For anyone who became accustomed to watching their 401(k) account balance climb higher for years on end, the market’s recent drop and continued volatility may be unnerving if not downright scary.
Nevertheless, you shouldn’t let fear cause you do something that could hurt your long-term retirement planning, advisors say.
“The coronavirus is certainly creating a prime opportunity for 401(k) mistakes to be made,” said certified financial planner Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio.
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“Unfortunately, not everyone will be able to avoid them, especially if their job or income has been affected,” Anderson said.
The coronavirus pandemic has taken a sledgehammer to the U.S. economy, as businesses have had to shutter and lay off or furlough employees. In the last three weeks alone, more than 16 million workers have lost their jobs.
While it’s uncertain when the solid economic footing will return or when the stock market will recover, here are some things to avoid, if possible, with your retirement savings.
Under recently passed legislation intended to ease the financial impact of the coronavirus crisis, 401(k) plan participants who are under age 59½ are permitted to withdraw up to $100,000 without paying the usual 10% early withdrawal penalty. (You would still owe income taxes if you did not replace the money within three years). The limit for 401(k) loans — which already were allowed — now are upped to $100,000 instead of $50,000.
It will be up to employers whether they allow the coronavirus withdrawals or loans in their plans. While the reason for the withdrawal must be coronavirus-related — i.e., you or your spouse contracted it or you are being adversely impacted financially — not much proof may be needed upfront. Down the line, though, experts say you should expect to justify it. In other words, don’t take more than you need.
However, financial advisors generally agree that withdrawing money from your 401(k) should be a last resort, even if you are financially strapped.
“Withdrawals still want to be avoided unless absolutely necessary,” Anderson said.
There are other ways to reduce your immediate obligations so you don’t have to come up with cash to pay them, he said. For example, you may be able to put a student loan or mortgage in forbearance.
Going to cash
A couple things can happen if you sell your investments — whether individual stocks or, say, a target-date fund — and move the money to a cash account (i.e., money market fund).
For starters, any losses you saw on paper become locked in — in other words, you’re selling stocks at a low price. Additionally, you may miss out on future gains, because trying to know when to get back into the market is challenging at best.
Although it’s impossible to predict what stocks will do from here, research shows that missing out on the best-performing days of the market — regardless of when the bad days are — can harm your long-term returns.
“It’s a natural reaction to allow emotions to take the wheel and pull out of the market when it drops rapidly,” Anderson said. “But if at all possible, locking in losses today should be avoided.”
He added that although the coronavirus pandemic has been an unusual event, the significant market declines that have accompanied economic disruptions in the past have always recovered and headed even higher.
Stopping or reducing contributions
While there’s a chance your employer may pause its contributions to your account — i.e., the company match — due to its own financial concerns, advisors generally recommend continuing your own contributions.
“A huge mistake would be to stop your own contributions if your employer stops matching,” said CFP Kristi Sullivan, owner of Sullivan Financial Planning in Denver. “The employer match was, is and always will be gravy.”
While the idea of putting money into stocks that conceivably could continue dropping in price may seem counterintuitive, the same logic that applies for not going to cash: You won’t know when to get back in and could end up buying at higher prices, meaning you missed out on potential gains during your period of not contributing.
In fact, experts say that if you still have a job and are not worried about cash flow, the more you can put into your 401(k) account when the markets are down, the better.