COVID-19 has completely disrupted the lives of the entire global population. All aspects of our daily routine have been altered. This includes such things as our working environment, socializing, shopping, entertainment, dining out, worshiping, education, etc. The list is endless. Even after the coronavirus has been eradicated, it could easily take several months for many of our daily activities to return to normal. In fact, a few pieces of our daily routine may never return to normal. Maybe that is a good thing. Maybe certain aspects of our lives will be much better in the aftermath of COVID-19. Of course, it’s much too early to know exactly how “America 2.0” will look 12 months in the future. One thing that we can all agree upon is the fact that it will be different.
Most likely, COVID-19 will alter the retirement savings strategies of many American workers. In fact, according to a recent study conducted by Mass Mutual, 55% of Americans are in the process of re-examining and re-thinking their long-term investment strategies. Based on the number of respondents who plan to make changes, 54% plan to contribute less to their 401(k) or IRA, while 26% have decided to increase their retirement contributions. What about you? Should you alter your long-term investment strategy? The answer is, “It depends on your particular situation.” Let’s examine the details.
We can all agree that funding and contributing to a retirement account is always a good idea. In fact, participating in a workplace retirement plan is one of the smartest investment decisions you will ever make. However, there are times when it makes sense to reduce or postpone the contributions to your 401(k), 403(b) or IRA. For example, maybe you’ve been laid off or furloughed and you need to pay for near-term expenses like food, medicine, housing, and clothing. In this particular scenario, it absolutely makes sense to temporarily reduce or suspend your regular IRA contribution. Of course, if you temporarily lost your job, workplace retirement plan contributions will automatically be eliminated.
Another reason to temporarily suspend retirement plan contributions is to establish an emergency fund (i.e. rainy day fund). All financial advisors will agree that creating an emergency fund is one of the single most important steps you can take to provide your family with financial security and peace of mind. You should make an effort to set aside a small percentage of your weekly (or monthly) paycheck until you have accumulated enough funds to cover six months of living expenses. If you don’t have an emergency fund, postpone your retirement plan contributions until you establish such a fund.
The COVID-19 crisis exemplifies how critically important it is to have an emergency fund.
Without question, the best part of an emergency fund is the fact that it provides peace of mind during these stressful times. It’s a nice feeling to know that you and your family are financially secure for the next six months.
According to the Mass Mutual survey, 26% of the respondents have decided to increase their retirement contributions in response to COVID-19. When exactly is a good time to increase your retirement plan contributions? Without question, the best time to expand your contributions is when the stock market has generated a substantial decline. Why? Because you receive more “bang for the buck” by purchasing more shares with the same dollar amount. However, you can receive an even greater benefit by increasing your contribution following a stock market sell-off. Please review the following example.
Jane contributes $500 to her IRA on a monthly basis. Each contribution is used to purchase ABC mutual fund. The current price is $25 per share which allows Jane to buy 20 shares. Two weeks later, the stock market suffers a nasty decline. Following the decline, ABC mutual fund is now selling for $20 per share. Jane’s $500 contribution will now allow her to purchase 25 shares. She can receive an even greater benefit by increasing her retirement plan contribution. For example, Jane adds $300 to her monthly contribution. Her monthly total is now $800. At $20 per share, Jane is now purchasing 40 shares of ABC mutual fund.
Jane’s example is a perfect illustration of why some investors actually welcome the stock market declines when they are saving for retirement. They are fully aware that purchasing additional shares “on the cheap” is the quickest way to grow a retirement nest egg.
In addition to benefitting from a decline in the stock market, another great reason to increase your retirement plan contributions is to take advantage of added tax savings. As you know, most retirement plan contributions are tax-deductible. In the case of 401(k) plans, contributing more money could mean capturing a larger employer match.
Do you have questions about changing your long-term investment strategy? If so, you might consider meeting with a licensed investment professional. Angelica Roxas has been a licensed investment professional for almost 20 years. She is a financial strategist specializing in helping clients develop specific investment plans in regard to asset allocation, retirement solutions, and tax strategies. In addition to being President of Strategic Asset Preservation Inc, Angelica is also the Founder and President of South Bay Tax Solutions. She is an expert on helping her clients understand complicated financial matters. More importantly, Angelica helped her clients successfully navigate the global financial crisis in 2008. Today, she is helping her clients stay the course and stick to their financial game plan as they weather the storm of the COVID-19 crisis.
If you would like to meet with Angelica at no cost or obligation, she will be happy to review your financial situation. Angelica’s phone number is (424) 247-1120 or email at firstname.lastname@example.org. Visit us at: www.strategicassetpreservation.com.