Reuters
Financial experts advise not to dip into a 401(k) savings plans.
- As coronavirus fears spread across the US, experts advise people not to withdraw from their 401(k) plans or employer-sponsored retirement savings accounts.
- A withdrawal from a 401(k) plan can be damaging. According to the IRS, an early withdrawal can result in penalties of up to 10%, or you may have to pay income taxes on the amount.
- We've rounded up three ways for you to retain your 401(k) plan during a crisis.
- Click here for more BI Prime content.
As fears over the novel coronavirus spur a slump in US markets, it may be tempting to dip into your 401(k) account.
People make early withdrawals from their retirement savings accounts because they're looking for a safety net. Some may be stressed about an economic recession, which experts say may happen in upcoming quarters, or want to pay down high medical bills. About 59% of young investors in an E-Trade report acknowledged that they took money out of their retirement accounts. Still, experts say early withdrawals are a big no-no.
"People may be more tempted to do this because they're looking for security - this actually does the exact opposite and exposes you to more risk and instability in the future," Eric Roberge, a certified financial planner and the founder of the financial-planning firm Beyond Your Hammock, told Business Insider. "If you're struggling to not panic, stop looking at your portfolio."
This money is reserved for your future, he said.
"This is long-term money that is supposed to be there to fund your retirement; it is not designed to act like an emergency fund because the markets have you spooked," Roberge said.
It is important that people stay calm and focus on saving money. Early withdrawals from an account can be damaging. According to the IRS, when someone withdraws from a 401(k) account before age 59 and a half, that person is subject to ordinary income taxes, plus a 10% penalty.
Here are three ways to manage your 401(k) account during a crisis based on advice from financial experts.
Do nothing
During a financial crisis, don't cash out on your investments. Taking money out of your retirement savings will force you to pay penalties, and your account will be exposed to even greater financial risks.
Leaving money in the account is good because the market will eventually bounce back, Laura McCamy wrote for Business Insider. McCamy left her 401(k) investments alone during the last recession and experienced a 30% increase in her retirement savings. Now she knows there's an advantage to staying put.
"I might not be able to stop touching my face, but I'm definitely not touching my investment portfolio; that's easy," McCamy wrote.
For example, the S&P 500, one of the major indexes measuring the US economy, lost about 37% during the 2008 recession, which caused a severe loss in 401(k) retirement-plan assets, according to an analysis from the Employee Benefit Research Institute.
"In most cases, if there is a recession, you will see your account value go down due to market volatility," David Blackston, the founder of Blackston Financial Advisory Group, told US News & World Report.
Since the coronavirus outbreak started, the S&P 500 has reached a new low, with an estimated market loss of $6 trillion, Business Insider reported. "Risks are now greater from consumer responses to the virus and lower oil impacting solvency, business investment, energy employment, and financial conditions via credit markets," Michael Wilson, an economist, told Markets Insider.
Lay out your long-term 401(k) goals
According to Roberge, it's important to stick to your plan. This means saving and developing a strategy for your future investments.
"Consider adjusting your allocation to take less risk (so if you're allocated 80% to equities and 20% to bonds, consider adjusting to something like 60-40)," Roberge said.
If you're young, you have time to recover from any losses you may take during a financial crisis. Danielle Harrison, a certified financial planner in Columbia, Missouri, told Business Insider that young people could take on more risk. Therefore, they can invest and receive more returns for their retirement.
"Although young individuals have the odds stacked against them with large amounts of student-loan debt, low starting salaries, and high insurance costs eating up the majority of their paycheck, they do have one extremely valuable thing on their side - time," Harrison said.
People older than 50 can open a Roth individual retirement account or a tax-advantaged retirement savings account and contribute $1,000. However, if you don't have $1,000, you can open an IRA with a credit union and set aside about $100 a month, Business Insider reported.
"Remember that things don't have to be all or nothing; you don't have to stay on the extreme end or throw everything into stocks," Roberge said. "And you don't have to jump out and move to cash. Again, this is long-term money. Don't make a short-term decision based off of fear and speculation."
Contribute to your 401(k) account
Experts agree that during a crisis, it is important to invest in your 401(k) account. During times of financial stress, you should continue to put money toward your retirement. The more you save for retirement in the long term, the more interest you can earn on your investments over time.
"There's no reason to stop contributing as you normally do to your plan, and if you had no plans to dip into your 401(k) before these events, you should not be changing your plans now," Roberge said.
What's more, people who regularly contribute to their 401(k) accounts may also receive a matching contribution from their employers.
"It's hard not to emotionally react to volatile situations, but we have financial plans for a reason: to keep ourselves grounded in turbulent, uncertain times," he said. "If you don't have a plan, this is a good sign it's time to make one so you're not flying blind."