Managing My 401(k) Through COVID

Sep 22, 2020 1:15:00 PM / by Jason Shaw


The COVID-19 pandemic has wrought havoc on the economy, and many people’s 401(k)s are suffering as a result. What can you do to minimize the damage and give yourself the best possible chance of saving enough for your retirement? The answer partially depends on your age and whether you’re facing job loss during the current crisis.

Should I adjust my 401(k) investments?

If your investment portfolio was properly diversified and aligned with a long-term plan prior to the economic downturn, then it makes sense to stick to that plan. It’s human nature to want to act during a crisis, and for many people, the instinctive response is to sell off investments in a panic when faced with a dramatic drop in value. When investors do this, however, they are locking in their losses, preventing themselves from benefitting when investment values recover.

While a bear market is generally not a good reason to sell off stocks, you may want to consider making adjustments at this time if the market volatility has dramatically shifted the balance of your investments. What your ideal investment balance should look like depends on a number of factors, so it’s best to make that determination in consultation with a trusted financial advisor.


Should I still be contributing to my 401(k)?

Whether you should continue your 401(k) contributions necessarily depends on your current income situation. Make sure you have the liquidity you need to meet your basic necessities for at least three to six months. If you don’t, then you may want to suspend or reduce your contribution until you’ve built yourself a comfortable safety net. If you’re in a position to do so, however, it may be beneficial to actually increase your contribution to take advantage of low stock prices. For 2020, the 401(k) contribution limit has been increased to $19,500 for people under 50 years of age, while those 50 and older can contribute $26,000.


What should I do with my 401K if I'm laid off?

If you are laid off from an employer that sponsors your 401(k), you have three basic choices.


Keep it where it is.

If your 401(k) balance is at least $5,000, then you have the option of keeping it in the plan. You won’t be able to continue contributions, but the investments can keep growing over time. Keeping the money with your former employer limits your investment choices to those available within the plan, however, and you’ll have to keep in touch with the employer to make any updates, such as beneficiary designations or address changes.


Move the money to an Individual Retirement Account or new 401(k).

If you get a new job with an employer that accepts 401(k) rollovers, then you can choose to move your investment there. If not, then you can still roll the funds into an IRA. One advantage of this is that an IRA may provide more options than your former employer’s 401(k), giving you more freedom to decide how to allocate your investment funds. Another advantage is that you can get professional advice and management from your financial advisor.


Withdraw up to $100,000 without penalty.

In response to the economic crisis resulting from the COVID-19 pandemic, the CARES Act provides relief in a variety of forms. One of these is the elimination of the 10% penalty on early withdrawals of up to $100,000 from tax-deferred retirement accounts, such as 401(k)s and IRAs, for those who have experienced negative economic effects of the pandemic. Of course, taking cash out of your investments stops them from growing, and if they have already lost value, then you’ll be stuck with that lower value at the time you cash out. Also, funds you withdraw and don’t repay will be taxable to you. Make sure you talk to a tax professional to carefully evaluate this option.


Will I still have enough to retire?

History tells us that market losses are regained over time. The longer you have before reaching retirement age, the better your chances of recovery. Since 1946, the stock market has taken an average of two years to recover from declines in the S&P 500 of 20% to 40%. Particularly if you plan to retire within the next few years, then this could be an ideal time to meet with your financial advisor to discuss strategies to secure your future.


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Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.

Topics: Financial Planning, Investments

Written by Jason Shaw