I know it feels like time to PANIC! But now, more than ever, is the time to establish a healthy social – and emotional – distance from your 401(k) retirement savings plans.
Unless you have been hiding under a rock (not a bad plan) you will have seen that the Covid-19 pandemic has torn through the stock markets.
In the last month, the S&P 500 index has plunged more than 27% and triggered the biggest sell-off for US equities since the 1987 stock market crash, an event that many of today’s younger investors weren’t even alive to witness.
Studying your shrinking 401(k) balance and panicking won’t help. Instead, take a step back and distance your emotions from the market’s gyrations with this generational guide to getting through this frightening period.
Millennials: embrace the chaos!
Welcome to the sale of the decade.
You may never get the lowest prices, “but it’s still a sale”, says Leon LaBreque, chief growth manager at Sequoia Financial in Troy, Michigan. “By the time you retire, you will have seen 20% or greater declines several times, and several recessions and economic cycles. You’ll remember all of them as ugly while you were in them and as buying opportunities in retrospect.”
Younger investors who were too early in their careers to begin investing at the lowest levels of the recently-deceased bull market have an opportunity to pick up some bargains.
The longer your time horizon and the sooner you start investing, the better you’ll fare, even if all you can afford when you start off is a small amount. That’s because in 401(k) plans, your profits are rolled over and reinvested, meaning that you begin earning compounded gains.
For those with stable jobs who haven’t yet opened a 401(k) account, this is a great year to do that. Odds are that you’ll be buying many stocks near their lows.
Gen X: just hang in there…
It’s painful to watch your carefully-accumulated savings decline. But remember, you won’t realize any of those losses until you actually sell. And you don’t want to sell, anyway. You still have another few decades to go until you’re going to draw on this money to finance your retirement.
“For those folks who have thirty to forty years ahead of them, they just should not be worried about the market touching the bottom,” says Jennifer Ellison, principal at Bingham, Osborn & Scarborough, in Burlingame, California. “It’s all about dollar cost averaging and rebalancing.”
Emphasize those strategies now. Dollar-cost averaging simply means that even if the market goes down, so will your average cost. And when it reverses course – three months, six months, a year or more from now – your gains will be all the greater. Rebalancing means making sure you’re sticking to your plan, based on your long-term goals.
A big reason to avoid selling is that you’ll need to reinvest at some point. Stuffing your money into the bank won’t earn you anything at all as the Federal Reserve cuts interest rates.
History shows that, as a group, investors tend to be a really bad judge of when to reinvest after a market crash. And if you happen to be out of the market on its 10 best days between 1980 and 2019, according to a study by Fidelity Investments, you would have ended up with about half the money at the end of the period than you would have possessed by riding out the storms.
If you’re in your 40s, you already know what it’s like to feel financially stretched. You still may be paying off your own student loans, as you try to save enough to cover your children’s education.
That doesn’t mean you should tap into your 401(k) to fill in any gaps, or shortchange yourself by not investing enough to earn that “free money” from your employer kicks into the pot in the shape of a matching contribution. And yes, you’ll probably need it.
Baby boomers: keep it working for you
You’ve got fewer years to recover your losses. That said, “remember that your retirement date isn’t your end date,” says Ellison. “You can expect you’ll still be drawing on those savings 20 years later.”
Translation? You still need to own stocks, since their long-term growth outpaces that of bonds or cash. The longer you can postpone dipping into your retirement savings, the greater the time they will have to recover from this sell-off, so you might consider living off your cash savings or even deferring retirement for a year or so, if you can.
Retired: still, don’t sell!
Actuarial data suggest that if you’re over 65, there’s a decent chance you’ll live to see your 90th birthday. Which means you still need those stocks. Evaluate how you’re doing against your objectives, and if you’re well ahead of the game, think about putting some money into stocks or funds that might do best in the recovery.
Still, once you reach your 70s, the rules say that you’re required to take a minimal annual distribution (a required minimum distributions (RMD) calculated as a percentage of your account balance) over the course of the coming year. That amount is calculated at the beginning of each year, so this year, in particular, you may want to keep that sum as low as possible.
If you’re not required to take a required minimum distribution, don’t. “You may want to hold off on taking the RMD until we get a recovery, and if we don’t, be prepared to save a portion of it,” cautions LaBreque.
No matter how old you are, the advice is broadly the same. Don’t panic, ride this out. And in the meantime stay safe.