If you’re watching the financial markets fluctuate in response to news of the COVID-19 pandemic, you might be asking, “What should I do with my 401(k) right now?” It’s a fair question, as the Dow Jones Industrial Average fell enough to end the 11-year bull market and businesses around the world face economic uncertainty.
Protecting your retirement savings in a volatile market requires a bit of strategy. Read on to discover a few things you can do now with your 401(k):
- What To Do With Your 401(k) During COVID-19
- Plan Your Asset Allocation
- Don’t Panic: Think Long Term
- Keep Investing
- Understand Safe 401(k) Options
- Think Twice Before Withdrawing Money
- Ignore It: Control What You Can Control
The answer to questions like, “Should I change my 401(k) investments now?” varies from person to person. Before you can answer, you need to know your time range and risk tolerance.
Consider the following questions:
- How much time do you have before you need the money? Think about the actual number of days, months and years you have left.
- How much money are you willing to lose? Individuals who are able and willing to risk more tend to see greater returns than those who keep their money in safer options.
There are no right or wrong answers to these questions. They just help you determine whether the risk of your portfolio matches your risk tolerance. Knowing your risk tolerance will help you decide how to manage your investments and make informed decisions on where to put your money.
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It’s a good idea to review your asset allocation periodically to ensure that your 401(k) is producing the desired results. Your asset allocation refers to how much you have in a particular type of investment, such as growth stocks, value stocks, mutual funds and bonds.
Deciding how to divide up your investment portfolio is a personal decision. As a general rule, the closer you are to retirement age, the less risk you can absorb because you don’t have as much time to let your portfolio recover from a significant loss. Older investors might lean toward conservative 401(k) investments such as bonds and money market funds. Likewise, younger investors have more time to ride the stock market’s ups and downs and might take on riskier investments like growth stocks and funds.
The COVID-19 pandemic and the market’s response to it are important reminders to reassess your portfolio — something that should happen regularly, anyway, as your needs change. Use the opportunity to speak with an investment professional about your asset allocation and see if it’s time to rebalance your portfolio or take a closer look at your level of diversification.
As you watch the balance in your 401(k) decline, you might be tempted to take your money and run. Unfortunately, this short-term solution can have long-lasting consequences.
For one thing, cashing out your 401(k) early means you’ll face income taxes even if new coronavirus rules let you off the hook for early withdrawal penalties (see No. 5 below). But even if you leave the money in there and just stop contributing to it, you could miss out on a chance to greatly expand your retirement savings in the future.
A 2018 review of investing patterns in the wake of the Great Recession of 2007 to 2009 showed that workers who continued to contribute to their 401(k) plans during the recession saw their retirement savings increase despite initial losses in the market.
Since the Dow Jones Industrial Average was founded in 1896, it has weathered several major pullbacks dating back to the Panic of 1901. Each time, it recovered.
Keep your eyes on your ultimate goal of retirement. If that’s still 20, 30 or 40 years away, there’s no urgency to withdraw your money now and invest it again when stock prices go up. And if history is any indication, they will go up.
One of the best-known investing axioms is to buy low and sell high. Unfortunately, the opposite occurs when panic-selling takes place during a market downturn. Look at this as an opportunity to get in rather than get out. When stocks go down, it’s a good time to hunt for bargains.
When stock prices fall, it means regular contributions to your 401(k) can buy more shares now than they could before. This is one reason some experts recommend increasing your contributions during a pandemic — especially if your employer matches your contributions to your 401(k). Even a modest increase in how much you invest can produce big returns when the stock market — and your 401(k) — recover.
The stock market can be volatile even when the world isn’t facing a pandemic. A variety of factors can make a stock go up and down, including inflation, government policies, tax laws, industry cycles and consumer trends. If you’re planning a big purchase or are nearing retirement, you likely have less tolerance for steep drops and want to invest in safer options. Here are a couple to consider:
Bonds tend to be more stable investments than stocks and are a popular choice when investors want to shield their money from a fluctuating stock market. Just keep in mind that when bond prices go up, their yields go down.
Another option is to seek out value stocks of companies with an established trading history instead of growth stocks, which can be less predictable. Less risk usually comes with less potential reward, but it also means more consistent returns.
Find Out: How To Invest In Bonds
The Coronavirus Aid, Relief and Economic Security Act expands the hardship withdrawal rules so that people can withdraw money from their 401(k) plans without paying the 10% early withdrawal penalty. It also gives you three years to pay back what you take out.
This might seem like a good idea — especially if the COVID-19 pandemic has left you without a paycheck. But even if you meet the criteria for waiving the withdrawal penalty, it might not be the best option.
First, you have to treat the withdrawals like income, which means you’ll have a greater tax liability. Second, if you take money out of the account, you’re forfeiting the money you might eventually earn when the market recovers. This is likely better left as a last resort, so think twice before you decide to withdraw money.
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Sometimes the best thing to do with your 401(k) is to ignore it and focus on building up another aspect of your financial health — like your emergency fund.
If you don’t have a solid emergency fund — one that can cover three to six months’ worth of expenses — it’s not a bad idea to stop investing for a while so you can build the fund up and prepare for the next financial downturn. Wage earners between 2009 and 2011 who had savings to rely on were less likely to stop contributing to their retirement plans and more likely to recover quickly when the economy rebounded after the Great Recession.
Your savings do more than provide a way to cover your expenses if you lose income during the pandemic. They also help you avoid giving in to your fears about the stock market as you think about how little control you have over what happens to it.
You do have control over your budget and your savings. Even if you have to dip into your emergency funds, you’re able to avoid compounding your losses by missing out on potential retirement income.
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This article has been updated with additional reporting since its original publication.