The collective wisdom during market turmoil is, “Don’t touch your 401(k) plan!” However, that guidance is only helpful if you are on the right path with your retirement savings and preparation. If that is you, then don’t change a thing. Unfortunately, not everyone is on track for a successful retirement. Uncertain times are scary and elicit a variety of emotions. To the extent they make you think about your financial future, the timing could be right. There are several types of people who should not ignore their 401(k) plans right now.
The decline in the stock market over the last several weeks is precisely what Cal was worried about. An unknown risk or event that could wipe out his retirement savings. Like many others in 401(k) plans, Cal invested his retirement savings in the cash option in his retirement plan. He figured while he wasn’t making much money, he wasn’t going to lose any money with that strategy. Now, Cal has the opportunity to enter the markets at lower price points in most investment categories. At a minimum, Cal should consider his time frame until retirement, desired annual income in retirement, and his risk tolerance. If Cal does feel comfortable selecting investments, his 401(k) plan offers two different “do it for me” strategies to help: a suite of target-date investment options and managed accounts. Alternatively, this could be a good time for Cal to engage a financial professional to help set a more appropriate long term investment strategy. Whether Cal makes a significant change today, or gradual changes over time, not ignoring his 401(k) during the volatility in the financial markets could help him grow his retirement nest egg.
For one reason or another, Sally never signed up for her employer’s retirement plan. While the current environment is scary and uncertain, it also offers Sally an excellent opportunity to start her journey to retirement. The benefits of joining her employer’s retirement plan are many. Sally could enjoy tax benefits, start receiving a matching contribution from her employer, and with consistent payroll contributions, she will have different purchase prices during a volatile time in the financial markets. Staying on the sidelines, or even changing course and heading to the sidelines is not the right response during volatile markets.
When Ema joined her employer’s retirement plan, she set her contribution rate at $50 a paycheck. Ema figured it was a comfortable amount considering her new job and other changes in her life. A few years have gone by now, and she is still contributing $50 a paycheck. While Ema was nervously checking her balance during the recent market volatility, a good thing happened. She saw a notification on her plan website that she needs to increase her contribution to receive the full company match. Now is an excellent time for Ema to increase her salary contribution to the level her employer matches. She also learned that her employer matches a percentage of the contributions employees make from their paychecks. Ema also decided to switch her fixed $50 rate per paycheck to a fixed percentage of her pay. Now her contribution amount will increase as her salary increases in the future.
Several years ago, Oscar used the online planning resources available through his retirement plan to set himself on the path to retire by age 66. Since then, a lot has changed. He got married, had a daughter, and received a promotion at work. Despite these significant life events, Oscar has not made any changes to his retirement savings strategy. When he reviewed his most recent retirement balance, the decline in value triggered a thought: I should revisit my retirement strategy. So, Oscar refreshed his personal information, added his wife’s savings details, his increased salary, and desire to save for his daughter’s college education. The result, Oscar realized he needs to make some changes. To stay on track with his goal to retire by age 66, he had two choices: save more money, or earn a higher rate of return from his investments. After pondering his options, Oscar recalled something he heard a few years ago, “You can’t invest your way out of a savings problem.” After he determined his investment allocation made sense, he decided to increase his annual savings rate to stay on track with his goal.
Current events and movements in the financial markets inevitably stir up emotions and concerns. For some, it makes sense to ignore your 401(k) plan. However, if you happen to look at your retirement account, or lack of, and any of the people mentioned sound like you, don’t follow the collective wisdom to ignore your 401(k) plan. Take action now. You could look back on the decisions you make as some of the most important ones that determined your lifestyle in retirement.