Time to hit the panic button? Or not? (Photo: John, Creative Commons Attribution-Share Alike 2.0 Generic.)
Yes, the market is down. A lot.
One of the most common questions we’re getting from clients is what they should do with their 401(k) contributions and investments.
You have several choices. Here’s a rundown of the pros and cons of each.
Option #1. Stay the course
As hard as it may be to stomach the market’s gyrations, the best option for most people is indeed to stay the course and not change a thing. Market downturns can present an attractive time to invest, as many stocks and even some bonds are on sale. Why pass up a great opportunity to get something at 30% off? Your 401(k) portfolio is designed to meet your retirement needs over a thirty-year or longer time horizon. When you are accumulating assets for a distant retirement, what happens in the market today is just not that relevant. And besides, trying to time the market is futile. Research shows that frequent buying and selling makes your returns worse, not better.
Option #2. Move future contributions into something safer, like cash or stable value
Consider leaving your existing investments “as is” but move all future contributions into a safer, less volatile investment option like a money market or stable value fund. By maintaining your contributions, you’ll continue benefiting from all the great tax advantages that 401(k)s offer, and feel reassured knowing future contribution dollars are not exposed to market fluctuations. The bad news? Those “safe” investments won’t be earning much in today’s low-rate environment, so when the markets look healthier, you may want to switch up your investment mix to move back to one better suited to your long-term retirement needs.
Option #3. Cut back on stocks
If the market has you traumatized, you can take dramatic action by changing your entire investment mix to cut back on stocks, and add to bonds or other safer investments. But keep in mind that the market has already given your stocks a haircut. Cutting back further may make it difficult for you to get the long-term growth you need in your retirement account, since stocks, not bonds, are usually considered the engine of long-term growth. And besides, if you sell stocks now to buy more bonds, you’re selling one asset (stocks) at a low and buying another asset (bonds) near their high. Selling low and buying high is the opposite of what savvy investors are supposed to do.
Option #4. Stop contributing
No doubt about it: making periodic contributions to your 401(k) or other retirement plan is critical. After all, most people don’t have pensions anymore, and Social Security replaces only 25% of pre-retirement earnings for higher-income workers. If you stop contributions, or even just cut back, you might lose out on a free employer match. More significantly, you’ll lose a valuable tax deduction, and will risk falling short when it’s time to retire. The only time we would recommend cutting contributions is when you anticipate losing your job, or fear a salary cutback. If that happens, those 401(k) contribution dollars might be put to better use meeting your monthly cash flow needs.
I have e- filed my taxes but have not yet paid the tax due. Am I still eligible to delay payment to July 15 ?
Tax guidance is still a little unclear because events are changing so rapidly, but the IRS has already said that the 90-day tax payment deferral itself is automatic when you file, which means interest and penalties are automatically waived for 90 days and won’t accrue for qualifying taxpayers and businesses until after July 15. Taxpayers are always encouraged to seek their tax preparer’s guidance, however, on questions like these. Stay healthy and safe!