By Joshua Winterswyk, CFP®
The recent stock market decline has been the fastest in history, and Americans across the country are watching their retirement accounts drop in value. As of this writing, 3/30/2020, the market has declined 22.43% off its high.
During times like these, long-term investors have to seek out strategies to take advantage of down markets. On a recent podcast, Matt, Brent, and I discussed a few strategies. Due to the recent volatility in the stock market, a question I have been receiving a lot in the last few days is “Should I still contribute to my 401(k) or IRA?”
The answer, in most cases, is yes. I want to take the time in this article to elaborate on this strategy specifically. The recent market decline does decrease retirement account balances, but it also provides a discount for any new money being invested. The stock market is on sale, and everyone loves a sale!
I know it is hard to think about saving and contributing in such uncertain times. We don’t know what is to come in the short term, but that uncertainty doesn’t mean we can’t think about the future. The steps we take today will help build future wealth and a healthy retirement. I understand that not everyone can save or contribute at a time like this, but if you can, here are a few tips.
Employer-Sponsored Retirement Plans [E.g., 401(k), 457, and 403(b)]
Now is a great time to start that 401(k) if you haven’t already—especially if your company is matching your contributions (free money!). If you already have a 401(k) plan, consider increasing your contributions if you can afford to. Take advantage of the discount and invest in stocks. Each contribution is investing in the market at a cheaper value than it was back in January.
The 2020 limits for 401(k) contributions are $19,500, and if you are 50 or older, you can add $6,500 extra as a catch-up contribution.
Even a slight increase in your contribution percentage will help, and it will also save you some money in taxes. The contribution reduces your taxable income.
Individual Retirement Accounts (IRAs)
If you don’t have an employer-sponsored plan or you are eligible to contribute to an IRA, now is a great time to fund your existing IRA or start one. The same rule for employer plans applies here: The market has declined, allowing you to buy shares of stock at a discounted price.
For tax year 2019 or 2020, you can contribute $6,000 into an IRA, and if you are 50 or older, you are eligible to make an additional $1,000 in catch-up contributions.
The regular deadline to contribute to your IRA for the previous year is April 15, but due to the CARES Act that President Trump signed into law last week, you have until July 15 to complete your IRA contributions for 2019.
One Last Note: Emergency Funds
Before any investment action is taken, make sure your emergency savings are fully funded. Our fee-only financial advisory firm generally recommends having three to six months of living expenses saved before contributing more to retirement accounts. This way, you are prepared for any short-term changes or needs.
If your cash reserves are healthy, then now can be a perfect time to pump up the retirement savings and invest in stocks.