Get Your Retirement Plan Back on Track
Whether the damage to your savings was self-inflicted or unavoidable, we’ll help you revive your retirement plan.
Investors engaged in a test of wills with the stock market during the sharp declines in March—a test that some failed. They panicked and sold their stock holdings, only to see the market bounce back. Fortunately, unless you’re close to retirement, you should have plenty of time to recover your losses. “Consider it a lesson learned, reallocate and move on,” says Steven Zakelj, a certified financial planner with Flatirons Wealth Management, in Boulder, Colo.
Take Emotion Out of the Equation
Don’t compound the damage by trying to figure out the optimal time to rebuild your stock portfolio. “A lot of times people say, ‘I’m going to wait until the dust settles,’ ” says Vinicius Hiratuka, a CFP with Elevated Retirement Financial Services, in Madison, Miss. “The stock market is a leading indicator. When the dust has settled, you’ve missed it.” In fact, the stock market indexes just finished one of the best quarters they have had in years.
Still, reentering the market will require fortitude, because the stock market will likely continue to be volatile. Consider taking emotion out of the equation by dollar-cost averaging your way to your target allocation of stocks, bonds and cash. If you sold $100,000 in stock funds, you might reinvest $25,000 on a specific day each month for four months. Over the long term, the day you invest won’t matter much. What will matter is that you invested.
In the meantime, use your reaction to the recent market swings as a barometer of your tolerance for risk, says Marcel Winger, a CFP with Mutual Wealth, in San Antonio. Keep in mind, though, that if you decide to dial down your allocation to stocks, you’ll also give up long-term returns. That’s particularly the case now, when low interest rates have depressed returns from bonds and cash. The Federal Reserve has made it clear that it intends to keep rates low for several years. Even with low inflation, you’ll need to invest in stocks to stay ahead of increases in the cost of living.
A financial planner can help you come up with an asset allocation that matches your risk tolerance but still provides sufficient long-term returns. Help is available even if you lost your job or suffered other financial setbacks because of the pandemic. CFPs from XY Planning Network, a fee-only network of planners, are offering free emergency financial advice to individuals who lost a job, had their income reduced or were forced to take unpaid sick leave as a result of COVID-19. To learn more, go to xyplanningnetwork.com and search under the keyword “coronavirus relief.”
Fill the Hole in Your Portfolio
Selling stocks in a downturn may be a temporary setback, but taking a withdrawal from your retirement plan could put a permanent dent in your portfolio. If you’re younger than 59½, you’ll usually pay a 10% penalty, plus income taxes on the amount you take out.
But if you’re among the millions of people who were laid off or furloughed in recent months, you may have had no choice, and the Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law in March provides an opportunity to repair some of the damage. If you or someone in your family was diagnosed with COVID-19 or suffered adverse financial consequences because of the pandemic, you can withdraw up to $100,000 from your 401(k) (or other employer-sponsored retirement plan) or IRA without triggering an early-withdrawal penalty. You’ll have up to three years to pay taxes on the withdrawal. And as long as your employer allows it, you’ll have up to three years to roll the money back into your plan. More than two-thirds of large employers will allow employees to repay coronavirus-related distributions over three years, according to the Plan Sponsor Council of America.
If you took a 401(k) loan (or are considering one) instead of a withdrawal, you also have new options. In addition to increasing the maximum you can borrow from $50,000 to $100,000, the CARES Act allows borrowers to skip making payments in 2020—giving you six years to pay it off instead of five. More than 60% of large companies say they’ll allow workers to suspend repayments in 2020, according to the PSCA.
You’ve probably heard it a thousand times: If you have a 401(k) plan, contribute at least enough to get any matching funds. But what if your employer has scrapped the match?
In response to the economic downturn, about 12% of employers have suspended their matching contributions to 401(k) plans, and nearly one-fourth are either planning to cut their 401(k) match or considering it, according to Willis Towers Watson, a consulting firm. The hopeful news is that match reductions or suspensions are usually temporary.
If you like your 401(k) plan (it offers good, low-cost investment options), continue contributing, Winger says. If you can afford it, increase your contributions to make up for the lost match, he adds. If you’re not enamored with your plan and your match has been suspended, consider redirecting some of your savings to a Roth IRA. You can build a portfolio of low-cost investments at any financial services firm. Contributions aren’t tax-deductible, but withdrawals are tax-free as long as you’re at least 59½ and have owned your Roth for at least five years.
And a Roth offers other advantages. You can always withdraw your contributions, tax-free, if you need the money. A Roth “doubles as an emergency savings fund, but you’re also not missing out on not putting money in a retirement account,” says Hiratuka. Not everyone can contribute to a Roth. In 2020, single taxpayers must have an adjusted gross income of less than $124,000 to make the maximum contribution of $6,000 ($7,000 if you’re over 50). Contributions phase out for those with AGI of up to $139,000; above that amount, you can’t contribute to a Roth. Married couples who file jointly need to have AGI of less than $196,000 to contribute the maximum; contributions phase out for AGI of up to $206,000.
How to Fix a Bad Plan
Like gauze on a camera lens, a bull market can hide a lot of blemishes in retirement savings plans. But when the market heads in the other direction, the plan’s flaws become glaringly apparent.
That’s particularly the case with some 403(b) savings plans. Typically offered to public school teachers, 403(b)s have the same tax benefits and contribution thresholds as 401(k) plans, but they’re often vastly inferior to their private-sector counterparts. Many school districts turn the job of offering retirement plans over to sales agents who promote investments with high-cost equity-indexed and variable annuities.
If you find yourself stuck with a poor-performing 403(b) plan, you have a few options, says Scott Dauenhauer, a certified financial planner with Meridian Wealth Management, in Murrieta, Calif., and founder of the Teacher’s Advocate blog. First, get the name of the plan’s compliance administrator from your school district and ask the administrator for its approved provider list. You may be able to find a low-cost provider, such as Fidelity, Vanguard or Aspire Financial Services. If you can find such a hidden gem, he says, add it to your plan and direct future contributions to its suite of funds, he says. If you already have equity-indexed or variable annuities in your 403(b), transferring that money to a new provider could trigger surrender charges of 5% or more. But if your new funds come with very low fees, you’ll probably recover those costs in a couple of years, Dauenhauer says.
If your research reveals only bad options, consider lobbying your employer for better choices. You can find information about how to approach your employer at 403bwise.org, a nonprofit organization that advocates for teachers.
Finally, if your plan is unsalvageable and your employer unresponsive, you may be able to take advantage of a penalty-free withdrawal to switch to a better plan. The Coronavirus Aid, Relief and Economic Security (CARES) Act allows individuals who have been affected by the coronavirus to withdraw up to $100,000 from any retirement plan—including a 403(b)—without paying a 10% early-withdrawal penalty. If you repay the money in three years, you won’t have to pay taxes on the withdrawal. The key here is that you can return the money to any eligible retirement plan—which means instead of putting it back in your 403(b), you could instead invest it in a low-cost IRA.
For this strategy to work, your employer must permit coronavirus withdrawals and you must be eligible to take one. You qualify for a coronavirus withdrawal if you, your spouse or one of your dependents has been diagnosed with COVID-19. You’re also eligible if you or your spouse have suffered adverse financial consequences as a result of the pandemic, which include layoffs, a reduction in hours or inability to work because of child care obligations.
As is the case with rolling your money into another provider’s funds, this strategy could trigger surrender charges. Your best bet: Find a financial adviser who is knowledgeable about 403(b) plans to help you navigate the process.