It is no doubt that we are in unfamiliar territory when it comes to investments and saving for retirement right now. With the market changing every day, it might be tempting to just halt all your investments altogether to save up some emergency income.
One of the most common places people are looking to cut contributions to are 401(k)s. Employee participation is important in maintaining a 401(k) offering. Before you or your employees decide to pause contributions or even withdraw money from your 401(k), here are some important things to consider before taking those steps.
1. Stop Checking Your 401(k) Balance Frequently
You’ve done the hard work to save for retirement and let’s face it, you probably didn’t even look at your 401(k) more than once or twice a quarter before you started seeing headlines about the COVID-19 impacting them. Take a deep breath and stop checking your 401(k) account so frequently. You are investing in your future. Before you pause contributions or withdraw, give yourself some cooling off time to think about it. Things are changing so fast that it is almost impossible to make short term stock decisions.
Take a break and check your balance once a quarter and talk to your advisor if you are feeling anxious about your 401(k).
2. Consider Your Company’s 401(k) Match
If you are thinking about a temporary reduction in your 401(k) contributions, make sure that you know your company’s matching percentage if they have one. You do not want to leave extra, free money on the table if you can help it. You will want to try as hard as possible to keep your contributions at the level where you are getting a full match from your employer.
3. Think About Your Risk Tolerance
With the market in decline, it is actually a good time to evaluate your risk and volatility tolerance. Take a serious look at what you are willing to lose to achieve a gain. Make sure that your 401(k) asset allocation is in line with the risk you are willing to bear. Many 401(k) plans will have pre-built, risk-adjusted, and easy-to-understand strategies so you can choose the plan that is right for you.
4. Remember the New Withdrawal Rules
The CARES Act loosened restrictions on 401(k) withdrawals but there are still caveats. While you can take an early distribution of your 401(k) account and the standard 20% withholding is suspended, you will still owe taxes on that distribution. Make sure that you are considering and budgeting for those taxes.
5. Increase Your Contributions if You Can
If you are in a position to contribute more to your 401(k), do it. It will help you to capture more of the upside when things start turning around. You can currently contribute a maximum of $19,500 to your 401(k) in 2020 and if you can, you might want to consider working to hit that limit sooner rather than later.
This will mean that your plan will be fully funded at the bottom of the market and will be able to participate more fully in the recovery.
6. Keep Contributing
Investments and savings tend to be one of the first places people look to cut spending, but it is important to keep contributing if you are able. When the stock market is down, it is helpful to look at it like a big sale. Everything is cheaper and you will be able to buy stocks at lower prices and ride them back up.
If you do decide to lower your contributions, set a calendar reminder for four months out so you do not forget to check-in and increase your contributions again when you are able.
7. Ask for Help
You do not have to navigate financial planning alone. At MCK, we’re here to help you. Talking with our advisors can help you decide what actions to take to ensure that you and your employees are making the best decisions with your 401(k).
Contact us today for a meeting.