If you’ve looked at your 401(k) lately, the news probably wasn’t so good. Since COVID-19 arrived, the stock market has been way down, which means investments are, too. But now isn’t the time to panic and stop your 401(k) contributions, or dump all of your stocks. As many financial advisors have been saying: “Your 401(k) is like your face — don’t touch it.”
“Nobody likes to lose money and see their 401(k) down, but it’s important to put things into perspective. Investing in the stock market requires patience — market fluctuations are expected,” says Silvia Manent, a certified financial adviser and founder of Manent Capital. “When there is volatility, the worst thing you can do is panic sell.”
Panic selling turns paper losses into real losses that often can be avoided when the market rebounds, Manent says.
That doesn’t mean you shouldn’t make any changes. Now is actually a great time to rebalance your portfolio, think about your contributions, and prepare your withdrawal strategy. What drives the moves you make will largely depend on your age. If you’re in your 20s, 30s, or 40s, you have a lot more latitude to simply ride things out. If you’re close to retirement or retired now, there are also options to get your retirement funds into better shape. With that in mind, here are some 401(k) moves to consider, based on your age.
If You’re in Your 20s or 30s… This might be your first experience with a bear market, which can be discouraging. Whatever you do, though, keep making your 401(k) contributions if you can afford it, says Justin Pritchard, a certified financial adviser with Approach Financial. You likely have a very long way to go until you retire (a good thing right now) and if you can up your contributions, you should. “Prices are lower now than before the crisis, so you’re buying more with the same number of dollars each pay period,” he says.
That doesn’t mean you should go full tilt buying up high-cost funds for a chance to beat the market, says Jonathan Bird, a certified financial planner and CEO of Farnam Financial. “If you’re not a full-time investor, trying to beat the market is like trying to run 20 mph on a treadmill — it’s very hard and it may end badly,” Bird says.
Still, at this point, your portfolio can be more aggressive, meaning heavier on stocks and less on bonds, Bird says.
If You’re in Your 40s…
The more money people accumulate in their 401(k), the more protective they start to feel about it, Bird says. That means you might have shifted more of your balance into stable bonds as you've gotten older, but make sure you don’t rely too heavily on bonds if you’re only getting a 2% or 3% return. Bird recommends you look at a Target-Date Retirement Fund if you have one available to you, which automatically starts shifting your allocations more toward bonds the older you get. If you don’t want to wade too deep into risk management, these funds can be a good, hands-off approach to calibrating risk based on your age.
This is also the time when you should mentally prioritize your retirement if you haven’t already, Manent says, and continue to invest in your 401(k). That means deciding it’s not just OK, but smart, to contribute and allocate money toward retirement versus other expenses, Manent says. Your 40s and 50s can be expensive decades, especially if you have college-age kids, so make sure you build up a cash reserve, too.
If You’re in Your 50s…
If you’re not yet maxed out on your 401(k) or other retirement fund contributions, now is the time to increase that amount if you can, Manent says. When you reach your 50s, you’re also eligible to make catch-up contributions to your 401(k) and IRA. This allows people 50 and older to contribute up to $6,500 more a year to their 401(k) beyond the usual limit. That’s a good chance to sock away more pre-tax retirement savings.
If you’re anxious or upset that your portfolio balance took a hit, keep in mind that your retirement may still be a decade or more away, and a market rebound will mean portfolio rebounds as well. You can also start thinking about whether you want to work past full retirement age to add value to your pension or Social Security benefits.
If You’re in Your 60s…
This is typically the age range where you focus on protecting and preserving your nest egg. But don’t forget that you won’t be spending all your retirement savings at once. Your retirement funds are meant to last 25 years, Pritchard says, and a lot can change in that time frame.
If there’s a good chance you won’t need to withdraw a majority of your 401(k) funds for another 10 years past retirement, that would allow you to take advantage of a presumed market recovery with some riskier moves.
However, if you need to make heavy withdrawals from your retirement funds in the next year or two, Pritchard says, then you may want to de-risk more of your portfolio, which means moving allocations into less risky assets like short-term government bonds, money markets, and CDs. If you need money, pull it from the bonds, and leave the stocks alone, he adds. Either way, your portfolio should not be heavily weighted toward stocks at this point.
If retirement is decades away, you have the advantage of not needing to worry nearly as much about this stock market downward spiral. However, even if you plan on retiring soon, or you’re already retired, much of your 401(k) may still have time to recover. Regardless of your age, though, this is a good chance to review your portfolio and make sure your allocations still make sense.
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