The global coronavirus pandemic has hurt the American economy as well as the global economy. The recession is significant, but not the first that most people have seen in their lifetimes. During these times of uncertainty, many might be a little concerned about what to do with their retirement savings. But, not to worry, there are several strategies to consider for your retirement accounts during a global crisis.
First, it’s important to express gratitude. You are fortunate to have saved money and have a plan for your future.
Additionally, gratitude can have a positive impact on your life, starting with our mental health. When you show gratitude, it helps you to feel more satisfied with what you have. When you are grateful, satisfied, and aware of your financial standing, you will be able to make decisions that positively impact your financial future and protect you against any economic disruptions that happen down the road.
Examine your contributions
Now that you have expressed gratitude, you may want to examine your current retirement contributions. An economic downturn creates an opportunity to evaluate your retirement contributions. If your employer offers a 401(k) match, it is always a good idea to contribute at least as much to your 401(k) as your employer will match. This money is typically automatically deducted from your paycheck. Therefore, you may not think about how much you are contributing to your 401(k). Many people increase their contribution by 1% each year, so you might not be aware of exactly how much you are contributing to your 401(k).
If your employment is safe and secure, you will likely want to stay on pace with your automatic 401(k) contributions. This way, your accounts will be able to ride the wave of the economy as it rises again over the next few years. If you have a ROTH IRA or another individual retirement account, it is also wise to continue contributing to your retirement account as long as you are still earning an income.
If you have lost your job or have taken a pay cut, it’s okay to decrease your contributions. Even if you contribute $50 a month, you’re still making progress toward your future goals.
Pay attention to asset allocation
As things become more volatile, you might be tempted to put more money into bonds or mutual funds rather than stocks. You may also think about moving your 401(k) to another type of fund. While this may seem like a good idea in the short-term, you should speak with an expert or financial planner before making this move.
It is wise to keep in mind that some funds have fees associated with moving money. For example, if you move money out of your 401(k), you may have to pay capital gains taxes on the growth. Therefore, you should do your best to avoid paying fees, especially if the net value of your retirement account is decreasing due to a decline in the economy.
If you do decide to change your asset allocation, your age might play a part in how you move your money. For those closer to retirement, you should focus on minimizing volatility. If you are further from retirement, you can look for opportunities to grow your retirement portfolio as the economy regains strength down the road.
Cut back on your expenses
Even if you have been able to maintain your employment, you may want to cut back on your spending and evaluate your financial habits. While many of us are saving money by not going to restaurants, bars, events, and other attractions during the COVID-19 crisis, there may be other ways for you to decrease your spending.
Many companies are giving breaks to their clients. For example, you might be able to suspend your gym membership while it is closed to save that monthly expense. Other people are choosing to refinance their homes and taking advantage of the lower interest rate.
It might be advantageous for you to look at your budget and credit card statements to see where else you can cut expenses. For example, you may be able to get a lower car insurance rate if you are driving less during the pandemic. You could also look for space to save on groceries and other necessities.
Creating a lean budget will help eliminate some of the financial pressure you may feel. If you live well within your means, you will minimize your financial burden if you face hardship.
Take a retirement withdrawal only if you have no other options
If you are in a pinch, you might be tempted to make a withdrawal from your retirement fund. An early distribution from your 401(k) or another retirement account might be penalty-free for some as a result of a stipulation in the CARES Act. However, if you borrow money, you will have to pay it back within 3 years and people borrowing money from their retirement accounts can withdraw up to $100,000 without taking the 10% early withdrawal penalty.
However, many financial advisors warn against this option and see it as a last resort. While you might see your accounts declining in value and be tempted to cash out to avoid further decreases, the long-term effects of this could be vast. If you have several years between now and retirement, your account will have plenty of time to recover before you need the cash. However, if you are closer to retirement, this might negatively impact your ability to retire on time.
Avoid 401(k) loans
If you need cash reserves, you may consider taking out a 401(k) loan. A 401(k) loan is a loan against the balance of your retirement fund that you must repay. If you aren’t able to repay the loan down the road, you may set yourself up for huge tax liability and penalty charge. These can be detrimental to your financial well-being, especially, if you’re already in a financial pinch. Some plans will also restrict future contributions to the plan until the balance is paid off. This will have long-term effects on your retirement savings.
So, if you’re considering a 401(k) loan, speak with your financial planner before you move forward. Your financial planner can help you review your other options before you make a financial move you regret.
Prepare for future crises
A hallmark of good retirement planning is preparing for the ups and downs of the market. If you are a young investor, there is a strong chance that this is not the last economic slump you will see in your lifetime. Therefore, it is wise to diversify your investments for future financial success.
If you are decades away from retirement, you have plenty of time to recover from the hit that your retirement accounts are taking now. Even if you are about to retire, there are smart moves you can make to protect your retirement income. As you get closer to retirement, you may want to consider shifting your portfolio away from stocks and towards bonds. This may protect you from having to sell shares at a time when stocks are not advantageous. You may also want to consider converting part of your portfolio to other investments that offer more stability.
The bottom line
Now that you know what do to about your retirement accounts during a global crisis, you see that there are plenty of options for how to navigate your finances. If you have retirement savings, it is important to start with gratitude. By simply saving, you are one of the 45% of American adults that have retirement savings. You are fortunate because this savings gives you something to work with.
As you navigate the financial crisis, be sure to speak with your financial planner for guidance. Many are offering meetings via teleconference. Ready to start working with a financial planner who specializes in retirement preparedness? Click here.