What to do with your retirement account now
By: Brent Weiss, CFP®, ChFC®
If you’re getting whiplash from watching the market, you’re not alone. This market volatility makes it seem as if all of the usual rules about investing and money management have gone out the window.
But stick with me. I’m going to highlight why the old, time-tested rules are more relevant than ever. And I’m going to show you the opportunity in a market like this one.
First, what I’ve learned in my career is that long-term financial success comes from:
- Having a plan
- Following a risk-appropriate investment strategy
- Having a long-term view
- Remaining disciplined and controlling your behavior
Those four factors are even more important when it comes to your 401k.
Your 401k plan
On paper, your 401k balance has probably taken a hit. You may be wondering if you should still be contributing. Maybe you should reduce your contribution, or stop altogether until things return to normal. And these feelings are understandable.
In times like these, people always say “stay the course,” but it’s important to know what that course is…
Your plan is your course.
The first step in investing for retirement or any long-term goal is to have a plan: a plan that looks at your goals, time horizon until retirement, and addresses how much risk you can handle financially and emotionally.
Your plan is your road map. As the saying goes, “if you don’t know where you’re going, any road will take you there.”
So what’s the plan for today? And have your circumstances changed since you came up with your plan?
You might be one of those individuals or families that may experience financial hardship in the weeks or months ahead. If you lose your job, or your significant other loses their job, or your household income is reduced, it is absolutely fine to stop, or to reduce, your retirement plan contributions temporarily. While not ideal…unprecedented times call for unprecedented measures. The first step is to shore up your finances to make sure you and your family get through this. With that said…don’t ignore your retirement. There are still steps you can take today to stay on course for a secure retirement.
Focus on what you can control: creating clarity out of this chaos
Remember, markets and short-term performance are not things you can control. If recent events have shown us anything it’s that you cannot predict what events will affect the market. You can’t state with any certainty when these sorts of events will start, how long they’ll last or when they’ll end. Not sure what to do or what investments make sense?
These six steps are based on the things you can control.
- Review your allocation to make sure it’s appropriate for your goals, time horizon and risk? Many people haven’t reviewed their retirement plans in 10+ years. Are your assets diversified and risk appropriate? If you’re not sure where to start, look at the allocations of your plan’s target date funds (also called retirement date funds). They aren’t perfect, but they’re better than no strategy or the wrong strategy.
- Take this time to look for low cost investment options, and keep more of your hard earned money working for you. Returns may rise or fall, but investment expenses are always there. Lower cost investment options put you ahead of the game.
- Rebalance your investments. This is your automatic way to buy low and sell high: you’ll sell your best performing assets, usually bonds during volatile markets, and buy the equities that have taken a hit. That will keep you in line with your plan and your desired allocation and level of risk.
- Continue to contribute. You will be buying equities at greatly reduced prices. When shares of your chosen investments drop, you’re getting a discount. When the markets go up, as they always have, you’ll own that many more shares.This is what people call dollar cost averaging, a strategy that’s been proven over and over again.
- Increase your contributions, if you can and if it fits your plan. I’m not calling a bottom, but this is a great time to buy equities. Remember that investing is a long-term strategy and I remain confident that in 10 or 20 years, buying at a 10%, 20% or 30% dip in the markets will be a very good thing.
- Rollover and consolidate any old 401ks. Many people leave them with their old employers because moving them seems like too much trouble. Most, if not all investment firms will be happy to help you with the rollover. Simplify your financial life with fewer accounts and gain back control. That makes it easier to coordinate your overall investment strategy and keep track of your money over time.
We’ve talked about some “DOs” so let’s discuss some DON’Ts
- If you lose your job, don’t just ignore your 401k or other retirement accounts. This is your money, it deserves your attention. At the very least, make sure you review the allocation periodically. You may want to look at rolling the account over to a traditional IRA where you may have more investment options.
- Don’t immediately take a 401k loan if you are experiencing financial hardship, a lot of people are willing to help right now. Call your lender if you are a homeowner, call your landlord if you are a renter; there is relief out there that can be better than taking a loan. Some finance companies are suspending payments on auto loans. If you take a loan from your 401k and then lose your job, that loan can become due immediately. That will only amplify the challenges you are facing.
- Don’t try to time the market. No one can.
- Don’t throw your plan out the window, sell everything or cash out your 401k. Don’t change your plan because of what markets are doing.
Remember, this is part of investing. This is what markets do from time to time and it’s what they have done for the last 100 years. This time is no different. Markets, and the economy, have always recovered and I believe that will happen again here. The markets have historically rewarded investors who have a plan, take a long-term view, and remain disciplined during times of uncertainty and fear.
My last bit of advice
Seek professional guidance from a competent and ethical financial planner. Having someone on your side that you know and trust can be the one thing that helps you get through this. So don’t feel like you have to go this alone. High quality financial advice is more accessible today. This is your hard earned money, this is your future, and you deserve the financial advice that can create security and peace of mind in your financial life.
As always, I’d love to hear your thoughts. Please shoot me an email and let me know what you’re doing with your finances and what you’ve learned.