One major financial question many pre-retirees have is: How can I best use my 401(k)? During the last six months, this question has become more important than ever.
Because of the COVID-19 crisis, many companies are weaning down their workforce to save money, causing employees to feel uncertain about what to do with their 401(k).
That’s why, today, we’re giving you tips and recommendations on what you could do with your 401(k) during this time — and how to keep the importance of this account top of mind as you navigate this time of uncertainty.
Should I Stop Contributing to my 401(k) Plan?
If your employer has stopped providing benefits like matching 401(k) contributions, should you stop contributing? The answer to this question is no.
One of the best ways to make sure you’re in control during these times is to not only continue to contribute to your 401(k), but to also try and contribute more to make up for the loss of that match.
We know that it’s difficult for many people to balance retirement savings with what they need for their current expenses, but even without a match, it’s important to keep investing as much as you can. In fact, we recommend investing as much as you can until it hurts. And while now is a time where it might hurt a lot, it’s still important to keep your eye on your long term goals and to keep in mind why you’re putting that money away in the first place.
Now is a time where it’s not only easy to stop contributing, but it’s also easier than ever to withdraw money from your retirement savings accounts thanks to the CARES act. But we believe that once you stop contributing, it’s harder to go back and start up again because you’ve seen those extra savings from your paycheck and will feel the loss more than before.
Of course, there are always cases where you may have to stop contributing to your 401(k), but hopefully for most, there are reasons why you can contribute and can continue to maintain what you’ve been doing so far. If you feel like you’re in a tight spot with your contributions and want to figure out how you can continue to maximize your savings, be sure to reach out to a professional like us for help!
How Much Should I Contribute During This Time?
Everyone is different, and the amount that everyone should put away in their 401(k) each month will differ from person to person as well. Rather than saying that you’re going to put away X percentage each month, we believe that you should create your own specific goals and a retirement plan that will allow you to save enough for your retirement — at least until you can get to the maximum amount that you can contribute (again, if you need help figuring this out, feel free to reach out!).
Now might also be a good time to consider how you can increase your savings in your 401(k). With the pandemic, you’re likely not spending as much money on travel, vacations, or eating out. Use that extra income to maintain, or even possibly increase, your contributions.
Should I Re-evaluate What’s in My 401(k)?
Larry Heller often talks about staying the course with your plan, and not panicking and getting out of the market when there is volatility. Instead, he believes that you should always continue to contribute to your savings — and six months into this pandemic, this outlook has not changed.
Now that we’ve made it past the initial volatility that came with the start of the pandemic, now is a time where you should be worrying more about the risk of not meeting your long term financial goals rather than the day-to-day, week-to-week, month-to-month, or even year-to-year volatility.
It’s also important not to confuse volatility with risk.
There is always going to be volatility and there is going to be risk. With a long time horizon, you will inevitably go through these ups and downs. 2020 is a great example of what can happen with volatility and how we can go pretty low before quickly recovering.
A lot of times, when people go in and make a change on the worst day by pulling their money out of the markets, they end up regretting the changes they make. Why? Because nobody has a crystal ball and can see what will happen in the future, especially when it comes to the market.
And with interest rates as low as they are, with 10 year treasuries at less than 1%, where are you going to put the money that you pull out? Keeping your investments in a vehicle like a 401(k) will help you grow that money tax-deferred over your time horizon so that you can meet your ultimate goal: retiring right.
We also recommend maintaining your 401(k) on an ongoing basis rather than making dramatic changes every once in a while because of the markets. We recommend doing portfolio checks at least once a year to make sure everything is balanced and on-track to meet your goals. During these checks, you should also look at your 401(k) and the funds that are in there to make sure that those funds are low-cost — if not, you should talk to your HR person and ask how you can have better, or less expensive, funds in your portfolio.
Should I Take a Loan From My 401(k)?
With the CARES Act, people are now allowed to take a loan out of their 401(k) to help them get through COVID-19. With this type of loan, you’re actually paying yourself back with interest, rather than having someone else is making interest off of you. But is it a good idea to do this right now?
If there are reasons why you really need money out of your 401(k), your 401(k) is a resource that is now available to you. But if you take the money, be aware that the money you take out is no longer working for you — this means that any growth you would have achieved will be lost due to decreased funds.
Instead, consider tapping into a taxable account before taking out of your 401(k) — after all, we believe that you shouldn’t lose out on the opportunity for long-term growth if you don’t have to. Also, don’t look at the new rules that allow you to withdraw from these accounts as a good way to take out and spend more money. Only look at it as a last resort that could impact your retirement.
However, if your circumstances require you to take a hardship withdrawal from your 401(k), the government has now made it available for you to do so before the minimum age of 59 and a half without a penalty, and you can now repay what you’ve taken out over the next three years.
What Should I Do With My 401(k) If I Lost My Job?
There are three different options for your 401(k) when you leave an employer:
You can leave your 401(k) with your former employer
You can roll your current 401(k) plan into an IRA
You can transfer the money from your 401(k) into a new 401(k)
To do this, you need to have over $5,000 in the account and you won’t be able to contribute any more after leaving — but you can still manage the account
This option allows you to invest your 401(k) funds in any way you like. If you choose this option, you avoid taxes on the plan and any fees from the 401(k) plan
If you have had 401(k)s at numerous jobs, now is also a great time to consolidate those and move them all into one IRA or 401k account where you can manage the investments much better.
Until you are maximizing your 401(k) contributions, it’s important to have a game plan on how to increase your savings — whether it’s each year or each quarter. If you are struggling this year, try and stay the course with your 401(k) and see if you can find other ways to maximize your contributions and to not take or borrow money out of it unless absolutely needed.
In addition, we encourage you to look at your asset allocation, reevaluate, and to rebalance your portfolio and to invest in low-cost funds. Having a game plan for your 401(k) when you’re younger and as you’re approaching your retirement will help you ensure you’re on-track to retire right.
If you’d like to speak with us about how you can create your own 401(k) game plan, please reach out to us via our contact page or call (631) 293-2806.