What to Do About Your Retirement Account During a Financial Emergency
If you have a retirement account either provided by your employer or funded by yourself (or both), you may be aware of a certain amount of loss in your account you have probably incurred recently because of market volatility due to the CoVID19 virus. Most retirement funds which have a lot of investment in the stock market are being affected by the CoVID19 virus causing an economic slow-down. There are several other reasons for the market volatility at this time, however.
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time. 2) Cashing out a tax-deferred retirement account before the age of 59 ½ will incur penalties of 10% of the amount withdrawn, unless you qualify for one of the six hardship reasons which are listed on the www.irs.gov website. 3) Any funds withdrawn will be counted as income for tax purposes, so cashing out will cost a lot. 4) Also, cashing out or even transferring the funds to a money fund when the market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. This is the time to use that account, if you have it, and to make a goal to start that account as soon as you can if you don’t have one.
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.
This is a fluid situation and the US government is working on increasing the availability of credit and changing some of the IRS rules, so be aware that some changes may take place. Continue to make loan and credit payments. If you are struggling to make loan or debt payments, contact the lender. There may be long telephone hold times or even a day or two for a call back but they can do more to help you if there is communication from you up front.
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.