Several years ago, the economic crisis and mortgage crisis caused many people to lose large percentages of their retirement and investment portfolios.
Losses of 40% or more were not uncommon. While this is devastating to those who are near retirement and is discouraging for everyone else, that doesn’t mean it all is lost.
In fact, if you are more than 5-10 years from retirement, it probably represented the best buying opportunity you will see in your lifetime. Market volatility and corrections will happen.
The best course of action is to stay the course and continuing to investing for your retirement.
Should I Withdraw the Money in My Retirement Accounts?
I received numerous questions from people asking if they should cash out their 401(k)s, IRAs, or other retirement plans.
In most cases, the answer is a resounding, NO!
By withdrawing your money from your retirement accounts now, all you will serve to do is lock in your losses and possibly subject yourself to taxes and early withdrawal penalties. For most people, the best course of action is to leave your money in your retirement accounts.
What You Should Do When Your 401(k) is Losing Money
Don’t panic. Panic is never a good thing. Panic causes people to make irrational and often detrimental decisions. Look at your situation and assess your options.
Look at your asset allocation. If your retirement holdings are properly allocated, you are in a good position to weather the storm. Generally, the closer you are to retirement, the more conservative you want to be with your investments. The further out you are, the more flexibility you have in regard to risk. You may find that you need to make a few adjustments after the dust settles, but maintaining a good allocation will make it easier to get your portfolio back on track.
Don’t withdraw your funds. Even though you may have lost money in your account, it’s better to leave your money in your 401(k) plan, otherwise you may face stiff early withdrawal penalties that will compound your current losses. Rebalancing your portfolio now and moving assets from equities into fixed return assets could be a case of selling low – which is the wrong thing to do.
Continue your contributing to your 401(k). If you are uncomfortable putting your money into the stock market right now, then consider making your contributions into a cash or money market fund if you have one available. You can also consider maintaining your contributions in their current funds. Remember, with dollar cost averaging you will buy more shares when prices are low which is a good thing when it comes time to sell. It’s true that the markets may continue to drop, but you never now when or how much. The more money you get in at lower prices, the more money you can potentially make when the markets increase.
You Should Leave Your Money in Your 401k Plan, IRAs, or Other Tax Deferred Investments
These are the reasons you should leave your money in your retirement accounts:
1. Avoid early withdrawal penalties and taxes. Early withdrawal penalties will eat your lunch. Before withdrawing your money from your 401k or your Roth IRA, you should keep in mind that you could pay early withdrawal penalties of 10% of your withdrawals and you may also be subject to taxes. Taxes and penalties could easily erase another 30% of your investment, on top of the 40% or so you have already lost.
2. Avoid locking in losses. At this point you haven’t actually lost any money – just the value of the shares. Selling your shares locks in the loss and turns a paper loss into a real loss.
3. Give yourself a chance to earn your money back. There is a good chance that the value of the shares in your retirement portfolio will increase in value, though it might take some time. Withdrawing your money removes any chances of recapturing the value of your investments.
4. Avoid handicapping your retirement. Withdrawing from your retirement accounts now means you will need to start saving for retirement again from scratch. Withdrawing your retirement savings, paying penalties and taxes, and locking in your losses will severely hamper your retirement plans.
What should you do with your retirement accounts?
At this point, the best thing you can do is stick to your retirement savings and investment plans. Continue contributing to your retirement accounts, make sure your asset allocation is set at your desired level, and don’t withdraw your retirement savings. The lower prices on the stock market means now may be a good time to invest and you may decide increasing your retirement account contributions is a good idea.
If the current markets make you nervous, consider investing in lower risk assets such as cash, money market accounts, bonds, and other low risk investments. This will keep your money in the tax deferred investment, prevent early withdrawal penalties and taxes, and give you the psychological advantage of not watching the value of your retirement accounts continually drop.
Investing Alternatives
If you’re 401(k) or IRA isn’t doing as hot as you would like, there are several other investments that you can make. You don’t have to rely on those accounts to help you achieve your retirement dreams.
You can make some simple investments in gold. You can buy gold bars, coins, or gold bonds. As you can probably guess, gold has held value better than the majority of other investment options. Investing in physical gold is one simple alternative to putting money in an IRA or 401(k). As long as you don’t mind having the physical gold in your home, then it’s a safe investment for your money.
Another option is to invest in peer-to-peer lending. As you can guess from the name, peer-to-peer lending is simply investing in other people. As long as people have needed money, there have been people that are willing to lend them money, for a modest interest rate of course. Using sites like Lending Club will let you few dozens and dozens of applicants that are looking for loans and you can decide which ones that you want to participate in.
Your retirement accounts are the most important parts of achieving your retirement goals. If you’re worried about how those accounts are performing, don’t panic. Everything should even out. Panicking is one of the worst things that you can do.
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fahersez says
In Malaysia, we contribute about 20% of our wages and salaries to the statutory retirement investment fund. This fuund called the Employee Provident Fund, invests the money and pays us a dividend yearly. (For 2008 it was 4.5%).
THere are restrictions to the withdrawal of the money until we reach retirment age of 55.
Still I think most of us appreciated the fact that we were protected from the tumbling markets effects on the EPF.