My Turn: Is COVID-19 crashing your 401(k)’s party?

For the Monitor
Published: 3/25/2020 6:30:14 AM

Many economists and retirement specialists, myself included, expect COVID-19 to cause a recession. Many people were irreparably damaged by poor investment decisions in the last recession; I am writing to remind us that we are the controllers of our own destiny.

To quote the Greek philosopher Epictetus, “It’s not what happens to you, but how you react to it that matters.”

Let me start with three considerations.

First, pause with gratitude if you have a retirement account – nearly half of American workers do not. If you do not have a retirement account, now is a good time to get one.

Second, know that in the last recession the market fell 57% over the course of two years. It took the typical account an average of 36 months to return to the original account value before the markets fell.

Third, from Feb. 10 to March 20 of this year, the S&P 500 plummeted a total of 32% and is showing no signs of slowing its descent.

The nation’s 401(k) and IRAs lost about $2.1 trillion over the course of the 2008 recession. However, by implementing strategies to help you mitigate losses and capitalizing on the opportunities that recession creates, you can come out ahead.

It’s important to act and not to become paralyzed by analysis in these times. We have all heard the saying about the deer in the headlights.

We have been recommending two primary courses of action during these times:

■Protect what you have. There is no sense riding the market down with dollars you have already earned.

■Stay the course with your savings plans – maybe even increase contributions. The market is on sale.

With the limited space of an article, I’ll discuss a strategy you can use to protect the investments you already have.

In the demonstration below, we can see that it is twice as hard to earn in the market as it is to lose. Therefore, it’s the most important thing you can do.

$100k + 50% = $150k

$100k - 50% = $50k

$50k + 50% = $75k

For many, most of their retirement savings is allocated in their employer-sponsored retirement plan, whether this is a 401(k), 403(b), profit-sharing plan or other similar account. It’s easy to feel restricted to the equity allocation options that these plans provide because you do not want to incur a taxable event, tax withholding or a penalty for touching the money before the age of 59½.

You can contact your human resources department or plan manager and transition to a more conservative equity allocation or transition to a money market to help stem the tide of decline.

Thankfully, you are most likely no longer tethered to staying in your employee-sponsored retirement plan. Under current law, you can roll out of these plans into a “like account.” This includes things such as an IRA that will allow you more control over the equity allocations without incurring a taxable event or penalty for moving the money before the age of 59½.

In the current economic condition, we have found fixed indexed alternatives to be a great vehicle within the IRA for many. They guarantee your principal and provide notable growth.

These are much like a hybrid between a CD and a mutual fund.

Like a CD, these represent contracts between yourself and investment/insurance companies for a specified period. In exchange for the contract term, the company protects your principal providing a guarantee that your money will never decrease.

These vehicles also defer taxes and can provide minimal interest rates.

In addition, your funds are linked to an external index such as the S&P 500 for growth opportunity. This is much like a mutual fund in the sense that you are provided the diversification of the index which will earn you notable earnings comparable to your equity earnings.

Interest is credited to your account in several different ways: Most commonly, an annual point-to-point. Each year, the growth of your chosen index is credited to your account and a new floor is created. This guarantees that your account value will never go below the new value.

Companies that provide these financial vehicles are removing negative market volatility and providing the opportunity to earn interest comparable to the equity market. In exchange, they are hedging that their money managers will be able to beat the index participation rate. In which case, they will then pocket the difference.

By eliminating losses and accepting slightly lower interest earning potential, you allow yourself to stay ahead and avoid gambling with your retirement dollars.

This recession doesn’t have to be as bad as the last one.

Remember, protect what you have, keep saving and investing, and don’t panic.

Most importantly, do all you can to stay healthy and take care of your loved ones and our community.

(Matthew J. Knee is a specialist with New Hampshire Financial Services in Concord.)


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