School closings, travel restrictions, grocery store supply issues and much more time spent at home have increased uncertainty, which sparked some dramatic market volatility. We’ve seen multiple days of negative market returns over the past few weeks and as much as we’d like to pinpoint when the volatility will subside, the reality is that no one has a crystal ball.
However, what we DO know is that this is not the first time we have seen volatility in the market, and it likely won’t be the last. It is critical to remember this is not the time to panic and we are here to help you weather the storm.
Resist the urge to mess with your 401(k)
We understand that when individuals and their families experience financial strain, it may be tempting to take funds out of your 401(k) to get by. This takes the focus off long-term planning and could be very detrimental to your retirement savings. Our guidance is to evaluate all potential sources of cash before tapping into these funds.
One of the most powerful investment concepts is the power of compounding returns. Compounding returns simply means when the money in your account grows over time, future growth is based on not only the amount of money you originally contributed, but also includes past returns. When you leave your money invested, you give your investments the chance to compound their returns and grow exponentially over time. If you take money out of your account, the magic of compounding returns disappears.
One study shows that by taking a $5,000 loan early in your career you could reduce your retirement savings by 20%.1 When you’re years away from retirement, it may feel like you have plenty of time to make up your contributions at a later time, but this should be considered a last resort in the hierarchy of financial solutions.
Let history show you the course.
Many investors try to ‘time’ the market by trying to sell as prices fall and buy back at lower prices. The reality is that if you sell investments in your 401(k) and move them to cash equivalent funds, you are likely locking in the loses that have already taken place in your account.
The key to a successful retirement account has and always will be to invest for the long-term and to stay the course. In other words, don’t make changes to your strategy when you get anxious. In the past 20 years, six of the best ten days in the market have occurred within two weeks of the ten worst days.2 It is easy to let emotions get the best of us when we see concerning headlines on a day-to-day basis but we need to remember why we save in a 401(k).
The savings in your 401(k) are intended to give you security during retirement, when you may have upwards of 20 years of expenses to cover after you enter this stage of life. Your future self will thank you for finding other resources to cover short-term expenses during market or health crises.
Your team at CI Budros Ruhlin Roe is here as a resource during these trying times. Please reach out to Hannah Walls or Eric Shisler if we can be of assistance with questions relating to your 401(k).
Hannah Walls, CRPS®
Retirement Plan Services Specialist
2 JP Morgan Guide to Retirement, 2020