My 401k Advice to the Unemployed

I’ve probably said something similar in the past, but I want to be clear about how I would invest my 401k if I recently lost my job. My strategy is based off hedging risk. The primary risks an unemployed worker with a retirement account faces is that they won’t get a job and that the stock market drops and so does their retirement account. How do protect yourself and hedge against that worst case scenario?

There are 2 possibilities for employment: stay unemployed (negative) or get hired (positive).

There are 2 possibilities for investments: goes up (positive) or goes down (negative).

Note that there is a correlation between hiring and a rising stock market. The easier it is to find a job, the more likely it is that the economy as a whole is improving and that could translate to rising investment portfolio. This also means there is a correlation between not get hired and the economy not recovering which could lead to a decline in investments.

The unemployed worker has already lost salaried income. To be long in the stock market just exposes you to more potential loss. You should be in cash. Most companies do not have an option to park your 401k money into cash. The good news is you no longer work for a company, so now you have the freedom to liberate your money.

  1. Rollover your 401k to a company like TD Ameritrade.
  2. Let it sit in cash until you establish new stable employment.

Once you are back in a stable job then reassess your investment strategy. And if the economy tanks and you can’t find a job, all your retirement money was protected! You lose nothing following this strategy. Note that every financial adviser will try and convince you to get into some investment, as they make their cut by keeping you fully vested in the market at all times. Ignore them and do your own homework.

I write this post because I do not see a driver for job growth and the stock market has rallied hard based off the belief in a recovery that I don’t see coming.


Add yours

  1. If you don’t see a recovery coming, it would seem more prudent to pull cash completely out of the 401k, pay the taxes and penalty NOW, and have the cash more readily accessable to convert to real tangible assets when the opportunity arises. One reason I say this is because of the budget deficits existing on a state, municipal and national level only proves one thing, taxes will continue to rise and wealth will continue to transfer in every way concievable.

  2. @Ed – If you assume that there is no recovery (long term) and that the taxes and penalties for early 401k withdrawal will increase, then you are 100% right. I may do exactly that myself at some point, but I would probably not advise that for someone else.

    My message is to get unemployed people to stop investing in a market that no longer invests in them.

  3. THE ABOVE IS VERY BAD ADVICE!!! You do NOT want to be in cash when us Dollars are being devalued due to Quantitative Easing, are you nuts? Do you want dollars when a gallon of milk is $1,000? Course not, but that is where we are headed, it’s called hyper inflation.


    Your only safe bet in today’s economy with a locked down 401K is to borrow as much as you can from your 401K and use it to purchase precious metals such as Gold and Silver. Remaining funds should be in Large Cap funds. This is because the large caps will protect themselves with commodities and you can ride their coat tails.
    When the market dumps later this year and the Dow goes back down to about 6-7K you then dump half your metals and pay back your loan. You will then ride the elevator back up.
    If you get laid off you can do an in-service transfer of your funds to an IRA, IRA’s give you the flexibility in buying commodities without paying capital gains. The big caution here is that an IRA is not sheltered from a possible law suit or bankruptcy like a 401K is.
    Just to remember, the 401K Ponzi game is rigged, and is why you cannot:
    1) move your money from your 401K
    2) buy commodities like Gold and Silver with your 401K
    3) cash out without a penalty
    It is designed to give the money to the big hedge funds where they can profit on it, and give you the crumbs.

  4. @John in NC – Let us say you end up being right. The currency is destroyed and precious metals have spiked. The government desperately needs funding. Where do you think they will turn? Where have they historically turned? They will tax the living hell out of gold and silver. You end up being right, but end up losing.

    When I look at a long term chart I see that gold have already spiked and the dollar has already fallen a great distance. Had you posted this comment 10 years ago, you would be the smartest man on the planet. Now I think this trade is getting long in the tooth, but I could be wrong. If I saw other countries behaving responsible with their monetary policy, I might even agree with you.

    I’m not in the hyper-inflation camp.

    Thanks for the comment. I like your large cap idea once the correction comes.

    I think we are nearing the end of 3 generation debt super cycle. We do not have a feedback loop between wages and inflation,

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