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Should You Adjust Your Workplace Retirement Savings Strategy?

Sep 21, 2020 4 min read Zina Kumok

Key takeaways

  • In uncertain times, consider lowering your contribution rate.
  • As you get older, your portfolio should get more conservative.
  • Set up automatic contributions to make investing easier.

 

If you're like millions of Americans, your income may be severely affected by COVID-19. Or if it hasn't been, perhaps you think it will be in the future.

When times are tight, it's easy to cut back on entertainment and other discretionary expenses (especially when there's nothing to do). But what about workplace retirement plans like 401(k)s, 403(b)s and 457s? Here are some key considerations.

 

 

Should you lower your contribution rate?

Cutting retirement contributions isn't a decision to take lightly. Every dollar you invest can earn compound interest, and when you reduce investments, you lose out on potential future interest and earnings.

If COVID-19 has been more of an inconvenience than a threat to your financial well-being, you're best off staying your course. But if you or your spouse has lost a job or been furloughed, you might want to rethink how much you're saving for retirement right now.

For example, it's okay to halt or limit workplace plan contributions if you've tapped your emergency fund or don't have enough emergency savings. It's also better to stop investing temporarily than to rack up credit card debt or take out a loan.

 

Should you take money from your account?

It's never a great idea to pull funding from your future, but some situations—like economic uncertainty—may warrant it. Any money you withdraw could be subject to income tax, plus a 10% penalty if you're under age 59½.

Alternatively, you might want to borrow from your account if your plan allows it. You'll owe interest on your loan, but your payments will go back into your account. Still, this strategy comes with risks, especially if your job isn't secure: For one, you pay yourself back with after-tax dollars—which could be taxed again when you withdraw money in retirement. Worse, if you leave your employer before you repay the loan, you'll either have to pay the full balance or owe income tax on it (plus a 10% penalty if you're younger than 59½).

However, the March 2020 CARES Act included benefits for investors looking to tap their retirement accounts: Opens in new window You can withdraw up to $100,000 without penalty (you'll still owe income tax, but have up to three years to pay it). You can also borrow up to $100,000 and take up to six years to repay (with interest).

 

Should you consider a Roth?

If your employer offers it, you can choose between a traditional and Roth account. The difference is taxes: You fund a traditonal account with pretax dollars, then owe income tax on withdrawals (usually in retirement). With a Roth, you contribute after-tax dollars, but withdrawals are federal tax free as long as you meet certain criteria.

A financial professional can help you decide which is best for you. But in general, if you think your tax bracket will be lower when you withdraw than when you contribute, a traditional account makes more sense. If you think your bracket will be higher (and you want tax-free withdrawals in retirement), go with the Roth. If you're not sure, you can "hedge" your tax risk by investing in both.

 

How to adjust your investment strategy

When it comes to investing, you essentially have two decisions to make: 1) how to allocate, or divide, new contributions among different types of assets, like stocks and bonds; and 2) how to ensure the money already in your account matches your investment strategy.

  • When to change allocations

    Proper asset allocation depends on factors like your "time horizon" (how long until you'll need your money), risk tolerance and family situation. In general, a 25-year-old should have a different portfolio than a 45-year-old.

    If you invest in a diversified "target-date" fund—or through an automated service offered through your plan—most of that's taken care of for you. (You should still check your account regularly to make sure it matches your strategy.)

    But if you invest through mutual funds, ETFs or individual securities like stocks or bonds (if available in your plan), it's easy to neglect your allocations, particularly as you get older. While a 90/10 mix of stock funds to bond funds may be appropriate for a 23-year-old (who has time to make up potential losses while seeking higher long-term gains), it makes less sense for a 33-year-old—and almost none as retirement approaches.

    One rule of thumb is to subtract your age from 110; the remainder is the percentage of your portfolio to keep in stock investments. (This is a rudimentary figure and doesn't account for other aspects of your financial life, including retirement money you may have outside your workplace plan. So, consult a financial professional regarding your needs.)

    If your current allocations don't match your strategy, you may have to change where you direct money going into your account—and "rebalance" what's already there.

  • When to rebalance

    Just because you set your portfolio to have a mix of 80% stock funds and 20% bond funds doesn't mean it will stay that way.

    Let's say it's been a banner year for stocks, and you learn that your stock funds now comprise 90% of your portfolio, when they should only be 80%. You need to rebalance to get back to your 80/20 mix.

    In this case, you'd shed about 10% of your stock investments and use the proceeds to buy more bonds. (You could also stop contributing to stocks and allocate more new money to bonds, but it might take longer to get back in balance.)

    Even so, unless you haven't rebalanced in a while, don't necessarily do so solely because of the recession. However, if you plan to retire early or experience a significant change to your finances, it may be worth calling in a financial professional.

    Also, if you invest in a target-date fund or through an automated service, they'll do the rebalancing for you. But if you have retirement savings outside your workplace plan, talk to a pro to ensure all your money works together under a single strategy.

     

What you can do next

If you haven't revisited your workplace retirement account, now is the time. If your income has decreased, consider lowering your contribution rate until things return to normal—but think twice before you withdraw or borrow from your account. Once your financial situation improves, raise your contributions back to their original percentage (or more if you can afford it).

Also, evaluate your investments and decide if your strategy fits your current situation. You may have to sell some investments (and buy others) to put your portfolio back in balance, and make changes to how you allocate new contributions.

Footnotes

Zina Kumok is a freelance writer specializing in personal finance. She has written for the Associated Press, Indianapolis Monthly and more. She also writes a blog about how she paid off her student loans in three years.

 

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