It's no secret that COVID-19 has been battering the U.S. economy since cases started spreading rapidly in March. Not only have millions of Americans lost their jobs, but the stock market has taken such a beating that it's driven retirement plan balances down.
The average 401(k) balance fell to $91,400 during the first quarter of 2020, according to a recent analysis by Fidelity. That represents a 19% drop from the final quarter of 2019. It also means the typical saver with a 401(k) lost $20,900 -- at least on paper or on screen.
IRA balances met a similar fate. The average IRA balance dropped $16,500 to $98,900 in the first quarter of 2020. That's a 14% decline.
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Clearly, drops as significant as these are disheartening. But they're also not a reason to panic. Here's why.
1. The stock market has a strong history of recovering from downturns
The recent crash is just one of many that have occurred during the stock market's history. But know this: The market has also managed to erase its declines from every correction or bear market it's experienced. And since we know exactly what caused the latest downturn, we may need to just sit tight and wait for things to normalize. That applies to life on a whole, but also, to retirement plan balances. But if history repeats itself, anyone who takes that approach is likely to recoup his or her recent losses and then some.
2. You only lock in losses when you sell off investmentsÂ
It actually takes an effort on your part to lose money in the stock market. If you unload investments when they're down, you lock in losses. Leave your portfolio alone, and you can ride out the storm.
Right now, there's generally no reason to touch your IRA or 401(k) unless you're already in retirement, or are taking an early withdrawal because you're truly desperate for money (normally that would result in a costly penalty, but thanks to the CARES Act, which is providing COVID-19 relief, you can now withdraw up to $100,000 from a retirement plan penalty-free if the need exists). Therefore, all you need to do is not mess with your investments or move all of your stocks into safer alternatives, and you won't risk locking in the losses you don't want.
3. You may have plenty of time to ride out this blip
If you're within a year or two of retirement, it's natural to be very nervous at a time like this. And you may, in fact, want to consider changing your plans and postponing that milestone, depending on how long the COVID-19 crisis plays out. But if you're several years away from retirement, or, better yet, several decades away, this recent downturn really shouldn't phase you, because you have plenty of time to ride it out and come out ahead.
Right now, things may look bleak in your IRA or 401(k). Therefore, do yourself a favor and don't check your account balance too often in the coming weeks. And also, keep funding that account if you're financially able to do so. It's never pleasant to see your balance decline, but if you recognize that the drop you're seeing is only temporary, you'll help yourself stay motivated to keep saving the way you should.
