The hits just keep coming. U.S. unemployment numbers are soaring and the stock market, after a good month in April, started May on a down note. All of this economic uncertainty is enough to worry even the hardiest retirement savers.
No matter how old you are or when you plan to retire, seeing your retirement savings stall out or lose value is stressful. Like it or not, the vast majority of savers need the upside of the stock market to build enough savings for a comfortable retirement. And if you want that upside, you have to accept the downside, too. You can, however, put up your defenses to protect your portfolio as much as possible through this crisis. Here are four fundamentals to remember.
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1. Don't sell in May
In April of every year, financial pundits bring up the concept of selling in May. "Sell in May and go away" is an investment adage based on the belief that stocks historically underperform between May and October. Buy into that theory and you would sell your stocks and stock-based funds in May, and hold the proceeds in cash until the end of October. You'd then reinvest to enjoy expected gains through April.
This year, as the pandemic economy lingers on, you might be especially tempted to follow the "sell in May" advice. The thing is, the stock market hasn't shown a seasonal summertime downturn since 2015 when the S&P 500 fell 0.3%. Summer returns for the index were positive between 2012 and 2014, too.
Even if the market did consistently underperform in the summer months, there's no way to know if that pattern will repeat itself in 2020. We are dealing with unprecedented economic circumstances, after all. There are factors that will be far more influential to market performance than seasonality, including the trajectory of COVID-19 infection rates as businesses reopen and the progress being made on a COVID-19 vaccine.
In this economy, it's impossible for an individual investor to accurately time market ups and downs. Try and you'll likely end up selling low and missing out on recovery gains. That's why the best course of action is to hold steady. Don't sell the investments in your retirement account. Let this cycle run its course. If the daily volatility stresses you out, set a limit on how often you can check your balance -- once every other week, for example.
2. Keep contributing
If your employment outlook is uncertain, it's natural to question your retirement contributions. You might feel more secure having that cash on hand rather than locking it away in your 401(k). But don't jump too quickly on that strategy. Look for ways to reduce your spending first. Try more efficient grocery shopping, adjusting your thermostat, and canceling entertainment subscriptions, for example, before dropping your retirement contributions.
Even lowering your contributions is preferable to eliminating them entirely. If you go that route, keep the excess funds in your emergency savings until you need them. If you get through this crisis without losing your job, plan on moving the money into a longer-term savings or brokerage account later this year.
3. Keep cash on hand
If your retirement account is the hero of your financial plan, the emergency fund is the all-important sidekick. When you have enough money in your emergency fund, you can manage through financial crises without incurring credit card debt or, worse, tapping into your retirement accounts.
Ideally, you should have an emergency fund balance that covers three to six months of living expenses. Of course, you can't exactly whip up a big cash balance overnight, especially in the midst of an economic crisis. If you qualified for the coronavirus stimulus check, that at least gives you a head start. You can also implement a spending freeze on everything that's not essential to free up some additional cash. Or, pick up a side job delivering groceries for Instacart or selling old clothes on Poshmark.
4. Don't borrow or withdraw
It's very difficult to regain lost ground when you withdraw funds from your retirement accounts. This is because those funds have many years to grow, and the earnings over time can far exceed the contributions you made out of pocket. A $20,000 401(k) balance, for example, grows to more than $80,000 if it stays invested for 20 years at a 7% return. In 40 years, it grows to $326,000. When you withdraw the $20,000 today, you're spending the $20,000, but you're also giving up all of that earnings potential.
Sit tight if you can
As long as your income remains intact, you can best protect your retirement savings by sticking to your plan. Keep your funds invested and continue on with your contributions. Find ways to add to your cash reserves and avoid loans and withdrawals from your retirement plan accounts unless you absolutely have no other choice.
