COVID-19 has swiftly plunged the nation toward a likely recession, and that has left millions of Americans understandably worried about how they're going to pay their bills over the next few months. Hopefully, these struggles will begin to ease once people are able to return to work, but the effects of COVID-19 will be felt for decades.
The pandemic has also pummeled 401(k)s, which will make saving for retirement more challenging going forward. Here's a look at three ways COVID-19 may have already hurt your retirement savings and what you can do to get things back on track.
1. Plummeting portfolios
The stock market has taken a dive since COVID-19 began to shut down the global economy, and that's caused the value of many 401(k)s to tumble. This is a big concern for retirees who depend upon their 401(k)s for support and for adults nearing retirement age who may now have to work a little longer than they'd planned so they can afford to retire comfortably. It's less concerning for younger adults who have decades to go until retirement, though it could still pose a serious problem if they try to withdraw money from their 401(k)s now. More on that below.
There isn't anything you can do to fix the state of the stock market, but you can make smart decisions about what to do with the money you still have invested in your 401(k). Look into the investment options available to you and decide if you'd like to move your money around or leave it where it is. Make sure your money is diversified between many assets and sectors and avoid emotional investing. Don't try to gamble on which companies are going to make a fortune during the pandemic or sell off your shares in established companies just because they've hit a rough patch recently. Doing that could set you back even further.
If you're already retired, trim your budget and limit how much you're withdrawing from your 401(k) until things start to bounce back. Turn to other sources, like Social Security and your government stimulus check, to help you cover your bills before reaching into your retirement savings.
2. Early withdrawals
The CARES Act has changed the rules on retirement account withdrawals, allowing penalty-free distributions to adults under 59 1/2 who have had COVID-19, have a spouse or dependent with the disease, or are experiencing financial hardship because of it. You can take money out for good and spread the tax liability out over three years or pay it all back over three years and the government will reimburse you for the taxes you've already paid. If your 401(k) allows loans, you can now borrow up to 100% of your portfolio's value or $100,000 -- twice the normal limits.
These options can seem like a lifeline if you're wondering how you're going to pay your bills and you don't want to take on credit card debt. But the short-term gain comes with long-term losses. When you withdraw money from your 401(k), you're setting yourself back and you'll have to put away even more in the future in order to save enough for your retirement. This is especially true right now with 401(k) values down so much. You'll have to sell off more of your assets to get the money you need than you would have if you'd tried to withdraw the same sum at the beginning of the year.
It's ultimately your call. If you don't withdraw money from your 401(k) and you have to take on debt to pay your bills, you might struggle to cover your expenses and set aside money for retirement in the future, so there are definitely circumstances where it's merited. But make sure you use up all your emergency savings first and explore hardship assistance programs and other options before you decide to dip into your 401(k). And if you do take money out -- whether as a withdrawal or a loan -- redo your retirement plan so you know how much you need to save going forward to retire on schedule.
3. No more employer match
Businesses are struggling right now, just like their employees. While some companies are able to keep their doors open by having their staff work remotely, they're having to make other sacrifices to stay afloat, including cutting 401(k) matches. The same thing happened during the Great Recession of 2008. Hopefully, this is a temporary measure, but when, and if, an employer match will return will vary by company.
In the meantime, try to step up your retirement savings to compensate for your lost match if you're able to. If not, contribute as much as you're able to right now, redo your retirement plan, and make necessary tweaks, like delaying your retirement date, to find a strategy that works for your budget. If your employer brings back 401(k) matching once the economy recovers a little, you can drop your personal contribution rate or keep it higher to help you grow your retirement savings even more.
We can never control every factor in retirement planning, and COVID-19 certainly makes it more challenging. But by understanding how the three above factors are affecting your 401(k) and taking proactive steps to course correct, you can still achieve your goals of a comfortable retirement.
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