What Investors Can Do to Safeguard Their Retirement Savings From COVID-19-RELATED Market Volatility
April 20, 2020
For many Americans, the stock market provided the first indicator of just how disruptive the COVID-19 outbreak could be. In less than a month, the novel coronavirus wiped out more than three years of record gains made by the Dow Jones Industrial Average.
It appears that the days of double-digit losses on Wall Street are now over. But, from late February to March 2020, many individual 401(k), 403(b), and IRA accounts sustained significant damage. Moreover, a true recession — two successive quarters of negative gross domestic product (GDP) growth — may be just over the horizon. While Americans wait for stay-at-home orders to be lifted and for life to return to something resembling normality, they are also watching their retirement balances and wondering how best to secure their financial future.
What should you do to protect your nest egg during this time of widespread economic uncertainty? If you need emergency funds, should you consider taking cash out of your retirement savings? Is now the time to re-balance your 401(k) portfolio, or does it make more sense to stick with your current allocations? Does the federal government’s recent $2 trillion COVID-19 relief package include provisions specific to your retirement accounts? For answers to these and other questions about your long-term investments, read on.
1) Did Congress Make Rule Changes To Retirement Accounts In The Coronavirus Aid, Relief, and Economic Security (CARES) Act?
Yes. The rule changes affect those still working and planning for retirement as well as those who are already retired.
- If you are younger than 59, you can withdraw up to $100,000 from your 401(k), 403(b), or IRA without paying the standard 10-percent tax penalty. However, any disbursements will still count as income for the purposes of your annual federal tax return.
- If you are younger than 59, you may also take a loan against your 401(k) or 403(b). If your account contains less than $100,000, you can borrow up to the complete balance. If your account is worth more than $100,000, your loan cannot exceed that threshold. If you wish to apply for a 401(k) loan under these terms, you have approximately six months to do so.
- Retirees over the age of 70 can preserve their account balances by suspending their required minimum distributions (RMDs) through the end of the year. Visit the IRS website for additional information about how RMDs are calculated and distributed.
Are There Any Eligibility Requirements I Have To Meet To Withdraw Money From Or Apply For A Loan On My Retirement Savings?
Yes. You must demonstrate that you have been directly affected by the coronavirus to qualify for any of the provisions described above.
If either of the following scenarios describes your current situation, you can claim to have been directly affected by the coronavirus.
- Either you, your spouse or a dependent have been diagnosed with COVID-19.
- You have lost your job, been furloughed, or had to take on primary caretaker duties and thus been unable to work due to COVID-19-related business closures.
Note also that the IRS does not require retirement plan sponsors to follow these new, more lenient rules if they wish. Individual plan sponsors can disregard these provisions if and as they so choose.
How Do I Find Out If My Retirement Plan Provider Is Participating In These Programs?
Contact your provider directly or ask your employer’s Benefits Officer(s) for assistance.
Do I Have To Pay Back Any Money I Take Out Or Borrow From My 401(k) Because Of COVID-19?
Yes. You have three years to pay back any early withdrawals and in full. If you do meet those terms, you will also be able to recover any income taxes (state, federal) paid on the withdrawn amount.
Loan terms are set by your retirement plan provider and will vary accordingly. However, if you borrow against your 401(k), know that the following conditions apply.
- Not all plans allow loans.
- 401(k) loans are not interest-free, and your plan provider sets those rates.
- Since you are borrowing from your personal savings, you will technically be paying yourself interest. That is, any interest you pay will be reinvested in your retirement savings account.
- These interest payments are not tax-deductible.
- Most plan providers charge administrative fees associated with opening and, in some cases, servicing a loan.
- Payments are typically made in the form of payroll deductions, meaning your loan payments consist of after-tax dollars. Once you are retired and begin taking distributions from your 401(k), you will once again pay tax on that income.
- Your plan may not allow you to make regular contributions to your retirement account for the life of your loan.
- Loan repayments do not qualify for matching employer contributions.
- Although your plan provider will set the term of your loan, these terms are subject to federal oversight. For example, the government-mandated maximum term for a 401(k) loan is five years.
- If you lose your job or change employers, any 401(k) loan balances you have outstanding will be due on the same date (including extensions) that your tax return for the year in which the distribution occurs is due. If you cannot pay the balance of the loan by that deadline, it will be treated as an early withdrawal, and therefore income, incurring the standard 10-percent penalty.
I Need Emergency Funds. Should I Take Advantage Of These CARES Act 401(k) Rule Changes?
Everyone’s situation is different. The CARES Act provisions may offer you and your family the most immediate benefits.
Generally speaking, however, the majority of financial advisers — including the Wealth Management experts here at Guaranty Bank & Trust — caution against cashing out or borrowing against your retirement savings. Under normal circumstances, doing so carries immediate and significant tax implications (as noted).
Although the present circumstances are anything but normal, and the 401(k) rules are temporarily more forgiving, this advice still applies. History shows that the loss of future earnings almost always outweighs any short-term gains associated with early retirement distributions. Simply put, the money you don’t invest cannot serve as a source of passive income — that is, grow to become wealthy.
Moreover, market turmoil has drained many 401(k) accounts of value. Drawing from them now means tapping into an already depleted source instead of giving it the best chance to replenish itself.
How Often Should I Check My 401(k) Balance?
While it’s tempting to follow the day-to-day performance of your 401(k), you may only be causing yourself stress by doing so. Saving for retirement is, by definition, a long-term strategy. Its success is measured in years and decades, not weeks and months. Instead, try and stay focused on your life goals. If you feel an overwhelming desire to try and take control of the situation, reach out to your plan provider and ask to speak to a retirement advisor.
Should I Stop Contributing To My 401(k)?
You can certainly bump up your take-home pay by pressing pause on your retirement savings contributions. However, there’s no way to calculate how much money you may be losing by not investing it now.
Any contributions you don’t make will also not be matched by your employer. In other words, suspending your retirement contributions translates into passing up free money.
That said, many companies will scale back or suspend matching 401(k) contributions during an economic downtown. Check with a Benefits Officer in your Human Resources department to verify the status of your employer’s matching contributions.
Should I Rebalance My 401(k) To Focus Less On Stock And More On Bonds?
In short: it all depends. Your age, investment preferences, risk tolerance, social values, and retirement timeline all play a role in how you might want to manage your retirement accounts. A financial advisor who knows you and understands your life goals can provide a more concrete — and actionable — answer to this question.
Here is what we do know about the bond market: it has been flooded recently by investors seeking a safe haven. Consequently, bond yields now sit at near-record lows. Moving from stocks to bonds would be a sell-low, buy-high move — one most seasoned investors would avoid making. Meanwhile, for those who are willing to gamble, many stocks are currently quite buyer-friendly.
Finally, recall that most growth-focused investment strategies are relatively conservative. If you do feel compelled to change your 401(k) investment portfolio, consider talking with a retirement advisor about the pros and cons of stable value funds (SVF).
I’m A Worker Over 50. Will My 401(k) Recover In Time For Me To Actually Retire?
Possibly. Few analogies for the economic crisis precipitated by COVID-19 exist. However, the Great Recession of 2007 to 2009 does offer some grounds for comparison.
According to a study released in 2011, “the share of 55- to 60-year-old workers with less than 5 percent of their money in stocks rose from 9 percent at the end of 2007 to 14 percent at the end of 2008. Meanwhile, for those 60-plus, the percentage rose from 13 percent to 18 percent, and, for the 50 to 55 age cohort, it climbed from 7 percent to 11 percent.” By opting out when they did, these individuals missed benefitting from the gains the stock market experienced in 2009. As Teresa Ghilarducci, Professor of Economics at The New School, notes, “Poorly timed retirement asset drawdowns are a big reason why catching up was so difficult after the Great Recession.”
Nevertheless, workers over 50 are particularly vulnerable right now. Their retirement accounts simply have less time to recover. Yet acting on emotion is never a wise investment strategy. In the words of Christopher Jones, Chief Investment Officer at Edelman Financial Engines, “A common response to higher uncertainty is paralysis. It absolutely works better than panic.” If you are a worker over 50, focus on the timing of your transactions. Recalibrating your 401(k) allocations under the guidance of a financial advisor is likely a better option.
What Can I Do To Supplement My 401(k) Or Boost My Retirement Savings?
Lifetime income annuities are assets that guarantee you a steady income stream as you age into retirement. In that sense, lifetime income annuities are not unlike pension plans.
Annuity funds are not tied to stock market investments and are backed by what are, effectively, life insurance policies. As with any life insurance policy, actuarial factors — chief among them your general health and life expectancy — can determine the terms of your contract.
You can purchase an annuity, or create one by converting a portion (or all) of your 401(k) savings. The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, gives 401(k) providers more incentives to offer annuities.
Just like any other retirement product, annuities are not a one-size-fits-all solution. For a thorough overview of lifetime income annuities, their pluses and minuses, and how to set one up, consult this article from U.S. News & World Report.
As you continue to monitor your 401(k) and seek out financial advice, it’s important to be vigilant against COVID-19 investment scams. “Scammers are also likely to prey on investors’ fears about market volatility, with schemes purporting to offer guaranteed returns on investments linked to precious metals, oil and gas, and real estate,” according to the North American Securities Administrators Association.
At Guaranty Bank & Trust, we understand what it takes to stay the course — the help of a trusted friend. Our Wealth Management experts aspire to be just that. If you have questions about your retirement fund, maximizing the lifetime return on your investments, or simply managing your household budget in these challenging times, call our Customer Care Center today at 888-572-9881.
Are you looking for more information about COVID-19 and your finances? Be sure to check out the previous installments in this content series.