What Should I Do with My 401(k) Right Now?
If you are wondering What should I do with my 401(k) right now?–you aren’t alone.
Millions of 401(k) investors are wondering the same thing.
Recent market volatility. Economic instability. Fear of not being employed in the near future.
The sense of powerlessness over this entire virus situation and your financial future. It’s very real.
With the uncertainty of what the next few months will look like–as we come out of our homes and back to some resemblance of normalcy–it’s easy to let fear dictate our financial decisions.
Before we dive in and answer, What should I do with my 401(k) right now?, we want to share a story with you about what happens when fear drives retirement investment decisions.
A Warning from the Past: The Real Cost of Fear-Based Decisions
Take a moment to read this fictional story below…
Up until 2007 someone, let’s call him Adam, was confident in his 401(k)’s performance…then 2008 hit, and he lost 37% of his total retirement savings.
Instead of staying on course and waiting for the market to bounce back, Adam put his IRA in cash and moved his 401(k) assets into a mutual fund comprised of “safe” bonds.
The market continued to dive in early 2009, and Adam felt really good about his decision.
He was so confident, he even stopped contributing to his 401(k).
He mentally checked out, and for the next few years, he didn’t open his 401(k) statements when they arrived.
Sadly, Adam missed out on the opportunity to recover from his losses.
From March 9, 2009, to January 4, 2010, the Dow Jones Industrial Average climbed to 10,583 points.
But Adam was invested in bonds, so he only saw a 2% growth.
The market continued to rebound throughout 2011 and 2012. The Dow Jones Industrial Average closed on December 30, 2012, at 12,217.56 points.
Adam was still sore about his 2008 losses.
Even though the current returns from his bond investments were low, he didn’t want to run the risk of buying into the market at all-time highs and then losing it all over again.
Adam never recouped his losses because he missed out on the opportunity to do so.
And, when he retires, chances are, he will come up short on the amount of money he needs.
There were a lot of Adam’s after the 2008 market crash.
And, sadly, there may be even more of them after the dust settles from COVID-19–when the real economic impact of the virus will be made clear.
This story of making decisions from fear should be a lesson to all 401(k) investors asking What should I do with my 401(k) right now??
Keep reading below to find out what options are available to you and why some may not be in your best interest.
Keep Your Contribution Limits the Same
If you have the money to contribute to your 401(k), continue paying into it each pay period.
In other words, leave your 401(k) alone, and keep on keeping on.
If you are worried about another big dip in the market, remember, you’re losing money on paper.
You don’t technically lose any money until you sell.
When you continue (or even increase) your contributions, you’re going to get more out of your retirement due to dollar-cost averaging.
This strategy simply means you invest no matter what the market is doing.
“You buy more shares when the market is down, and less when the market is higher. This and time can build wealth,” says Mark Sorensen, Chief Investment Officer at 401(k) Maneuver.
He adds, “100% of the time, every market correction–every bear market–has always come back 100% of the time, and there’s no reason to think this time will be any different.”
Sometimes in times of uncertainty, the best thing to do is nothing–just keep contributing–and know that your patience will be rewarded over time.
[Related: How Does the CARES Act Impact My 401(k) in 2020?]
Resist the Urge to Defer Your Contributions
If cash is tight or if your spouse has lost his/her job, think twice before you completely stop contributing to your 401(k).
Instead, if you absolutely have to, pull back the amount you’re contributing.
If you are currently putting in 15%, scale back to 10% or 12% to free up extra cash.
A word of caution: be very clear on exactly what you’re going to use that money for. If you’re pulling back on your contribution amounts “just to have more money” in your bank account, you are going to spend it somewhere.
It’s one thing if the extra money is going to help pay your mortgage, car, or credit card payments. It’s another thing to not fund your retirement savings so you can order more UberEats.
[Related: 7 Tips on How to Manage Your Finances Right Now]
If You Are Able, Contribute More to Your 401(k)
If you are sitting on extra cash and have money in savings, consider increasing your 401(k) contributions right now.
While many states have opened up, and more are to follow in the coming weeks, most American’s still aren’t spending like they used to.
Could you increase your contribution by 1%, 2%, or even 5% with the money you’re saving by not having that morning coffee at the drive-through or all those dinners out with friends?
Crunch your numbers and see what’s possible.
Think Twice before Taking Out a 401(k) Loan
If you’re asking, What should I do with my 401(k) right now?–or more specifically, Should I take out a loan from my 401(k)?–take heed…
If you’re in need of an emergency cash injection, your 401(k) should be your last option because it may cause irreversible damage to the amount of money you have at retirement.
According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average.¹
Even with the waved penalties the CARES Act eliminates, borrowing from your retirement to fix a short-term problem may be detrimental to your financial future.
This legislation was meant for Americans to be able to access cash they need.
The CARES Act doubles the borrowing limit on your 401(k) from $50,000, or 50% of the vested account balance, up to $100,000, or 100% of your vested account balance.
This provision allows qualified participants to take a loan from a qualified employer plan within 180 days from the bill’s date of enactment, March 27, 2020.
Technically, you are supposed to show hardship as a result of COVID-19, but this is a self-certification process, so you might not need to prove much.
Be aware that each plan administrator will treat this differently. Some may require more documentation than others.
In addition, a 401(k) loan may become a taxable distribution if you leave the company or if you are let go before paying it back.
Should this happen, it may leave you financially worse off than you are now.
Therefore, it is advisable not to borrow from your 401(k)–and instead look for other options for your short-term cash needs.
Potentially Maximize Your Retirement Income
No matter where you are in your retirement savings journey, 401(k) Maneuver is dedicated to helping you learn AND correct 401(k) mistakes that may lead to feelings of hopelessness about retirement.
We invite you to check out our no-cost 401(k) Masterclass Videos.
In just 13 minutes, you’ll discover 3 strategies that may…
- Improve Your Account Performance – Have more money, creating a fulfilling retirement.
- Manage Risk to Minimize Losses during the Bad Markets – Keep more of what you have made.
- Reduce Fees That Harm Account Performance – So more of your investment grows for your retirement.
We regularly post videos with financial information and updates. Check us out on YouTube.
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