With all that is happening in the world today, managing your retirement funds may not have been a top priority of late.
Also, the stock market picture wasn’t exactly pretty, for a while. After the shares fell in March, you may have completely stopped looking at your account. Due to those losses, the average 401 (k) balance dropped to $ 91,400 in the first quarter of 2020, down 19% from the previous quarter, according to Fidelity.
The good news: stocks have largely recovered from heavy losses in March.
But upside-down markets and the fact that many employers are cutting jobs, cutting wages, or cutting contributions they make to 401 (k) s employees are good reasons for savers to take another look at their 401 (k).
“Sometimes it takes a period of volatility like this to realize that a real plan has not been implemented,” said Matthias Giezendanner, a certified financial planner and founder of San Francisco Wealth Planning.
Now is a good time to reevaluate your risk tolerance, contribution levels, allowance and, for those no longer working at the company that sponsors your 401 (k), to think about the next steps for your retirement savings.
Evaluate your contributions
Some employers are cutting their contributions to employee 401 (k) plans as a way to save cash and potentially avoid layoffs. This includes 12% of companies that have already suspended matching contributions and 23% that plan to do so or consider it this year, according to a survey of companies that employs 12 million workers by Willis Towers Watson.
“The key to keep in mind when this happens is that it’s usually temporary,” said Andy Mardock, a certified financial planner at ViviFi Planning in Bend, Oregon. “If possible, increase your own savings rate to fill the gap.”
If you are experiencing financial difficulties due to a cut in wages or a layoff in your family, your cash flow may be low and your savings may be depleted.
“You may want to reduce your 401 (k) contribution to replenish savings and make sure you have enough cash to support your living expenses,” said Dan Herron, a certified financial planner at Elemental Wealth Advisors in San Luis Obispo, California. “While this may negatively affect your financial plan, your current well-being is more important.”
But for those who are still employed and who may be spending less because they stay home more, it’s a good time to increase that contribution rate, said Ryan Mohr, a certified financial planner with Clarity Capital Management in Portland, Oregon. That’s especially true for younger people with more time until they retire, he said.
“For those with a longer time horizon, it may be a good time to consider increasing contributions and taking advantage of the lower prices the stock market has delivered,” he said.
Rebalance to maintain your goals
If you had an investment plan and your situation has not changed, there is no need to change your approach, Mardock said. But you may still need to rebalance your portfolio.
“Big changes in investments, as we have seen recently, can cause portfolios to deviate from their target strategy,” he said. “This means that investments are ‘out of balance’. Rebalancing may be necessary to maintain the correct level of risk and return.”
Now is the time to re-align your target stock and bond allocations with your intended goals, Mohr said.
“Take the gains from fixed income and reassign stocks at lower prices again, which can go a long way as markets recover,” he said.
For those approaching retirement, Mohr said, take a look at your risk tolerance and time horizon to determine if changes should be made to the allocation. Ask yourself: Have you taken more risks than you intended? Are you being too conservative?
If you are looking to retire for years to come, you will need to have more cash available.
The goal is to have two years of spending available in cash and another two years of spending in short-term or intermediate bond funds, said Tara Unverzagt, a certified financial planner at South Bay Financial Planners in Torrance, California.
“The goal is to never be in a situation where you have to have a ‘wholesale’ at low prices to get cash to pay your expenses,” she said.
Don’t leave your 401 (k) behind
If you are one of the 25% of American workers who have been laid off during the pandemic and have an employer-sponsored retirement fund, you don’t want to leave your 401 (k) behind. You can usually leave your money in your old employer’s plan. It has the potential to grow with the market, but you will not be able to add new contributions.
To continue contributing to your account, you can ask your 401 (k) provider to transfer the funds to a new or existing IRA account. If you are likely to have a year with significantly less income than the previous year, you can make a Roth conversion with your IRA.
A Roth conversion allows an individual to convert all or part of a traditional pretax IRA to a Roth IRA, Giezendanner said. “You will owe taxes on the converted holdings at your current tax rate, but you will be able to take tax-free withdrawals in the future from your Roth IRA at retirement.”
You also have the option to withdraw cash from your 401 (k) if you are no longer an employee. But, like financial hardship withdrawals, penalties can be significant and the impact on your future savings could be great.
“If possible, try not to take advantage of retirement accounts to pay the bills,” said Mardock. “Possible income taxes and penalties can be very painful and will keep you up to date in the future.”