Right now you might be thinking that your financial situation looks a bit worrying. We’re seeing a bear market and commodities behaving in unprecedented ways – did you ever think they wouldn’t be able to give oil away?
And in the meantime, the CARES Act is allowing – maybe even encouraging – people to dip into their retirement savings by offering loans from retirement accounts and distributions without a penalty for early withdrawal or a mandatory withholding. So with all this in mind, you might be left wondering how to use your 401k.
Our advice? Don’t touch your 401k. Don’t even look at it. Everything you take out now will make it harder for your balance to bounce back with the next bull market.
Seriously though, we understand that it’s unsettling – it’s natural and advisable to review your 401k or IRA at this time. Regardless of what might look like damage that’s been done to your finances, here are some practical actions you can take.
How to Use Your 401k in the Midst of a Pandemic
01: Rebalance Your 401k
If you are using a target-date or default investment option, rebalancing occurs automatically. So sit back, and don’t worry.
Do you use a custom allocation? It might seem counterintuitive, but consider rebalancing by selling off better-performing assets – right now, that’s short-term fixed income or government bond funds – buying poorly performing assets, which is pretty much everything else. Put another way, buy low and sell high.
If you have multiple investment accounts you probably use a custom allocation created by your advisor. This considers sub-par 401k investment options and concentrated stock holdings, among other objectives. If that describes you, collaborate with your advisor on managing your rebalance.
02: Save More – Add to Your 401k
The contribution limit for 401k, 403b, and most 457 plans is $19,500 for 2020. If you are over age 50, you can save an additional $6,500. Remember, these limits refer to amounts saved from your paycheck. A company match or profit-sharing arrangement is in addition to your personal paycheck deferrals, so it won’t affect these limits.
Are you maximizing your contribution? If not, consider increasing your deferrals to make the maximum contribution by year-end.
Are you flush with cash in the bank? Then consider deferring a significant portion of your salary so you hit the max earlier while the market is still down – that way, you’ll see the biggest return on your investments when the market recovers.
03: Increase Your Risk
Perhaps now is a good time to revisit your retirement plan. Does your current portfolio risk still reflect your goals and objectives for the future? Put another way, do you have enough growth potential in your retirement accounts to carry in and through your retirement?
Again, increasing the risk might seem counterintuitive right now when instincts might be strongly telling you to be cautious, but bold moves now can be the building blocks for a quicker recovery of your finances when the market is looking healthier.
No one knows what the future holds, but we are confident that $1.00 invested in stocks is still the best vehicle to maintain and grow your purchasing power.
04: Do Nothing
What, me, worry? I don’t think so. Investing shouldn’t be a thrill ride, and it shouldn’t make you anxious. My advice is often to just stay the course – don’t falter.
Even if you just sit back and do nothing, or if you decide to make a few minor adjustments to your 401k, your portfolio or your investing attitude, bear markets don’t need to be frightening. They can be a time of opportunity.
Going Forward: Life as We Know It, and As We Don’t
Crises always come and go; I’ve seen some before, I’ll probably see some again. I’ve seen markets dive, I’ve seen markets recover. This coronavirus pandemic is no different and this certainly isn’t the end of this story.
There will be changes, of course. Life already feels different and as if it won’t go completely back to normal. Perhaps it will mean changes to our industry – life-critical devices and personal protective equipment need to be manufactured locally – or our working patterns – remote work will increase substantially.
Oh, don’t you worry. We will still – and we should – meet in person from time to time, but employers are going to be reluctantly acknowledging that some work won’t – and shouldn’t – require you to be in a particular location. And maybe that’s going to bring a lot of positives with it.
What the rest of 2020 holds remains to be seen, but looking from here out at 2021… families are going to be desperate to reunite or get a change of scenery. They’re going to want to do those leisure activities that they’ve had to stay away from. They’re going to want new clothes, to get their hair done, to buy presents for loved ones. The sheer pent-up demand for cars, trips, clothes, eating out, traveling, and so on ought to power the next bull market.
There are things to be worried about right now, like keeping your loved ones safe and well. You don’t need to be worried about your balances. As always, if you want to have a chat about how best to manage your finances at the moment and to allay any concerns you might have, please be in touch.