Should I stop contributing to my 401(k) plan because of the coronavirus pandemic? Let me guess: You don’t like the answers you’ve been getting. Well, you’ve got a point.
We’ve all heard the arguments about why we should continue to contribute to our 401(k), 403(b) or other workplace retirement investing accounts right now. If we quit, it means …
- Giving up any employer match (free money)
- Shelling out more in taxes — as in no more upfront tax break from a traditional 401(k) or tax-free growth and withdrawals from a Roth 401(k)
- Freeing up a disappointingly low amount of cash per paycheck after the IRS takes its bite
- Missing crucial days of the eventual recovery and ravaging your long-term investment returns
It’s all true. But it’s garbage advice for some people. So, let’s try again.
Q: Should I stop contributing to my 401(k)? (Take 2)
The answer depends on why you’re asking.
If you’re tempted to stop saving in your 401(k) because you’re nervous about the market, Certified Financial Planner Jeanne Fisher says to shift your perspective. “Think of yourself as a buyer … If I were to ask you when you want to buy electronics, you’d say you want to buy on Black Friday,” says Fisher, who is the managing director at Strategic Retirement Partners in Nashville.
Right now we’re in a Black Friday situation for stocks. If your financial life is still relatively stable (e.g. you’re still fully employed, have an emergency fund, and are able to pay for your essential needs), continue to add to your 401(k) shopping cart at a regular cadence with each paycheck. Perhaps you’ll be heartened to know that’s what the majority of investors in defined contribution plans have been doing, according to recent Vanguard data.
If, however, fear of the stock market’s volatility is not the reason you’re asking …
Q: When Is It OK to Stop Contributing to My 401(k)?
If the coronavirus crisis has rained financial instability upon your household — if you simply cannot afford to contribute to your retirement savings — it’s OK to take a break. “I’d prefer you reduce savings than get into debt and get behind on other bills if you find yourself in a position where cash flow is incredibly tight,” Fisher says.
Immediate financial needs should take precedence over long-term savings goals if, for example, the breadwinner(s) in your household is laid off, furloughed or otherwise unable to work and you don’t have an adequate emergency fund to get you through. Same if you have no cash cushion and you fear a pending layoff or having to take a dramatic salary cut.
Also note that you can no longer contribute to a 401(k) at a company where you are no longer employed. If through some lucky circumstance you can still afford to save for retirement, open an individual retirement account (IRA). (See: 6 Types of IRAs Every Woman Needs to Know About.)
Q: My Company Stopped Matching Our 401(k) Contributions. Should I Still Contribute?
You should. HerMoney’s own Jean Chatzky points out that you still get the tax benefit by contributing to your retirement account, and second, when companies curtailed or paused 401(k) matches back in 2008, it didn’t last long. According to Fidelity Investments, half of the plan sponsors who dialed back their match in 2008/2009 reinstated it within a year. You want to be present and contributing the moment your employer puts the match back in play.
Q: What Should I Do If I Moved My Money to Cash When the Stock Market Started Tanking?
Completely bailing out of stocks indicates that there may have been a mismatch between your portfolio holdings and your true stomach for risk. Greg McBride, chief financial analyst at Bankrate.com, recommends revisiting your long-term goals and risk tolerance to decide what the right investment mix is for you. At the same time, he cautions, “Do not let short-term volatility cloud your judgement and compromise your long-term financial security.” You need to be able to sleep at night — and lightening up your exposure to stocks may help — but don’t pull back so much that you risk your long-term savings losing money to inflation.
Q: My Asset Allocation Is Out of Whack in My 401(k). Should I Adjust Now or Wait for the Market to Calm Down?
There’s no telling when volatility will settle down, McBride says. “Why wait? If volatility continues, you can always rebalance again down the road. But no sense waiting and letting your asset allocation drift too far from the intended target,” he says.
What you shouldn’t do is completely overhaul your asset allocation strategy. For example, if you were 60% in stocks and 40% in bonds before the coronavirus crisis, don’t flip the mix based on your headspace right now. Long-term investment strategies — for good times and bad — should be set during times of normalcy, not panic.
Q: How Much of My Portfolio Should Be in Stocks vs. Bonds and Other Safe Investments?
A common portfolio allocation rule-of-thumb is to subtract your age from 110. That number represents the percentage of your money that should be in equities (stocks, stock mutual funds, exchange-traded funds or ETFs). The remainder should be in bonds. That general recommendation is appropriate for most people — but not all.
“Not everybody the same age has the same tolerance for risk,” Fisher says. She says to think of the rule as a sliding scale. So, for example, a typical 30-year-old investor would allocate 80% to stocks and 20% to bonds, based on the formula above. But if you’re a 30-year-old investor who is particularly risk averse, you may choose a 70% stocks, 30% bonds mix, she says. If you’re comfortable taking on more risk, you might consider a 90%/10% allocation.
Q: All this 401(k) Management Stuff Is Too Much for Me to Deal with Right Now. What Should I Do?
Target-date mutual funds were made for times like these. They are a hands-free solution if you’re not comfortable managing the mix of investments in your portfolio on your own. (There’s no shame in that!)
Here’s how they work: Investments in these mutual funds are based on the amount of time an investor has until retirement. The closer it gets to that date, the more conservative the allocation gets within the fund. The companies that manage these mutual funds adjust the holdings on an ongoing basis based on market movements. They sell investments that are overweighted and use the money to bulk up on underweighted holdings. And it all happens automatically so that you don’t have to do a thing.
Most 401(k) plans offer target date mutual funds or a managed account model. (Look for fund names with a year in the name.) You can move your money into one at any time. A 40-year-old with an average tolerance for risk (read: exposure to stocks) who wants to retire in 28 years at age 68 would choose a target date 2048 fund, or as close to that year as possible. If you’re comfortable with risk, then choose a target date that’s farther out.
Q: How Can I Take Advantage of the Market Dip During the COVID-19 Crisis?
You already are! The great thing about the way 401(k)s are set up is that your contributions from each paycheck have you dollar-cost averaging into your account. That’s a strategy that many pros recommend because it means you don’t have to try to pick the exact right moment to invest. It will happen naturally with some of your money as you gradually add to your portfolio: With some contributions you’ll be buying when the market is low and at other times during an upswing. But all together you’re smoothing out the average price you pay.
The best way to be opportunistic right now is to max out your contributions, if you’re not already. The IRS lets employees save up to $19,500 in a 401(k) or similar workplace retirement plan in 2020. If you’re 50 or older, the limit is $26,000 annually. If your company automatically enrolled you in the plan when you started the job, you’ll need to adjust your contribution (ask HR for directions) since you’re likely only contributing a fraction of the allowable amount, and may not even be contributing enough to get the entire employer contribution (free money!) if your company offers a match.
More Answers to Your Retirement Account Questions:
- 401(k) Loan vs. Hardship Withdrawal: Which One Is Better?
- The New Rules of Borrowing From Your 401(k) — and Better Options to Consider
- Need Cash From Your Retirement Savings? Tap Into a Roth IRA First
- IRA vs. 401(k): What’s the Difference?
- Podcast: Suze Orman on Coronavirus, Your Retirement and Recession Fears
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