In the last weeks, millions of Americans have lost their jobs and there are growing concerns of a recession. Although we need to stay vigilant of our physical and financial health, we need to focus on what we can control. This article provides three key areas related to your 401(k) that I encourage you to review with your advisors.
Should You Withdraw Money Early from a Retirement Account?
Normally, retirement accounts are designed to encourage people to save for retirement. However, the CARES Act may enable access for individuals to coronavirus-related withdrawals of up to $100,000 (or vested account balance if less) from their 401(k) or IRA without the 10 percent penalty (under age 59-1/2). Income tax liability can be spread over three years with opportunity to “re-contribute” the withdrawn funds within three years. Also, some 401(k) plans permit borrowing. The CARES Act upped the loan limit to $100,000 (or 100 percent of your vested balance).
However, I advise you to use your retirement account as a last resort for a variety of reasons:
- This is a time to prioritize survival and not maintaining one’s lifestyle.
- It’s hard to save for retirement and even harder to put the toothpaste back in the tube.
- Market declines become bad news if you have to sell.
- Not all 401(k) plans permit withdrawals or loans.
Employers Might Suspend 401(k) Matching Contributions
Many plans provide a boost to retirement savings in the form of a match or safe harbor contribution. For example, the employer might match 50 percent of your contributions up to six percent. If you contribute six percent, the employer kicks an additional three percent. That’s a 50 percent return on your contributions.
Unfortunately, some employers are cutting back in this economy as they have in prior downturns. Willis Towers Watson estimates almost 20 percent of companies with at least 1,000 employees cut back or suspended matching contributions following the 2008 Crisis.
It may be disheartening, but don’t despair. You’re responsible for your future. Perhaps you’re going to inherit funds or can survive on Social Security benefits alone. And if those aren’t enough, keep saving. Think about how our budgets have improved – less dining out, travel, shopping and more. You might even have a 15 to 25 percent rebate from your auto insurance company. Remember the power of compounding – the earlier you save on a regular basis, the better.
Review Your Investment Strategy
It’s ill-advised to switch horses midstream. If this market sell-off got your attention, then work with your advisor and possibly ride out this financial storm. Make any big adjustments after the rebound because getting out often means missing out.
Other investors see this as an opportunity to rebalance their portfolios and buy things on sale. It might also be time to get projects done, your car repaired or even replaced.
The markets are likely to continue to be challenging. Earnings releases and guidance are coming. There may be efforts to reopen parts of the economy – which may trigger additional COVID-19 cases, or medical advancements may be better than expected and economic stimulus may reignite inflation and higher interest rates, and U.S. elections may lead to higher taxes. Meanwhile, the equity market (the S&P 500) has recovered about half its 34 percent decline from the February 19 high.
Life’s rich with uncertainty. If you wait for all uncertainty to go away, so do the opportunities. Have a plan and stick to it – and the second part is often the hardest. Secure your future wisely and stay healthy.