What to Do About Your Retirement Account During a Financial Emergency
The Covid-19 Pandemic of 2020 shook up the stock market in a big way for several months. Many folks who have retirement accounts heavily invested in the stock market were very concerned if they closely followed their account balance. Most retirement accounts took a big hit in March, April and May of 2020. But most of those accounts are now back in value equal or better than where they were before the pandemic. This 2020 scenario points out the importance of holding retirement accounts steady during a financial emergency, if at all possible.
A typical reaction to a big drop in your retirement account balance might be to move your allocations or to withdraw money from your account. If a person did this during the spring or early summer of 2020, they might have lost money. Of course, you should talk to your retirement advisor if you are very concerned, but as a general rule, you shouldn’t do anything drastic. In a usual year, there are many reasons for market volatility.
It is important to know that the stock market volatility is actually a normal thing. There is usually a 10% market correction every year and a 15% correction every 3 years. In the past 10 years we have seen more “up” years in the stock market than “down”. These market corrections can cause a lot of anxiety and stress for people who watch the value of their accounts go down, but it is important to know this is normal. It is also important to not act emotionally. Rely on the advice of your financial advisor, not your friends or relatives.
Here are some general recommendations:
- Stay invested. Pulling your money out will lead to loss.
- Stay calm, don’t panic. Remember that stock values go up and down.
- Don’t try to “time” the market. Regular and steady deposits give better returns.
- Visit with your investment advisor if you have questions or concerns.
Some folks may be tempted to transfer their accounts into a cash fund or even to close out their account. This is not the recommended course of action for several reasons. 1) The stock market goes up and down—always. But the general trajectory is up. It may take several months for the trend to turn and stocks to return to their previous high, but they will, in time. 2) Cashing out a tax-deferred retirement account before the age of 59 ½ will incur penalties of 10% of the amount withdrawn, unless you qualify for one of the six hardship reasons which are listed on the www.irs.gov website. 3) Any funds withdrawn will be counted as income for tax purposes, so cashing out will cost a lot. 4) Also, cashing out or even transferring the funds to a money fund when the market is down will cause a loss since the money invested was used to purchase shares at a higher price.
It is recommended that you have an emergency savings account equal to three to six months of your expenses. A financial emergency is the time to use that account, if you have it, and to set a goal to start that account as soon as you can if you don’t have one, that way, you won’t need to cash out retirement funds to meet your daily expenses.
Continuing to invest in your retirement fund when the market is down can actually be to your benefit when the stock prices go back up because you’ve “bought low” and can later on take advantage of the growth. Being well diversified is always a good strategy, but even more so when there is a lot of market volatility.
If you have lost your income or it is greatly reduced you may not be able to continue to add to your account. You can ask your Human Resources department at your place of work what your options are to reduce or stop your contributions for a time. When the stock market stabilizes, or work hours increase or you go back to work, you can resume your contributions.
Continue to make loan and credit payments. If you are struggling to make loan or debt payments, contact the lender. Explain your situation if you are unable to make the payment and the lender may be able to help you.
The most important thing to remember is that investing for retirement is a long-term endeavor. Jumping in and out of a retirement plan will cost you a lot in the short and long term and should be avoided.