What Happens to Your 401(k) If the Market Drops 20%?
Market volatility is a normal part of long-term investing, but a sudden 20% drop can feel anything but normal.
Historically, the S&P 500 has experienced multiple drawdowns of 20% or more, including during 2008, 2020, and other economic slowdowns. While markets have eventually recovered over time, short-term losses can be unsettling, especially for those close to retirement.
(Source: Historical S&P 500 performance data; Morningstar and Vanguard investor research.)
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What a 20% Drop Means in Real Dollars
If you have:
- $100,000 invested → A 20% drop reduces it to $80,000
- $500,000 invested → A 20% drop reduces it to $400,000
- $1 million invested → A 20% drop reduces it to $800,000
The loss only becomes permanent if investments are sold during the downturn.
The Risk for Near-Retirees
Younger investors often have time to wait for recovery. But those approaching retirement face what financial planners call “sequence-of-returns risk”, where early losses during retirement can impact long-term income stability.
Diversification and withdrawal strategies matter significantly in these scenarios.
The Bigger Picture
While market corrections are normal, they highlight the importance of:
- Asset allocation
- Emergency savings
- Risk tolerance
- Long-term perspective
For investors, the key question is not whether markets will decline, but how prepared they are when they do.
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