Evaluate your current 401(k) balance and think ahead to stay on track during market fluctuations.
Financial concerns stemming from the coronavirus outbreak have rippled through the global economy.
“The coronavirus has had an undeniable impact on the stock market, which extends to 401(k)s,” says Steve Sexton, financial consultant and CEO of Sexton Advisory Group, a financial services firm in San Diego. The uncertainty surrounding the disease has led to the selling off of equities, oil price wars and a stock market drop.
If you have a 401(k) plan, you may have noticed a decline in your balance recently. The exact decrease will depend on how your funds are invested. While allocations in stocks are likely to see larger drops, money invested in bonds may have less of a change in value. “For some portfolios, that can mean a 15% to 20% drop in value over the past two weeks,” says Katharine Earhart, partner at Fairlight Advisors in the San Francisco Bay area. “For those closer to retirement and in more conservative portfolios, the stock market drop may have less of an impact as the portfolios are allocated more towards fixed income.”
Follow these guidelines to make sure your 401(k) plan stays on track and is protected during this coronavirus-focused time:
- Steer away from panic.
- Evaluate your current setup.
- Take advantage of the long-term potential.
- Build a cash reserve.
- Consider delaying retirement.
Steer Away From Panic
Keep in mind that 401(k) plans are designed for long-term savings and do not take a day-to-day trading approach. While your balance may currently be down, it may also increase as the market eventually recovers. “Reviewing your 401(k) plan account daily doesn’t help keep you calm and may create more panic,” Earhart says. “The market is volatile right now, and if you stay the course, you don’t need to look at it every day.”If you continue to be concerned, avoid rash decisions based on fear, as they may lead to further losses. Early withdrawals from a 401(k), which refer to taking out money before age 59 1/2, will be treated as taxable income. You’ll also have to pay a 10% penalty on the amount withdrawn in most cases.
Evaluate Your Current Setup
Consider the overall financial picture in your 401(k). “Look at the balance of equities and fixed income in your portfolio,” Earhart says. If you’re not clear on how your funds are invested, sit down with your financial advisor to review your situation.
For individuals who are planning to retire in a couple of decades, allocations in a 401(k) might include 50% in stocks and 50% in bonds. “As you near retirement, the recommended allocations for 401(k)s are more conservative with bonds having 70% or higher allocations,” says Kevin Neal, president and CEO of Moenio, a client advocacy financial firm based in Miami. Bonds tend to have lower risks, and as a result may work in your favor at this time. Talk to your financial advisor to see if any changes should be made in your plan, given the number of working years remaining until retirement.
Take Advantage of the Long-Term Potential
If you are between 20 and 50 years old and are planning to retire in 15 or more years, there may be no need to shift funds away from your 401(k) plan. “The financial upside of the coronavirus is that most of the money in the stock market is made after the market has corrected,” Sexton says. If you are currently contributing to your 401(k) every pay period, you might decide to carry on with the same contribution amounts. The funds you put in could be used toward future gains. “You now have the opportunity to buy mutual funds at a discount, meaning for the same 401(k) contribution, you can accumulate more shares than the previous month,” Sexton says.
For instance, perhaps you were purchasing shares that cost $30 a share before the coronavirus outbreak. If those same shares now are available for $21 a share, you could buy more shares with your same contribution amount. When the market turns up again, you’ll reap more for your investment. “While the market is in a downturn, it makes sense to contribute as much as you can to your 401(k) right now,” Sexton says. “Take into account the benefit of not having to pay taxes on the money you contribute to your 401(k).”
Build a Cash Reserve
If you’re worried about needing cash soon and having to access your 401(k), consider other sources for your needs. “It’s always important to have a cash reserve on hand in case of an emergency or job loss,” Earhart says. If you don’t have an emergency fund in place, this may be a solid time to start building one. You might put funds into a savings account or money market account.
Consider Delaying Retirement
If you were planning to retire this year or within the next five years, the market downturn and resulting 401(k) losses could mean that starting to make withdrawals now will result in less retirement income than expected. “Unless you already had a plan in place to mitigate the effects of a market downturn, the decline in your 401(k) values may require that you work a few more years before retiring,” Sexton says. During the next years, your 401(k) values could build again, putting you back on track for your expected retirement income.
Rachel Hartman, Contributor | US News