Personal Finance & Money Asked by Mark Hubbard on September 30, 2020
My wife and I are living on our Social Security benefits. I’ve been very pleased with the growth of my Fidelity 401k in my former employer’s retirement plan. As far as I know, I can leave my balance in the company’s plan indefinitely, correct? Obviously my balance fluctuates somewhat with the performance of the stock market, but Fidelity has done a great job so far.
I’m 71, so next year (2021) Fidelity will have to pay me a Required Minimum Distribution, which will be a taxable ballpark-figured amount of about $25K, which we probably will not need to spend. I’ll set it aside and use part of it to pay our income taxes as well as our Medicare supplemental insurance plan ("Part F"), property taxes and homeowners and earthquake insurance if needed. (Through frugality and diligence, we paid off our mortgage years ago.)
Soooo, what if the market crashes? Should I move my balance to several FDIC-insured IRAs now? I realize the return on FDIC-insured IRAs would be miniscule compared to Fidelity’s historic returns, but at least the funds would be insured. I want my wife to be able to comfortably get by should I die.
Any advice or recommendations? I’m inclined to stay with the Fidelity 401k, but I don’t want to be foolish about these retirement funds.
Thank you in advance for your comments and answers!
The FDIC will not protect you in the event of a market crash. It will only protect cash deposits and other cash-equivalent securities held within your retirement accounts if the institution holding those deposits (not necessarily the brokerage account) fails. If you invest in stocks, mutual funds, bonds, etc. that go down in value due to a market crash, FDIC will not help you. You're on the hook for those losses. It doesn't matter whether those are in a 401(k) or an IRA - the protection (or lack thereof) is the same. There are other reasons for moving from a 401(k) to an IRA that is covered in other questions here.
There is also SIPC insurance that protects you if your brokerage fails, but it does not protect against the value of your assets going down either.
If you are worried about a market crash, then you could move more (not all in my opinion) of your investments to low risk instruments like money markets or investment-grade/government bonds. Nothing short of cash is guaranteed not to lose value, but you can minimize loss by investing in low-risk assets. Be warned, however, that low risk assets also limit potential gains, so you may miss out on an opportunity if the market does NOT crash.
That's why I say move some of your investments. You won't need all of your savings the instant you retire, so you can keep some money that you won't need for several years in higher-risk investments to capture the gains when the market recovers (or keeps gaining if there is NOT a crash).
The above is not specific investment advice - just a general idea for how to reduce risk of loss in a portfolio. If you want advice tailored to your specific needs, then make an appointment with a local financial/retirement planner (ideally one that doesn't primarily sell insurance...)
Correct answer by D Stanley on September 30, 2020
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