Markets are in turmoil. Investors are on the verge of panic. Fears about the coronavirus outbreak are running rampant, and no one's certain what might come next. With major stock market indexes having already fallen more than 10%, a lot of people are worried about whether their retirement savings has taken a permanent hit.
In response to the market's swoon, many investors are making dramatic changes to their 401(k) accounts, shifting their asset allocations and looking for ways to reduce the amount of risk they've taken on. But for most people, that's not the right kind of change to be looking at. In fact, if there's one good reason to check on your 401(k) right now, it's this: You should make sure that you're setting enough of your paycheck aside to reach your goals for a financially secure retirement.
What you need to check
The first thing to look at with your 401(k) account is how much of your paycheck you're having withheld to go toward retirement contributions each pay period. If you're like many workers, you might never have made a conscious decision about your 401(k) contributions. Employers have the right to set a default contribution rate, and if you don't affirmatively make a different decision, that's the amount that your employer will take out of your pay to go toward your retirement.
Automatic default 401(k) contributions are better than nothing. But they have some shortcomings:
- Many employers set an extremely low default rate, with 3% of pay not being uncommon. A 3% default rate contribution often won't even be enough to take full advantage of any matching contributions that your employer might make on your behalf.
- A few employers make increases to the initial default contribution rate after you've been working at your job for a certain period of time. However, that's still the exception rather than the norm, and so your 401(k) contributions might have gotten locked in at that low beginning rate throughout your career -- even as your pay grows and you're better able to set more aside to cover retirement needs.
So if you find out that you've been investing your 401(k) using default contributions, there's a simple thing you can do right now that takes advantage of low stock prices: make changes to boost the amount you set aside in your 401(k).
Why contributing more to your 401(k) makes sense
There are plenty of reasons why increasing your 401(k) contributions is a good move. First, if you want to accumulate enough of a nest egg for you to sustain your standard of living in retirement, then setting a goal of saving 10% or more of your salary is really just a good starting point. In that light, a 3% default contribution simply won't get you where you want to go.
In addition, when stock markets are going through corrections, every dollar you invest will purchase more shares of the mutual funds, exchange-traded funds, or individual stocks that your 401(k) lets you buy. Even if you can only increase your contributions temporarily, doing so now after markets have fallen will make your investment dollars stretch further.
Finally, it's good to get in the habit of regularly increasing the percentage of income you set aside for retirement. Some workers find it easiest to wait until they get a pay raise and then just set aside whatever extra money they receive in their 401(k)s. That way, they don't ever really miss the money they got -- the entire amount of their raise effectively goes toward securing their financial future.
If you're tempted to make wholesale changes to your 401(k) plan investments, now might not be the ideal time. But if you want to increase the amount of money you save in your 401(k) to take advantage of stocks on sale, there's never been a better time -- and the sooner you do it, the more you'll benefit.