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In late March, when stocks had dropped 30% from their February peaks, financial advisor Peter Mallouk got a frantic call from a nervous client, a food services manager 18 months away from retirement. “He said, ‘Look, my 401(k) is my retirement. I want it in cash.’” Mallouk talked him down, explaining that he wouldn’t need all his 401(k) money on Day One of retirement.
Looking long-term at the big picture, including his estimated Social Security income stream and substantial savings in a brokerage account, the manager decided to stay invested and continue to contribute to his 401(k). “For pre-retirees, even if you’ve got just one year until retirement, it’s okay to have a substantial amount in stocks. Don’t sell now. Give them time to come back,” says Mallouk, president and chief investment officer of Creative Planning, in Kansas City, Kansas.
As of the market close today, the S&P 500 was up 19% from its March 23, 2020, low, but it’s still more than 20% below its February high. Experts can’t agree on much but that volatility is the norm. So what—if anything—should you do with your 401(k)? Here are some talking points.
Should I stop 401(k) contributions? If you don’t have emergency savings and you’re worried about being laid off, it might make sense to stop contributions to build up reserves. Still, to the extent that your employer offers matching contributions, try to at least maintain enough contributions to get the employer match. If you feel your job is secure, don’t turn off contributions just because of market volatility. “I’d put that in the mistake category,” says Mallouk. Instead, keep up your contributions and consider stepping up contributions.
Should I accelerate 401(k) contributions? Some of Mallouk’s clients are accelerating 401(k) contributions, taking advantage of the dip. You can put away up to $19,500, or $26,000 if you’re 50 or older, into a 401(k) or similar workplace retirement plan for tax year 2020. Typically, contributions are spread out over the full tax year, funded bit by bit with each paycheck. But you can change the percentage of your salary going in at any time during the year. For folks who save to the max, by raising your contribution percentage, you’ll max out earlier in the year.
“If you have job security and emergency reserves intact, you should buy, buy, buy as much as you can and get to the max as soon as you can. You don’t know where the bottom is, but you’re far from the top,” Mallouk says. Warning: Check with HR to see that you won’t lose your employer match if you accelerate contributions; if your plan has a year-end true-up provision, you’re fine.
Should I rebalance my 401(k)? If you’re thinking about going all cash, think twice. “People going from stock to bonds or stocks to cash, they’re likely causing what will be permanent damage to their portfolio; they’re likely not going to go back to stocks until the market’s recovered,” says Mallouk. An alternative for nervous investors who have been picking and choosing among an assortment of funds in their 401(k) is to switch to one target date fund or a model portfolio service if your plan offers that approach. With a target date fund, you pick one TDF, and the fund automatically rebalances its mix of stocks and bonds as you get closer to retirement. Make sure you read the fine print to see how the mix changes; the year you pick doesn’t have to match your retirement year. You’re basically going on auto-pilot, and you’re less likely to make timing mistakes.
For what to do if you’re in payout status, see Congress Suspends Required Minimum Distributions For 401(k)s and IRAs For 2020, Opening Window To Tax Savings.
For more advice see Your Money And Coronavirus: A Financial Protection Guide