How to save your 401(k) and IRA from a financial crisis
If you recently checked the balance of your retirement account and your immediate response was panic, you are not alone. To make matters worse, you are probably thinking of making the typical mistakes that most other people going through the same thing also do. Mistakes that which you will most likely regret in the long run.
In our latest webinar, Jon V (our co-founder and CEO) goes over the three basic steps to take to save your retirement account from a financial crisis.
You can check our video here.
Below are the three basic steps we recommend you make today.
1. Plan ahead
Make sure you have enough savings in the bank to get you through a rough patch. The critical question here of course is “how much is enough?”.
The standard advice, when the whole world is not in quarantine, is to have at least 6–12 months worth of your expenses in savings. For example, if your monthly expenses are $5k, that means that you would need to have $30-$60k in your savings account.
But what happens when there is a market crisis?
Statistically, it takes eight months to a year and a half for a diversified portfolio to recover from a market crash.
At least that’s what happened 63% of the time when we experienced a market crash in the past. A portfolio with exposure only to equities would have taken around 8 years to recover from the dot-com bubble in 2000 and 6 years to recover from the crash in 2008.
Long story short: in order to better through a market crash, it is prudent to have at least two years' worth of expenses in your savings account, while also reducing any non-essential spending.
2. Relax (don’t do it)
What you decide to do when a crisis hits is super critical for your retirement account. Instead of obsessing over your portfolio, try to meditate or start a new hobby. Watching the market go up and down and wondering whether you should liquidate or not is a recipe for a disaster.
Remember the market does not move linearly, it is volatile and unpredictable. If you don’t stick to your financial plan, there are high chances that you will miss on the market recovery — plus any possible dividends or tax-loss credits if you have a taxable account. Talk to your financial advisor and hang in there.
If you prefer to self-manage your portfolio, AgentRisk Lite is a product we built specifically for DIY investors. And as a way for us to help out during the COVID-19 crisis, we’re offering the premium plan for free!
3. Buy the dip
The all-time-classic mistake most investors make is re-adjusting their risk profile during a crisis. When the markets are doing great, everyone is aggressive. And when the markets are volatile, they want out.
Have you ever been to the grocery store while hungry? You usually end up buying a lot of unhealthy junk food which you would normally avoid, unless you stick to your regular grocery list.
A similar thing happens when you decide to change your financial plan during a crisis. You are not thinking clearly and you are not thinking long term. So what do you do? You panic-sell assets at a loss — not a good strategy for tax-sheltered accounts, such as your 401(k) or your IRA.
Market dips is the time when fortunes can be made. But it can also be the time when fortunes could be lost when you behave emotionally.
If you want to re-adjust your risk profile when the markets are down, my advice is to put down more money — provided you have enough cash reserves. If you meet the requirements, you can add $6,000 to your IRA accounts for the previous year and another $6,000 for the current year. Your future self will thank you. Of course, everyone’s situation is different, so please consult with your tax accountant first.
We’re here to help
Our commitment at AgentRisk is to help all investors make the best decisions when it comes to managing their hard-earned money. If managing your IRA account yourself is proving to be challenging, especially at times like these, you can always let us do it for you and get the white-glove service that all our customers enjoy. Or, if you want an in-depth review of your portfolio with one of our investment team, you can always schedule a one-on-one session. We’re currently heavily discounting the 1-time fee of our consultation sessions to help as many people as possible
At AgentRisk, we build investment products and tools for individuals as well as for financial advisors and wealth managers, leveraging state-of-the-art machine learning algorithms and time-tested investment theories.
