 favorite]


@bottlebrushtree
While that's true most of the time, the Primary Fund just announced that their customers might lose money.

Until yesterday, I didn't know the difference between a money market fund and a money market account.
posted by Asymptote at 8:59 PM on September 17, 2008


With all due respect to jessamyn and meta_eli, the "just wait!" advice here and in yesterday's thread isn't helpful to the OP,

Not to mention, if someone had their money in a DOW index fund and decided to "Just Wait!" today, they would have lost 5% of their.

If you're worried about the value of your investments, sell everything now and keep your money in cash. E*Trade has a savings account earning 3.3% APY. If you put your money in something like that, you might earn back your 5% in 18 months.

Look, I don't really think "Panic and sell everything!" is imprudent advice at this point. Yeah, the market might bounce up tomorrow, or it might drop another 5%. We don't know. It essentially depends on how Bernake and Paulson decide to respond.
posted by delmoi at 9:22 PM on September 17, 2008


5% isn't all that bad, so I wouldn't blame you for pulling the emergency brake now, but I suspect this is much worse if we look at year-to-date changes. you're lucky if it's -20% and if that's the case, you'd be pulling out at what could be the worst possible moment. nobody wants to buy anything right now and you wouldn't get duck shite for all your work.

your average savings account will get you perhaps 3.25% right now. get a calculator and do the numbers on how long it will take to undo the damage with that interest rate if you want to but I'm telling you it's not a good idea.

she needs her money for a down payment within a matter of months

okay, I understand dreams are fun but this is your alarm clock ringing. postpone your purchases. this is a recession and you have been hit. hard. what do you do when you have the flu in november? go out wearing shorts drinking alcohol? you know better. this sounds a lot like you are being talked into something that's really bad for you.

this is your retirement money. a down payment? seriously? what a massive gamble given that we are, did I say this already, in a massive and prolonged recession. this is how people ruin themselves. (I am sure you are the one person in 200 million who is way smarter and to whom that would never happen.)

look, I am with fidelity as well and my 401k is down nearly 48% from last year. it sucks. it may take many years to get back where it was, if it does. but pulling out now makes you (and me) nothing but gluttons for punishment. (the only good reason to pull out is an imminent default of one of your investments - a total loss.)
posted by krautland at 9:28 PM on September 17, 2008


Whoah, you know what's safe RIGHT NOW? Nothing except cash, gummint treasuries, and FDIC insured bank accounts. And I'm not so sure about the last two.

MM accounts are breaking the buck as we speak, with redemptions stymied for seven days. There could easily be a run on them. Corporate bonds are all over the place. Even short term treasury yields just hit incredible all-time lows today. If it was me and I knew I'd need the money soon, I'd have it in cash and nothing else.

In fact, I AM in cash and nothing else right now.
posted by unSane at 9:29 PM on September 17, 2008 [1 favorite]


Some good news though, is that the price of real-estate is also declining.
posted by delmoi at 9:29 PM on September 17, 2008


5% isn't all that bad, so I wouldn't blame you for pulling the emergency brake now, but I suspect this is much worse if we look at year-to-date changes. you're lucky if it's -20% and if that's the case, you'd be pulling out at what could be the worst possible moment.

She could be pulling out at the worst possible moment, but she could also be saving herself another 20%. No one knows, and it's not like she couldn't just buy back in later if she felt like it. The lower the risk, the higher the cost.
posted by delmoi at 9:43 PM on September 17, 2008


There really isn't much to suggest here, Kelly. If you knew you had to have this money, that was the time to start moving it into safer territory. Lesson learned. Right now, you can hold it and maybe get some of your losses back by the time you need it, or you can lock in your losses. It's not something that's subject to real advice.
posted by dhartung at 9:45 PM on September 17, 2008 [1 favorite]


Money market accounts are neither 100% guaranteed safe nor FDIC insured. (That said, I think Fidelity's offerings are pretty secure.)

If you want to ensure capital preservation at the expense of all else, put your money in a U.S. Treasury bond or, failing that, a U.S. Treasury bond fund. Not all bond funds are safe - take the junk bond fund I have some money in, for instance.

Please.
posted by ikkyu2 at 9:52 PM on September 17, 2008


She could be pulling out at the worst possible moment, but she could also be saving herself another 20%.

true. the choice is making -20% a certainty or riding it out.

Whoah, you know what's safe RIGHT NOW? Nothing except cash, gummint treasuries, and FDIC insured bank accounts.

uhm... not true.
posted by krautland at 10:15 PM on September 17, 2008


true. the choice is making -20% a certainty or riding it out.

Yes exactly, the choice is to gamble her life savings... or not.

uhm... not true.

Umm... gold lost 25% of it's value between march and September.
posted by delmoi at 10:37 PM on September 17, 2008


Some good news though, is that the price of real-estate is also declining.

Not so much 'round these parts. There was no bubble here to start with, and you can still get perfectly fine single-family homes in decent neighborhoods for $75K.
posted by ROU_Xenophobe at 11:09 PM on September 17, 2008


The other thing that nobody is mentioning is whether or not the OP can actually use the 401K for a down payment on a home (not all plans allow this), whether or not the plan will require proof of hardship, and what the penalties are going to be. You aren't necessarily going to be able to use your 401k for a home down payment. And even if you are, you won't get everything you've put into it (maybe up to a 35%-45% penalty).
posted by stovenator at 12:26 AM on September 18, 2008


You should NOT have been saving for a house purchase inside your 401k, especially for a purchase within a few years. Because of the 10% penalty + taxes at ordinary income rates you are pretty much guaranteed to actaully lose money in your 401k, and that's assuming an uptrending market. With a downtrending market you will have basically been throwing your money away. Sad but true. Get some real advice before you do more damage to your net worth. Also, as stovenator says the plan may not allow you such a withdrawal, even for hardship. Good luck.
posted by emberm at 1:39 AM on September 18, 2008


emberm, that assumes no employer match. If she's getting a 100% or even a 50% match, then she'd be silly not to use it.

I guess this is a controversial topic, judging from the responses. There are a few good answers in here, though. The right answer is, if you need the money in 1 year, get the hell out of stocks and into cash (money market). If you said anything else, bzzzt, sorry, better luck next time.
posted by knave at 3:25 AM on September 18, 2008


* or, as ikkyu2 said, treasury bonds.

The point is you don't sit there wondering gee, maybe this is a bottom, if you need the money in a short timeframe. Because gee, maybe it's not.
posted by knave at 3:55 AM on September 18, 2008


The other thing that nobody is mentioning is whether or not the OP can actually use the 401K for a down payment on a home (not all plans allow this), whether or not the plan will require proof of hardship, and what the penalties are going to be. You aren't necessarily going to be able to use your 401k for a home down payment. And even if you are, you won't get everything you've put into it (maybe up to a 35%-45% penalty).

Yes, all of the comments that talk about whether or not this is a good time to invest in the market are missing the point. Short term savings for a house should never have been put in a 401k to begin with, and there are major considerations when trying to withdraw money from the account.

You probably have 3 options:

1. Don't use any of the 401k value to pay the down payment. This option might be tough, because it would probably mean you would have to postpone buying a house until you had enough saved. On the other hand, you wouldn't really be losing any money, because you could still use the 401k funds at retirement.

2. Borrow against your 401k to pay the down payment. Not all 401k plans allow taking out a loan against your funds, so this may not be an option for you. If your 401k plan does allow it, you would most likely be able to borrow up to 50% of the value of your fund as a loan that you would pay back to the account (with interest). Unlike a loan with a bank, you would be keeping the interest, not the bank. The major problems with this would be that you would need to make sure that you could afford both the loan payment and the monthly costs of your home (including the mortgage payment), and that if you lost your job you may be required to pay the entire borrowed amount back at once (although again this will vary based on the terms of your individual 401k plan).

3. Apply for a hardship withdrawal for your down payment. Again, not all 401k plans allow this. If they do, you will definitely need to pay taxes on the withdrawn amount, and you will most likely need to pay a 10% penalty on top of that. For most people the net result would be that only around 65% of the fund's value could really be used for your down payment.

The first thing you should do is find out what your options are for the 401k. I don't know enough about your situation to recommend an option out of the three, but you should definitely consider the different alternatives very carefully before choosing one.
posted by burnmp3s at 4:46 AM on September 18, 2008


Lelly wrote: If I wait that could mean 12 more months of paying my landlord's entire mortgage and then some and having only my obscene heating bills due to her 100 year old windows to show for it.

I hear you on that. I thought the same thing in 2006. Well, I checked out my home value on Zillow a couple of weeks ago and it's down almost 20% from my purchase price. If I had waited I could have essentially lived rent free - with free heat - for the past two years. So I just want to give you a little perspective that in a falling real estate market you actually save money by waiting. If you want my unprofessional opinion on where the housing market is going, I think we have at least two more years of falling prices and if the historical chart is any gauge I think housing prices will start rising again once they get back to 2002 levels.
posted by any major dude at 7:17 AM on September 18, 2008


I meant to write Kelly
posted by any major dude at 8:07 AM on September 18, 2008


hehe, I thought so.
I live in Buffalo, so I don't think we're really subject to the same trends as the rest of the nation's real estate. It's too screwed up and low cost here to begin with.

Buffalo real estate started to go UP just as the subcrime crisis begain. My own neighborhood is up about 20% in the last year alone. Right now, unless my landlord's interest rate is in the 40% neighborhood, based on what she paid, we're paying enough in rent for the mortgage, the insurance, the taxes, and then some. As well as covering all the utilities ourselves. and that's the norm here.

And to clarify for people who are worried I'm throwing my retirement away....
I'm getting an approx. $45- 60,000 house, with a NACA mortgate. I'm using approx $2500 of the now $3000 in my 401K. We're not talking about 20 grand on a 200,000 property. ..

and I put the money in my 401K since my employer's generous matching much more than offsets the tax penalties, I sat down to do the math more than two years ago and determined it would be better than a Roth IRA for just that reason, after confirming I could take the money out when the time came. I know about the tax penalties, I'm in the 10% effective tax bracket so it won't be too bad. I used to do taxes for a living and explain this to other people all the time. :)

I basically just needed someone to say "bonds are stable" or "because of XYZ avoid bonds!", that sort of thing.
posted by Kellydamnit at 8:45 AM on September 18, 2008


Cash it out now. I cashed mine in for the same reason a couple of months ago and I'm extremely thankful now that I did it. Even though I got an unlooked for legacy later and etc. You're going to need the money soon; if you're already applying for a mortgage it shouldn't be hard to have the closing before December 31 and thus the tax hit won't be as much of a tax hit.
posted by mygothlaundry at 9:03 AM on September 18, 2008


Umm... gold lost 25% of it's value between march and September.

Yes, can we please not get into gold-buggery? No, the price of gold will never fall to zero the way a paper asset might. But that's not because it has some magic intrinsic value; it's because gold is a relatively rare element that has some common uses. Wheat will never be worth $0, either, but I sure wouldn't be mucking around with wheat futures.

It's very easy to lose money with gold, same as with any other commodity. Look at the price since 1975. There are times you would have done well, times you would have lost your shirt. From about '83 to '02, it didn't do much of anything-a period in which the DJIA increased 675%.

Gold is fine as a highly speculative commodity investment. That's as far as it goes.
posted by Chrysostom at 9:20 AM on September 18, 2008


cashing out and stuffing your money under your mattress is a bad idea in an inflationary environment. stocks are historically very good at combatting inflation, but if you dont want the risk, at least put your money in cds or short term bonds. municipal bonds might be a good place to start.
posted by brooklynexperiment at 9:37 AM on September 18, 2008


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