All of us have been affected in some way or another as a result of the Coronavirus Crisis. Not only has it been an eye opener for all of us, it has brought the importance of planning to the forefront. Despite what one's political views are, we see the drain the crisis has caused on hospitals, medical supplies, and just the necessities in life. One would have assumed in a post 9/11 world our government would have been more adequately prepared for such a crisis.
As individuals, this crisis should stimulate your own review of how prepared you are for your future from a financial standpoint. A recent BankRate survey shows 69% of American’s are saving 10% or less of their income.
The saying is “cash is king”. In times of need that old saying is never so true. Take time and look at your savings. Savings is different from investments. Savings are funds you have available to maintain your household expenses for 6 months to 1 year depending on your age.
Let’s look at an example of how you can better plan and allocate funds. Let’s say you make $200,000 and you allocate 8% into your 401k plan and you are 45 years old. Let us also assume you are not saving any money outside of this 401k plan. As a Financial Advisor, I typically recommend my clients’ have 3 buckets of money set aside – Shor-Term, Mid-Term and Long-Term funds. In my example, this 45-year-old is putting aside $16,000 a year. Even though he or she I would say is not putting enough of his paycheck away, let’s assume they can’t find any more money to put away. In this case they should carefully look at the priority of at least trying to fill the short-term bucket. Maybe a reallocation of something like $8000 to the short-term bucket and $8000 to the long-term bucket might be more appropriate. As I said earlier, in a crisis “cash is king”. In 5 or 6 years they should be able to have $50,000 set aside, this now is emergency money, which should be able to cover 5- or 6-months expenses should a job loss occur, or a medical situation arise.
Now on the topic of your 401k, a couple of observations. Many in the workforce, especially those in their 30’s and 40’s, have never really experienced any real loss to their 401k like they are experiencing now. They see the statements and if it only goes up, so why shouldn’t I put as much in as possible? Especially since short term savings offer such low return. The answer is simple, because you need to be prepared for the unexpected.
Now what about the loss we are experiencing now with your 401k Plan, should you be concerned? Unless you are 3-5 years away from retirement and needing those funds, the answer is no. Over the long term, and when I say long term, I am looking out 15-30 years, investments tend to achieve the average. So, if you're in an S&P 500 Index Fund, you experienced a substantial loss, will this loss continue? It might. Nobody has a crystal ball and could tell you when it will start going up again, but if you maintain a long term prospective over that 15-30-year time frame your investment will and should potentially achieve the average. So, maintain your long-term position and tell yourself you are in it for the long haul.
What if you're 5-10 years from retirement, should you be concerned? This group should seek out the advice of a financial professional. For one, your investment allocation should be revisited and reviewed. Your retirement time frame should also be reviewed. If you were to retire at age 65, is this now still something that can be achieved? A few options are to either work another year or two to achieve your desired retirement income. Or you can also review to see how much additional savings it would take to stay on track with your desired retirement age. Again, these options are best discussed with a financial professional.
If you are 59 ½ or older and still working, you might check with your Human Resource office to see if you are eligible for an in-service withdrawal. What this does is allow you to roll-over usually about 90% of your 401k Plan assets into an IRA. The big advantage of this is you now have the complete universe of investment options available to you unlike your 401k plan. If this is something, you're eligible to do, I would advise again you do so with the advice of your financial advisor or tax professional. Additionally, if you do this, you can continue your 401k and make eligible contributions. Because you are going from one qualified retirement plan to another there are no tax consequences. One drawback of the in-service withdrawal is that as the money inside your 401k plan is typically available to you through a loan. A loan provision is not available with an IRA.
Finally, there is no loss of resources for you, from your company HR department to online sites to professional financial advisors. Utilize those resources and begin getting your house in order. Peace of mind is comforting. In these times of uncertainty and even calamity, provide yourself and your loved ones with the comfort of certainty for the future.
Michael Rosenberg, RFC is Managing Partner of Diversified Investment Strategies, LLC, Livingston, NJ. He has been in practice since 1981. Securities and Investment Advisory Services offered through LPL Financial a registered investment advisor member FINRA/SIPC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The hypothetical examples listed are not representative of any specific situation. Your results will vary.