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The Effects Of A Volatile Market On A 401(k)

The last few weeks have certainly had an extremely profound effect on all Americans. Everyone is feeling the uncertainty, the fear, the panic and the uneasiness. But at the same time, I have seen acts of kindness, neighbors coming together (virtually of course) to help one another and most people abiding by the CDC rules for the betterment of the greater community. These are trying times and will continue to be for a while, but remaining hopeful, positive and making smart choices regarding your family, your health and your finances will help you through these times.

The fear of the unknown is commonplace, but it’s important to keep perspective and think long-term. This holds especially true of your finances and your financial retirement plan. Having a financial plan is crucial and being knowledgeable about your accounts is more important than ever. Your 401(k) is an important component of your financial plan and is a company-sponsored retirement account that employees can contribute to. Also, many employers may make matching contributions.

The Bureau of Labor Statistics’ National Compensation Survey for 2018 reported that typically in any year, only half of all workers participate in a retirement plan at work. Taking advantage of a 401(k) is a smart investment strategy – there are tax advantages, the funds are automatically taken out of your paycheck and companies may match your contribution up to a certain amount. In a volatile market, considerations regarding your 401(k) should include the following:

1.   Funds available

Now, more than ever, take the time and learn about the choices within your 401(k). Some plans offer hundreds of options while others have a more selective offering of funds. Understanding your company’s offerings will provide you with more confidence in your fund allocation.

2.   Percent of portfolio allocated to those funds

What percentage of money is in each fund? If you have an extremely aggressive fund that has done well over the last few years, you probably don’t want to put 100% of your money in those moving forward because sooner or later they will most likely underperform. Asset allocation means that your money should be spread throughout the various funds based upon varying criteria. For example, how many years away from retirement may dictate what funds to invest in and to what percentage each is allocated.

3.   Retirement date

Your retirement date plays a major role in your 401(k) decisions. If you are only a few years away from retiring, you probably want to air on the side of safety. However, if you know you will most likely be working for the next 20 to 30 years, you should be fairly aggressive with your fund choices.

4.   Changing your contributions

Increase your contributions as much as you can. We like to suggest a target of 10-15% of your income. Starting in 2020, eligible workers 50 or older can contribute an additional $6,500 to their workplace retirement plan beyond the $19,500 annual limit for a total of $26,000. We also suggest if you receive a bonus or a raise, put those additional funds in your 401(k). We have found that after 6 months, many of our clients said they didn’t miss the incremental dollars contributed to their retirement accounts.

5.   Letting your emotions guide your decisions

Especially during this time of uncertainty and instability, it is important to not let fear guide your sound financial decisions. We often say emotions are the biggest impediment to successful investing. If fear drives your financial decisions, often individuals stop contributing to their 401(k) or they start selling off certain stocks. On the other hand, if greed drives your financial actions, you may be afraid of missing out and therefore you start buying aggressive stocks when the market increases. Riskier stocks usually do better when the market is going up. For some, it is a huge temptation to put your money there but when the market turns, the loss may be significantly greater than other less risky investments.

Now is not the time to make any drastic, emotion-based decisions regarding your future financial security. Everyone’s situation is very different, therefore one strategy doesn’t fit all. Take the time to understand your financial plan, ask questions, or call your financial planner or advisor to help guide you through this uneasy time.

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