Leave volatility to the markets, not your decisions.
Cashing out retirement funds can haunt your future (and present).
Stick to your strategy (even if it means rebalancing).
The recent stock market madness has left many investors heading for the exits. But when it comes to your retirement savings: Back away from the door!
For most people, retirement is a long-term goal. While stocks (and bonds) tend to rise in the long run, volatility happens. And how you react to it (or don’t) matters. After a decade-long rise in stock prices, a market “correction” (a fall of more than 10% in value) was bound to occur. (As if that needed nudging, the global coronavirus outbreak — plus a regional oil price war — put an end to the aging bull.)
True, the size of the recent shock waves may have left you frazzled. And things could get worse before they get better.
But when it comes to investing for your future, letting emotions rule decisions can turn short-term jitters into long-term pain. After all, raiding your retirement fund to pay for, say, a home or college (or a boat) is risky enough. Doing so during a down market only makes a bad situation worse:
Selling Low “Locks in” Losses
When the value of your retirement account falls, you lose money — on paper. It may not be nice to look at, but unless you’ll need to start tapping your funds soon, you can simply look away. But when you sell fallen investments, your losses become real.
Uncle Sam Might Not Treat You Kindly
Cashing out retirement savings before their time can provide you with less cash than you think. With traditional 401(k)s, IRAs and similar accounts, you’ll owe income tax on your withdrawals. And in normal times, any retirement money you tap before age 59½ could trigger a 10% IRS penalty. (The recent Coronavirus Aid, Relief and Economic Security [CARES] Act waives the penalty on withdrawals up to $100,000 if you’ve been affected by the COVID-19 virus medically or financially.)
You’ll Miss Your Best Opportunities to Recover
Historically, the market’s best returns have come on only a relative handful of days — and that’s likely to hold for the future. If you’re out of the market on those best days, not only will you miss opportunities for easy wins, the losses will be even harder to make up over time.
(The same is true for the market’s worst returns. But if you think you can get around that by “timing” the market — pinpointing the highs and lows, then buying and selling accordingly — think again. If the recent volatility took the world’s top professional investors by surprise, how well do you really think you’ll do?)
What You Can Do Next
Take a deep breath, stick to your strategy, and stay diversified across different kinds of investments. Keep (or start) contributing regularly to your account. If volatility has knocked your asset allocation out of whack — maybe the portion of stocks in your account has fallen below your target — you can rebalance by selling some bond investments and buying some stocks while they’re (relatively) cheap. (A diversified Prudential Managed Account can do the legwork for you.) And if you need money for a shorter-term goal, consider alternatives.
Example: With interest rates super-low, borrowing may be a good option. Even a loan against a workplace retirement account — usually not the best move — beats cashing out. Bottom line: There may be sound reasons to tap your retirement savings well before you retire — but market volatility isn’t one of them.