There are always many concerns, questions, and fears when it comes to market downturns with your 401(k). After all, for many, this is your main nest egg for retirement. Keep in mind that everyone’s situation is slightly different, and will be addressed in the answers as best as possible.
Should I Stop Contributing to My 401(k)?
This is the most common question that gets asked as soon as the stock market begins to decline. In short, it is best to keep contributing and not pay attention to the price. While it may seem scary to keep investing while the price of those investments goes down, short-term changes should not be a factor when saving for retirement.
In fact, it's more appropriate to think about stocks being "on sale", the way you would buy more at the grocery store if everything was 25% off.
You are in this 401(k) for the long term, and continuing to invest during a market downturn will likely have a long-term positive effect on your account, and missing out on the lower prices could limit the growth of your investment.
Should I Take Advantage Of the Relaxed Loan and Withdrawal Requirements Amid Covid-19
The government has made it easier to get loans and hardship withdrawals from your 401(k) plans. Keep in mind that taking money out of your account means that if the market rises again with a reduced balance, you could miss out on the recovery. In this scenario, you would not see as much of an increase as you would had you left the money in the account.
As an example, let’s take a 401(k) with $100,000 balance, and the participant takes a loan of $50,000, leaving them with just $50,000 balance. Let’s assume the market goes back up 30% over a period of time after the loan.
If the balance was still $100,000, that would mean a $30,000 gain, and a new balance of $130,000. If however the loan or withdrawal was taken, now the balance only increased to $65,000 (total of $15,000 gain).
Should I Rebalance or Change myInvestment Allocation, or Any Other Strategies?
The decision to rebalance or update your investment allocation depends on how you are already allocated, your age, or years until retirement.
If you are more on the conservative side, and yet your 401(k) was allocated a bit more on the aggressive side even before all this, you may want to rebalance and make sure your portfolio is in line with your risk tolerance. For example, if your stock/bond allocation was 70/30 at the start of the year, it may be closer to 50/50 as of April 1.
Your age is a key ingredient when deciding what changes you should make in your account. If you are very young, perhaps in your 20’s or 30’s, your timeline until needing these 401(k) funds is very large, and you don’t need to worry about some turbulence like this downturn. If however, you are closer to retirement, then perhaps insuring you are more conservative in order to avoid big losses may be in your interest.
It’s important not to do any knee jerk reactions with your 401(k), but rather make decisions based on other factors, such as age and timeline. Just remember that cashing out now will ensure that when the market rises again, you will be sure to not see any of those gains, but certainly your account realized the loss already.