We wanted to take this time to talk to you about your 401(k) and what we’re seeing during this historic time with the pandemic and COVID-19 virus. You may be asking yourself, “What am I going to do regarding my retirement and how will my 401(k) be impacted”? There’s a variety of ways that we can address the situation. It’s all based on when you’re looking to retire. If you’re a younger employee making contributions to your 401k in this downturn, things may be a very positive for you. Those people that are looking to retire, not knowing if you can retire when you had planned, that’s the beauty of having a Financial Blueprint®. We can do the analysis in relation to your retirement and your retirement goals to ease any anxiety you may have about your retirement date.The 401(k) is a long-term tool and is not meant for daily market timing. Individuals have access to their funds to adjust them as they please, but typically 401(k)s are best used to plan for the long-term and for your retirement. One of the best tools used withing a 401(k) is dollar cost averaging. Basically, you’re adding into the market with each pay period. If you’re contributing on a systematic basis you are buying regardless of what the market is doing and when the market is down, you get to buy more shares for your money which gives you a better long-term return.
Down the Road
You can make the choice on your own to move to from fund to fund or to go totally to cash in time like now but the dollar cost averaging process, especially for the younger investor, over time and long-term has done well. People think that long-term means only until they retire but these are funds are ones that you’re going to be spending throughout your retirement. It’s not just that retirement date that you must liquidate these funds, you will be spending these funds and using them for your retirement for 20-30 years after you retire. So, the money in there, even if you’re close to retirement, is still long-term money that you will be using many years down the road once this crisis has gone past us. It’s important to remember that your 401(k) is not a 1 to 2-year investment. This is money that you will be using for many, many decades to come. In our vlog today, we show a chart that goes through how the capital markets have rewarded long-term investors, historically. We have called it an emotional roller coaster of investing and another chart we show during the vlog shows the cycle of behavioral finance or what investors go through. In these downturns, especially if you’re a younger participant in a 401(k), this time in the market gives you a great buying opportunity to get some valuations of stocks and bonds in the mutual funds that you’re invested in. As it comes back up that also helps you in appreciation.
The saving process is also invaluable to you to build net worth. We talked about retirement, but it also helps you in terms of your balance sheet. Your 401(k) is also another great way to shelter an additional income from taxes because the dollars are taken out of your paycheck before you put it in the 401(k). If you have a Traditional 401(k) model instead of the ROTH 401(k) model, you’re putting those dollars in and reducing your taxable income at your marginal tax bracket, which depending on your personal plan and how things look down the road, will likely give you a tax benefit long-term. You’re not paying taxes on those gains while you earned them so, it’s a very beneficial part of the 401(k).
Historical Data Tells a Story
Trey & Greg go over a chart in this vlog that show the market’s response to a crisis based on an example portfolio with a combination of 60% stocks and 40% bonds. It shows a one-year, three-year, and five-year time frame of how the overall market responded. If you look at the chart remember there are no guarantees but what we have seen in the past is that history is one of our best guides for when you go through these kinds of downturns. People tend to want to try and pick the winners and losers when the markets are like they are. Looking at the charts in the vlog you can see that over time different parts of the market outperform others. It’s very hard, beforehand, to see what will outperform in the future. That’s why it’s typically important to try and stay diversified, to not panic, and to not to adjust based on the present. Keep looking at the long-term and how having an effective allocation that’s diversified makes you comfortable and will benefit you in the long run. Markets have historically rewarded the disciplined investor who looks beyond the concerns of today to the long-term growth potential of the markets. Again, if you watch the video you will see a graph that shows anytime we have had a downturn in a time that seemed like a major crisis, eventually just became a blip on chart as we’ve continued to see markets move up over time. When you spread out the timeline, short term instances no matter how severe, tend to be wiped out by the long-time value of money just by keeping that money invested.
A Solid Plan for Your Future
In our Your Financial House® process, we believe everyone should have a Financial Blueprint®. You’d never build a house without a blueprint and you’d never give your money to a builder who didn’t want to use a blueprint. We believe that to have Your Financial House® on a solid foundation, you need a blueprint to not only look at where you are today, but to establish goals and lay out your vision and dreams for down the road. By looking at the blueprint and putting all the data and information together, you can see if you’re still on track to reach those goals. Just because you have a 401(k) doesn’t mean that you’re on track to retire. It’s an incredible savings vehicle for you to put money aside for your retirement. If you really want to fine tune that then having a Financial Blueprint® will really help you understand how all of your assets, the contributions you’re making to your 401k, and the way you’re saving and spending your money play a key role as you move forward in life.
Greg Powell, CIMA®
President and CEO
Email Greg Powell here
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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