Of course this is not the first time people were worried about their funds. The 2007-2009 Great Recession had the same effect. Whenever there is concern for the economy as a whole, people may start contemplating the safety of their investments.
When the economy suffers, people may also have a hard time making ends meet from a financial standpoint. Some may consider taking money out of their retirement savings to cover their mortgage or rent, keep up with their child’s tuition, or help with everyday expenses and bills in light of a job layoff or salary cut. Even with professional guidance, it's hard to know whether you should touch your retirement nest egg when there is an economic downturn, or if you should wait it out.
No one can accurately predict what the economy or stock market will do, but here are some considerations when thinking about your retirement savings:
1.) Think twice about borrowing money from your retirement fund.
If you’re considering withdrawing money from your retirement plan to help with current cash flow issues, you should reflect on the following:
• Are you or your spouse still working?
• How close are you to retirement?
• What are the tax implications of withdrawing funds from your retirement account?
• Can you take out a home equity loan or explore cash-out refinancing instead of tapping into your retirement savings?
• What are your options for a short-term personal loan?
Do You Have an Emergency Fund?
If possible, you should tap into your emergency fund or savings account before you consider withdrawing from your retirement plan to cover everyday expenses. Perhaps you've been saving for a vacation or a down payment on a new house. It's painful to have to reallocate those hard-earned savings dollars from a long-term goal. However, it might make more sense to postpone a dream than to cheat yourself out of a comfortable retirement. Remember that there can be penalty fees and tax implications associated with taking money out of retirement savings before you turn 59 and a half.
2.) Do your research before making changes to your retirement portfolio.
If you are concerned about the safety of your retirement funds, and are contemplating moving money out of the stock market and placing it in “safer” investments, keep in mind that it’s never a good idea to panic. Take some time to rationally think through all of your options, and the implications of each. Here are a few tips:
• Don't make rash decisions. It's essential to remain calm and rational throughout a financial crisis. When you panic, it becomes more difficult to make sound decisions. Speak with a financial advisor regarding how to manage your money and what your options are.
• Consider holding onto long-term investments. If you are many years or decades away from retirement, you might consider staying the course. While it may seem counterintuitive to hold onto depreciating assets, the value of your investments could very likely recover once the economy improves. On the other hand, if you panic and sell off your investments as soon as their value dips, you’ll be cementing those losses rather than giving them a chance to regain their value. In other words, there will be no bouncing back from the loss.
• Don’t put all your eggs in one basket. Your retirement portfolio probably includes stocks and bonds. When some people hear the word “recession”, they immediately think of bonds as a safer investment vehicle than the stock market. And of course, there is some truth to that. Bonds do tend to be less volatile than stocks, and therefore can be seen as less risky. The general tradeoff is that bonds typically provide much lower returns than stocks. During an economic downturn, it’s not uncommon for bonds to become more “in-demand” for this very reason. A higher demand for bonds during a recession can drive up their value, while the value of stocks may start to decline. While moving most of your investments from stocks to bonds could be a secure move for someone very close to retirement, some financial experts warn that keeping too much money in bonds could be a bad idea if your retirement is far off, as it could prevent you from meeting your retirement goals. Generally, a better tactic is to properly diversify your retirement portfolio, keeping some funds in “higher risk” investments, and others in more secure investments.
• Don't make early withdrawals from your IRA, 401(k) or other retirement accounts out of panic. During an economic crisis, it could seem tempting to pull cash out of your retirement accounts so you don’t suffer portfolio losses. However, liquidating retirement funds now will impact your future income — potentially leaving you short on cash at a time when you need it the most. Withdrawing money from a retirement account early can also result in you having to pay penalty fees on top of income taxes.
3.) If nearing retirement age, consider the pros and cons of taking an early retirement or postponing it.
Many people who lose their jobs due to an economic downfall may contemplate whether it makes sense to retire earlier than they were originally planning. However, taking an early retirement could put you at a considerable disadvantage in terms of the funds you will receive from your retirement accounts or pension plans. You may receive less money per month than you would if you had waited until the regular retirement age.
On the flip side, some people who reach retirement age in the midst of an economic downturn may consider extending their work life, especially if they’ve already experienced significant losses in their retirement portfolio. If you can continue to work, you have a better chance of seeing your retirement savings bounce back several months (or even years) down the road. Of course, this option will be dependent on the type of work you do, your age, health and other factors.
An economic downturn and recession is understandably a stressful time for anyone with investments. Not knowing what will happen to your hard-earned savings is not what anyone wants to experience when they sign up for a retirement account. The biggest takeaway is not to act impulsively out of panic. Analyze the options for your unique financial situation and develop a plan. And remember that it’s always a good idea to seek professional advice. A financial planner or investment expert can help you rationally explore the options available to you, and can help walk you through the pros and cons associated with each choice.
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