Guidance for 401(k) Savers During Uncertain Times
In addition to the effect the Coronavirus has had on our daily lives, the related investment volatility and economic uncertainty have understandably raised concerns for many. We hope the below will be helpful during this stressful time.
Market volatility is not new, and if history is any guide, the markets will eventually recover. However, often the timing of upward movements can be equally surprising as the market drops. Staying invested to the degree appropriate for your circumstances and goals is often the most prudent course of action. We know that many people have not lived through the kind of market volatility we’re seeing today and that the anxiety is real. This is when our disciplined saving behaviors can set the stage for future financial well-being, including in retirement, which is a long-term proposition, providing years if not decades to recover from a downturn. Even for those who are close to retirement, the time horizon for most of their investments should be 30 years or more, considering life expectancies.
What is Betterment doing?
As your plan’s investment advisor, Betterment will continue to assess and monitor the funds in your plan and make changes in keeping with disciplined investment practices your employer hired us for. In addition to our low costs, automated features such as rebalancing and portfolio allocation changes help to ensure that individual accounts are invested consistent with your goals (which is “retirement” for your 401(k) account). And finally, for those who have various accounts like Roth and Traditional, our tax coordination tools can grow your after-tax wealth more effectively.
What should I do with my 401(k)?
With respect to actions you might take, the recommendations depend in large part on your financial situation. We encourage everyone to review their account to make sure their personal information and preferences are current and as complete as possible. Beyond that, we have several thoughts:
- Betterment promotes the importance of emergency savings equal to at least 3 months of expenses. If you do not have sufficient amounts in an emergency fund, suspending your 401(k) contributions may be appropriate, depending on your overall financial situation. You can create a separate emergency fund goal directly within your Betterment account which enables you to track it alongside your 401(k).
- If you have sufficient emergency savings, continue contributing to your 401(k) plan. Since your contributions are going in at periodic intervals through payroll deduction, you are benefiting from dollar cost averaging, a well-established investment strategy that you may not even realize you’re leveraging. Furthermore: betterment.com
- If your 401(k) plan offers an employer matching contribution, be sure you are contributing enough to maximize that benefit. The employer contribution into your account will help offset any negative returns.
- Downturns in the stock market — especially those driven by panicked sellers — may provide opportunities to “buy low.” Although this can be stomach-churning, your willingness to increase your contributions now may be handsomely rewarded, especially if you have decades until you will need to withdraw that money.
What else should I do?
Betterment helps 401(k) investors maintain a holistic perspective with respect to their financial saving goals. As such, we have several other actions you may consider doing during these uncertain times.
- Keep an eye out for state and federal programs that you could benefit from, including tax breaks and rent reductions.
- If you have a mortgage, consider refinancing to take advantage of the lower interest rate environment; however, think twice before extending the loan term (the number of years you will have to make payments).
- If you have student loans, investigate whether the lower interest rate environment opens up alternatives that might reduce your payments.
The next few months will undoubtedly be difficult, but the economy will eventually recover. The “when” of the recovery will be a surprise, and you will need to be invested to benefit from it. In the meantime, we urge you and your family to stay safe, lend a helping hand to your community, and position yourself now to be set up as best as possible for the future.
For more on how we stay the course, check out our guide to stock market volatility.
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