The Coronavirus Pandemic and Your Retirement Accounts—What You Should And Should Not Do

Most economists expect the Coronavirus outbreak to cause a recession. Since many people made bad financial investment decisions in the last recession, it is important to remind ourselves of what we should and should not do. 

First, pause with gratitude if you have a retirement account—nearly half of workers do not. If you don’t have a retirement plan this is a good time to get one.

Second, know that in the last recession, workers who did not lose their jobs and did not have to withdraw from their retirement accounts to pay basic bills were back to where they had been fairly quickly.

The morbid joke about the Great Recession was that it turned Americans’ 401(k)s into 201(k)s. The nation’s 401(k)s and IRAs lost about $2.1 trillion over the course of 2008. But people who did not withdraw funds from their retirement accounts and kept saving did better than those who withdrew money for whatever reason. People who continue to add stock to their retirement accounts may be able to benefit. Stock market swings can have surprisingly little impact on your wealth if you don’t sell now.

The Do’s and Don’ts of Saving in a Recession

Do stay the course. If you’re considering pulling money out of the market right now, know that this is the absolute worst time to do so. Buying high and selling low is the biggest mistake individual investors make. It may look bad now, but it will look worse if you sell at the trough and only buy back in when the market is up 10-20%.

Don’t look at your account balance too often. Studies show that people who check their accounts frequently and trade more frequently tend to buy high and sell low compared to people who rebalance once a year. Evidence suggests that people who are open-minded and have neurotic traits are especially vulnerable.

Don’t add more years to your mortgage if you are refinancing. You want to make sure you are never in a situation where you have to sell stocks to pay a mortgage when you or a family member loses a job, hours, or gig in a recession.

Do consider talking with your portfolio manager, Brian Mattox and Jason Tkach, about allocating a greater share of contributions into stocks versus bonds at this time. With interest rates at historic lows, bonds are unattractive looking forward (as interest rates go up, bond values go down).  If you truly want a “safe-haven” for your new contributions, you can use the money market option instead.

Consider adding to existing stocks you own that are still solid companies with strong balance sheets – remember, many of the companies you own in your portfolio are the companies that offer the products and services you use on a daily basis. 

Do contact your human resources department and start contributing at the maximum level. The maximum annual 401(k) contribution is $19,500 in 2020, and up to $26,000 for those 50 and older this year. Only 4.6 million taxpayers out of 140 million get the maximum tax advantage for saving in retirement accounts. Your HR department will celebrate your joining the elite club of maxers.  Remember, if you’re not in the higher tax brackets, you may wish consider utilizing the Roth 401k option as well for some or all of your contributions.

What is a Roth Conversion? A Roth conversion refers to the transfer of an Individual Retirement Account (IRA), either Traditional, SIMPLE, or SEP-IRA, into a Roth IRA. With Roth IRAs, you pay tax on the money before it transfers into the account.

One benefit to having your money in the Roth IRA is that, unlike a Traditional IRA, you currently are not obligated to take Required Minimum Distributions (RMDs) after you reach age 72 (RMDs would be required to any non-spousal beneficiaries, however).

Another benefit is that since the money was taxed before going into the Roth IRA, any distributions are tax-free. Keep in mind that tax rules are constantly changing, and there is no guarantee that Roth IRA distributions will remain tax-free.  

Why Go Roth in 2020? In the face of the market downturn after the COVID-19 outbreak, you may be in a unique financial situation. For example, suppose you have an IRA account that was worth $1 million before the downturn, but it’s currently worth $800,000.

Perhaps your income has also decreased, potentially putting you in a lower tax bracket. Maybe you own one or more businesses, such as restaurants, that have been closed. You may not yet know if these businesses will be opening again in 2020. Your income could hypothetically be considerably lower this year than last year.

But, this may present an opportunity. Less earned income may mean lower total taxes due on a Roth conversion, especially if the overall account value has dropped. However, we recommend you contact us before modifying your retirement investment strategy. 

Do practice social distancing.

Do wash your hands.

Do comfort the anxious and the sick. Though maybe not in person.

And lastly, please reach out to an advisor at Kendall Capital at any time for guidance.