What should you do with your 401(k) when markets turn volatile?

The numbers started dropping, then they kept dropping. If you have been paying attention to markets these past few weeks, you have probably felt your stomach turn more than once. After peaking in February, major United States equity indices slipped into correction territory, falling more than ten percent at one point and erasing roughly five trillion dollars of market value. That kind of headline lands hard on anyone with skin in the game. It hits even harder when you read that a key nowcast for first quarter growth from the Federal Reserve Bank of Atlanta briefly projected a contraction, and that some economists are raising the odds of a recession before midyear. In moments like this, investors can feel as if they are standing on a beach while the tide rushes out. The urge to sprint for higher ground is natural. It is also the moment when a steady, rules based approach matters most.

Market pullbacks are not just numbers on a screen. They are emotional events. For older investors, particularly those approaching retirement, a ten percent decline can feel like a verdict on decades of saving. For younger investors, the instinct may be to throw good money after bad or to stop contributing altogether. Both reactions are understandable and both can be counterproductive. The heart of a sound retirement plan is neither blind optimism nor doom scrolling pessimism. It is a clear framework that links your investment mix to your time horizon, your ability to withstand losses without changing course, and your need for income. If you build that framework when skies are clear, you will be far better prepared to navigate storms when they arrive.

Start with first principles. A workplace retirement plan such as a 401(k) in the United States or a 403(b) for nonprofit employees is designed for long term wealth building. The benefits are structural. Contributions flow in on a schedule, which turns volatility into a feature rather than a bug through dollar cost averaging. Taxes are deferred in traditional accounts, which allows compounding to work without annual friction from tax bills. Some plans offer Roth versions that flip the tax timing. You pay tax today in exchange for tax free withdrawals in retirement, subject to the usual rules. Many employers sweeten the deal with matching contributions. That match is the closest thing to a guaranteed return that most investors will ever see. In a choppy market, free money is still free money.

The second principle is diversification. This word has been repeated so often that it can sound like wallpaper, yet it earns its place in every serious conversation about risk. A portfolio that holds a mix of asset classes can absorb hits better than one that leans on a single pillar. Stocks are engines of growth. Bonds are shock absorbers. Cash is dry powder and a psychological anchor. The right mix is not a guess. It is a function of time and tolerance. A common rule of thumb subtracts your age from one hundred to estimate an equity allocation. For a thirty year old, that implies about seventy percent in stocks. For someone in their mid fifties, it implies closer to forty five percent. Rules of thumb are only starting points, but they help you move from feelings to frameworks.

What does that mean when markets are falling? For younger investors, the answer is deceptively simple. Keep contributing. If you can, increase your contributions when valuations drop because you are buying more shares for the same dollars. Your time horizon does the heavy lifting. A twenty five year old with four decades ahead of them can endure several full market cycles. A bear market at the start of that journey is less a threat than an opportunity to accumulate at lower prices. That advice may sound glib when you see red across your account dashboard, but it reflects a mathematical reality. The most important variable in long term wealth building is not your stock picking skill. It is the habit of steady contribution combined with patience.

For investors on the cusp of retirement, the calculus changes. Sequence of returns risk, the danger that a cluster of poor returns arrives just as you begin withdrawals, can dent a nest egg in ways that are hard to repair. There are several ways to reduce that risk without abandoning growth altogether. One approach is to increase your allocation to high quality bonds as you approach retirement so that you have several years of expected withdrawals in lower volatility assets. Another is to set aside a cash buffer equal to a year of planned withdrawals, then refill that buffer in good years while leaving it untouched in bad years. A third is to adjust the order in which you tap accounts, for example by drawing from taxable accounts first while letting tax advantaged accounts compound for longer. None of these tactics requires a heroic call about the economy. Each is a way of buying time, and time is the antidote to volatility.

Volatility also invites a recheck of your contribution strategy. If your plan allows catch up contributions and you are age fifty or older, use them if you can. Extra tax advantaged dollars can both strengthen your base and give you more flexibility in how you rebalance. Rebalancing is a quiet discipline that pays over a lifetime. When markets move, your mix drifts. A portfolio that was sixty percent stocks and forty percent bonds at the start of the year may creep to fifty five and forty five after a drawdown. Rebalancing guides you to sell a little of what has held up and buy a little of what has fallen back to target. Done on a schedule such as annually, or when allocations drift by a set percentage, rebalancing forces you to buy low and sell high without drama.

The question of how much to contribute is as practical as it gets. Budgets are not theory. They are daily life. A target of ten to fifteen percent of gross income into a retirement plan is a reasonable baseline. If that feels impossible, begin with whatever amount captures the full employer match. If your employer matches three percent, contribute at least three percent. Then build from there. One simple technique is to raise your contribution rate each time you receive a raise. If you receive a three percent raise, dedicate at least one percentage point of that increase to your retirement plan. Your take home pay still rises, and your future self benefits from a bigger engine of compounding.

Taxes add another layer to the decision. Traditional 401(k) contributions reduce taxable income today. Roth 401(k) contributions do not, but qualified withdrawals in retirement are tax free. The best choice depends on your current tax rate, your expected future rate, and your preference for certainty today versus tomorrow. Some investors split contributions between traditional and Roth options to hedge that unknown. If you are already maxing out workplace plan limits and still have the ability to save more, individual retirement accounts can extend your tax advantages within the usual income limits. If you find yourself choosing between paying extra toward a low interest student loan or directing those dollars into your retirement account, compare the after inflation cost of that debt with the expected long term return on a diversified portfolio. A five percent loan when inflation is three percent has a real cost near two percent. In many cases, continuing regular payments on that loan while adding dollars to a tax advantaged account can leave you better off over time.

Volatility is also a reminder to audit your emergency fund. A well funded cash reserve is not glamorous, yet it is the cornerstone that lets everything else in your plan stand upright. Three to six months of essential expenses is a common guideline. If your job security is uncertain or your household has a single income, leaning toward the higher end of that range can make sense. An emergency fund creates separation between market events and life events. It keeps you from liquidating long term investments to handle short term surprises. In a period where layoff headlines are rising, that cushion provides practical and psychological resilience.

If you do face a job loss, resist the temptation to tap your retirement account. Early withdrawals typically trigger both taxes and penalties, and they interrupt the compounding that you have spent years building. Instead, review your budget line by line and rank spending by necessity. Identify temporary sources of income such as severance, unemployment benefits where available, or part time work. Contact lenders to ask about hardship options rather than missing payments without notice. If you have a loan from your 401(k) already outstanding and you leave your job, understand the repayment rules so you do not turn that loan into a taxable distribution by accident. These are not pleasant tasks, but they can limit the financial scars of a rough patch and position you to resume your plan quickly once you are back to work.

There is a separate but related worry that surfaces whenever markets and fiscal debates run hot. Many savers ask whether they should increase contributions because they fear lower Social Security benefits in the future. The honest answer is that policy risk is real and unknowable in detail. The practical response is that your best defense is higher personal savings and a flexible plan. If you increase your retirement contributions during your working years, you raise your margin of safety regardless of how benefits evolve. Flexibility matters too. The retiree who can trim discretionary spending by ten percent for a year, or delay a car purchase, or downshift part time work for a season, can absorb policy surprises better than someone whose plan assumes every variable breaks their way.

The behavioral side of investing deserves its own paragraph. The most common investing mistakes do not come from a lack of intelligence. They come from a mismatch between the portfolio on paper and the person in the mirror. If a twenty percent drawdown will cause you to sell everything and go to cash, you do not need a pep talk. You need a more conservative allocation that you can live with through full cycles. The right portfolio is not the one with the highest backtested return. It is the one you can stick with. To help with that commitment, write down your investment policy in plain language. Define your target allocation, your rebalancing rules, your contribution rate, and the conditions under which you will make changes. Put the policy where you can see it. During turbulence, read it before you open your brokerage app.

You can also reduce noise. Set a schedule for checking accounts rather than refreshing them throughout the day. If you are a long term investor, a monthly or quarterly review is often sufficient. When you do review, focus on process rather than outcome. Did you contribute on time. Does your allocation match your plan. Are you on track with your savings rate relative to your retirement income goal. These are the levers you can control. Markets will do what they do. Your job is to bring consistency to the parts of the plan that belong to you.

For readers who like a concrete picture of the path ahead, consider a simple roadmap. In your twenties and thirties, prioritize building the savings habit, capturing the full employer match, leaning heavily toward equities, and building an emergency fund. In your forties, raise your savings rate toward the high end of that ten to fifteen percent band, pay attention to fees inside your plan, and begin thinking about how much annual income your assets will need to generate in retirement. In your fifties, increase catch up contributions if possible, tilt gradually toward more bonds and cash, and sketch a withdrawal strategy that coordinates taxable and tax advantaged accounts. As you approach retirement, tighten your cash buffer, practice your withdrawal plan with a paper exercise for a year, and confirm that your portfolio risk matches your comfort under stress.

A word on the headlines that started this conversation. Markets do not fall in straight lines, nor do they rise that way. Economic data series are noisy, and nowcasts are updated frequently. No single forecast determines your future. What does determine it is the accumulation of ordinary, repeatable actions. Contribute on schedule. Diversify across sensible building blocks. Rebalance without emotion. Keep costs low. Maintain a cash reserve. Align your risk with your reality. If you do those things during good times, you can keep doing them when times are uneasy. That is the quiet advantage of having a plan.

There is one final step that many savers skip because it feels less urgent than choosing funds. Review your beneficiaries on all retirement accounts and life insurance policies annually. Make sure they reflect your current wishes. Check that your contact information and your preferred email are up to date with your plan administrator so you do not miss notices. If you have not created basic estate documents like a will and health care directive, put them on your to do list. They do not change the market, but they do change how smoothly your savings can support the people you love.

The numbers will rise and fall. Commentators will assign causes and predict paths. None of that should distract you from the core truth that has guided successful retirement savers through wars, recessions, bubbles, inflation scares, and political cycles. Time in the market beats timing the market. Diversification dulls the sharp edges of uncertainty. Discipline turns intention into results. In a season when the tape is red and the forecasts are gloomy, lean into the habits that build long term security. Your future self will thank you for the calm you kept today.