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How to get back on track if your 401(k) has taken a hit
By Penelope Wang
May 19, 2020
PHOTO: THE VOORHES
For Christine Manzo, the coronavirus crisis has been an economic gut punch.
“My husband was downsized from his job as a senior talent acquisition manager, and, adding insult to injury, our 401(k) has taken a huge hit,” the 61-year-old real estate agent from Brunswick, Ohio, told Consumer Reports. “That was supposed to be our retirement savings.”
As the crisis continues to wreak havoc on the stock market, whipsaw 401(k) plans, and undermine the ability to save, consumers are watching their retirement plans derail. And for many, this comes too close on the heels of the 2007 to 2009 Great Recession, a hit that many Americans have still not recovered from.
Rebounding from these financial setbacks won’t be easy. The International Monetary Fund forecasts a worse downturn this year than the Great Recession, and even financial experts are having trouble mapping out a road to recovery.
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“This is an unprecedented situation,” says Mark Zandi, chief economist at Moody’s Analytics, who thinks normal economic growth won’t resume until a vaccine or treatment for the coronavirus is available a year or longer from now.
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If that timeline sounds discouraging, it may help to remember that the nation has recovered from financial calamities in the past, says William Bernstein, an investment adviser and author of “The Four Pillars of Investing” (McGraw-Hill Education, 2010). Since 1980, Americans have come through four recessions and six bear markets—including the Great Recession, when stocks fell more than 50 percent at their lowest point.
Of course, it’s still difficult to ride out any market downturn, particularly this one, with all its uncertainties. But holding a well-diversified portfolio—a mix of stocks and bonds geared to your risk tolerance and financial goals—remains the smartest strategy.
As found in a study by Katherine Roy, chief retirement strategist at J.P. Morgan Asset Management, 401(k) investors who kept contributing to their plans during the Great Recession had fully recovered by March 2010, just two years after the bear market bottom. That was a faster rebound than the market itself, which regained its precrash high in March 2012.
Granted, staying the course might not be possible if you’ve become unemployed or your salary or hours have been reduced. But for those who can still save and invest, and especially if you were hoping to retire soon, it’s crucial to know where you stand and decide whether you need to adjust. Here are some guidelines to follow.
Review Your Asset Mix
The coronavirus calamity notwithstanding, the key question remains how much money you want to keep in stocks vs. bonds, based on your risk tolerance and financial goals.
Bear in mind, most people need to maintain a stake in stocks, even in retirement, to get the long-term growth they need. But for those who prefer a more cautious strategy—and for older investors who have already amassed enough savings to afford a comfortable retirement—it may make sense to reduce the percentage you invest in stocks and increase your fixed-income holdings, says David Blanchett, director of retirement research at Morningstar.
As a guide, the Vanguard Target Retirement 2030 fund, which holds 70 percent in stocks and 30 percent in bonds, fell almost 15 percent in the first three months of this year, while the Vanguard Target 2015 fund, which maintains 40 percent stocks and 60 percent bonds, was down just 7.4 percent. (You can compare the potential risks and returns of different asset mixes using an online tool, such as Bankrate’s Asset Allocation Calculator.)
What to do: Take a new measure of how much risk you are comfortable with right now. Factors to consider may include your age—older people have less time to ride out a market downturn, while younger ones can even benefit from bear markets because they can buy more shares at low prices that will eventually appreciate in future bull markets, Bernstein says. Another consideration is any changes to your present financial situation that limit your ability to take risks—for example, if your job situation is shaky. Generally speaking, if you aren’t panicking, that’s a sign you don’t need to cut back on equities.
Then keep your asset mix on track by rebalancing periodically. Shift just enough money from your winning investments to your laggards to restore your ideal mix. Make sure you are choosing low-cost funds, such as broad market index funds, which generally charge just 0.5 percent or less vs. 1 percent or more for many actively managed funds. The savings can increase your returns.
Build Up Your Cash Reserves
One of the most effective measures for protecting your finances is to amass an emergency fund that can cover three to six months of expenses—perhaps as much as a year if your job isn’t secure. That money should be kept in a safe, easily accessible account, which will spare you from having to tap retirement funds or run up your credit card balance for unexpected bills.
What if you lack sufficient rainy day reserves? Scrutinize your budget to find ways to free up cash for savings. (See “Your Guide to Getting Cash During the Pandemic.”) If you have no wiggle room, consider reducing your 401(k) contributions by a few percentage points temporarily, until you have an adequate cash cushion. But try to keep saving enough to get your full employer match, if one is offered, says Marguerita Cheng, a certified financial planner (CFP) in Gaithersburg, Md.
Those nearing retirement should build an even bigger cash reserve—enough to pay essential expenses for at least a year, says Harold Evensky, a CFP and retired professor of personal financial planning at Texas Tech University in Lubbock. Without that reserve, you may end up tapping your retirement assets during a bear market or perhaps panicking and going to cash.
What to do: Although interest rates have dwindled, you can earn above-average yields on your cash reserves at online banks, recently as high as 1.7 percent. That might not sound impressive, but it beats the yield on 10-year Treasury securities (0.7 percent) and savings accounts at walk-in banks (0.07 percent). You can search online for high-yield savings accounts at Bankrate and DepositAccounts.
Rethink Your Withdrawal Rate
This is something people in or nearing retirement need to review, and the pandemic has given new urgency to designing a safe withdrawal strategy. The 4 percent rule is the traditional rule of thumb for retirement withdrawals. You pull out 4 percent of your portfolio in the first year, then increase that amount by the inflation rate in subsequent years. Studies show that this strategy can minimize your risk of running out of money over a 30-year retirement.
But you may be able to pull out more income by adopting a more flexible approach, according to research by Jonathan Guyton, a CFP in Edina, Minn., and William Klinger, a professor at Raritan Valley Community College in Branchburg, N.J.
Their 2006 study found that by heeding basic spending “guardrails,” you can start with a withdrawal rate of 4.6 percent and increase that amount in subsequent years without falling short. The key is to tighten your budget after years when the market is down, perhaps by skipping an inflation adjustment or cutting withdrawals by 10 percent.
Still, to make sure your retirement income strategy is right for your current financial situation, you may want to consult a financial planner, who can help you run the numbers.
What to do: Retirees may want to consider skipping their required minimum distributions from their 401(k) plans and individual retirement accounts because that’s permitted this year under the coronavirus relief package. If you can forgo those withdrawals, your portfolio will have more time to recover from losses.
Do You Need a Professional Planner?
If you want help with your financial strategy, consider hiring a certified financial planner. CFPs include brokers, who buy and sell investments on a commission basis, and registered investment advisers, who charge a fee for advice.
Brokers are required only to provide “suitable” investments but not to avoid conflicts of interest (e.g., recommending a high-cost fund that pays them a higher commission rather than other available, better-performing funds).
Investment advisers tend to have fewer conflicts of interest and follow a so-called fiduciary rule, which requires them to put a customer’s best interests first. That rule, however, was rarely enforced, says Barbara Roper, director of investment protection for the nonprofit Consumer Federation of America.
Under a new Securities and Exchange Commission rule, known as Regulation Best Interest, brokers and investment advisers must act in their customers’ best interests. But that rule, which was scheduled to go into effect June 30, does little to strengthen investor protections or minimize conflicts of interest, Roper says.
For now, focus on pros who are fee-only CFPs—meaning they are paid by the investor, not by third parties, and they offer comprehensive planning services. You can find candidates by searching at garrettplanningnetwork.com, napfa.org (the National Association of Personal Financial Advisors), and xyplanningnetwork.com.
Editor’s Note: This article also appeared in the July 2020 issue of Consumer