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The past month during the coronavirus pandemic has been a rollercoaster ride for investors. And amid this turbulence in the market, the most common advice is often to sit tight and don’t reassess your financial portfolio. While this might be the course for many, when it comes to retirement saving, it can be beneficial to turn your attention to your own financial goals and timeline.
While the reality of the markets and uncharted waters of today can create a lot of anxiety, the most important thing you can do is stick to your plan. If you’ve seen the headlines, you know that there are a lot of opportunities and considerations to keep in mind in the current environment. It’s important to understand the resources and services available to you, while also keeping your long-term savings goals top of mind.
The CARES Act and You
To withdraw or not to withdraw? That is the question roaming the minds of many after the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that make it easier for those struggling with economic hardship from the coronavirus pandemic to take early withdrawals (“coronavirus-related distributions”) or loans from qualified retirement accounts.
A recent survey from Voya of 1,000 U.S. adults found that most individuals (86 percent) feel that “staying the course” and having a long-term view on their investments (85 percent) is important amid concerns about the COVID-19 pandemic.1 This sentiment is also noticeably higher among those who were working with a professional financial advisor (96 percent) and those who participate in a retirement savings plan (93 percent).
And while some will have no other choice but to use retirement savings for short-term financial challenges, there is much to consider before taking action on these new coronavirus-related distributions and withdrawing money from retirement funds.
Seek short-term resources first
I would recommend individuals should first draw from emergency savings and short-term investments to meet immediate financial needs. Generally, I would encourage individuals to consider flexible and health savings accounts for addressing health care costs.
You might also look to see if there are actions you can take in the short term to provide you with funding elsewhere. For example, are there opportunities to refinance student loan debt, a mortgage or car payments? Taking advantage of lower rates is a good option to look into before tapping into your nest egg.
Take only what you need
In many cases, there’s no denying that short-term and emergency savings may only support so much. This is why now — with the new coronavirus-related distributions — loan and withdrawal amounts have been increased from $50,000 or 50 percent of assets in one’s qualified retirement plan assets to $100,000 or 100 percent of assets. Depending on the balance in your retirement account, this can be a tempting financial resource to consider for immediate needs.
When faced with financial pressure, it can become easy to simply remove as much as you can from the plan, thinking that you will need all the financial help you can get. This is understandable, but I would encourage individuals to think about what they need to cover essential expenses.
A good approach is to tally up how much is needed to cover those expenses, such as your mortgage or rent, groceries and utility bills, and take as much as you’ll need to cover those basic needs over the coming weeks or months. Keep in mind that, if you need to withdraw additional funds down the road, you can always do so.
‘Stay the course’
Remember, retirement is a marathon not a sprint. Market volatility will exist, but volatility can also bring benefits for long-term, consistent savers. In fact, many will argue that putting funds into your 401(k) during a downturn allows you to “dollar cost average” and potentially take advantage of investing in the market without trying to time the market.
This, however, is easier said than done. The magnitude of the recent market selloff can be nerve-wracking, and many individuals tend to “act before they think.”
Professor Shlomo Benartzi of the UCLA Anderson School of Management and senior academic advisor to the Voya Behavioral Finance Institute for Innovation recently published an article in the Wall Street Journal sharing insights surrounding the current panic gripping financial markets along with considerations for how to prevent costly investment mistakes.
He includes a short assessment in the article that can help determine whether individuals are likely to engage in “panic selling.” For those at highest risk, he has several prescriptions, including changing the format of one’s “performance screen” on their retirement plan’s website to show projected retirement income instead of wealth.
Because of all the factors that need to be considered, it’s important to leverage the numerous resources available to you. If you’re working with an adviser, talk to them. Now is the time to determine how you might need to change your strategy depending on your plan and overall timeline.
Many advisors say the best service they can provide right now is to keep their clients from panicking and helping them understand the broader market dynamics — all while keeping long-term financial plans intact.
For those in the workforce, you might consider seeking support from employer resources where available. More and more employers today are offering holistic financial wellness solutions to support their employee base, inclusive of things like: Health Savings Accounts to offset the burden of medical costs; student loan debt support; and tools for building emergency savings.
While ultimately my best advice is to stay the course, stay invested and continue to contribute to your retirement plan, I also understand that this is an unusual and unprecedented time for many individuals, so don’t be afraid to ask for help.
Charlie Nelson is CEO, Retirement and Employee Benefits at Voya Financial.