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Your Financial Life

How to Protect Your 401(k) During COVID-19

By Melissa Olson | Johnson Financial Group

5 minute read time

The COVID-19 pandemic has impacted financial markets globally, including 401(k) investments. Declining 401(k) balances are causing many people anxiety about their retirement goals and financial future. While you can’t control the markets, you can control how you react. Melissa Olson, Retirement Plan Services – Participant Education Specialist, explains how a long-term perspective can help you apply discipline during these uncertain times. These common questions and answers will provide you with guidance on staying the course and navigating your retirement goals.

What is the most important thing to keep in mind for those who have seen decreases in their 401(k) balances?

Remain invested. Although it may be tempting to react emotionally, it’s critical to maintain a long-term perspective and keep the big picture in mind. If it causes you fear and panic, avoid checking your portfolio every day. Market volatility is normal. Talking with a financial advisor can help you affirm your risk tolerance and ease your concerns by understanding the history of previous economic downturns and opportunities for growth amidst the disruption. The best performing days in the market are often found in close proximity to the worst days.

What are the dangers of taking a premature withdrawal from your 401(k) account?

Avoid taking a premature withdrawal from your 401(k) account unless absolutely necessary. Not only does an early withdrawal hurt your future retirement goals; you may also miss an opportunity to participate in a future rebound. Additionally, an early withdrawal may result in early withdrawal penalties and taxes from the IRS.

What might be considered a harmful reason for taking money out early?

A harmful reason for taking an early distribution would directly relate to needs versus wants. Avoid an early distribution for purchasing anything that is not a necessity. Revisit your household spending plan and tighten spending habits where necessary. Don’t get sidetracked by withdrawing funds for impulse purchases, such as vacations, a new car, or a new cell phone, but instead consider the long-term financial impact it could have on your retirement goals.

What should you do before taking an early 401(k) withdrawal?

Speak with a financial advisor before making the decision to withdraw retirement funds. He/she will help to assess your situation and help develop a solution to meet your financial needs during these uncertain times. If tapping into your 401(k) is the only option, your financial advisor will be able to help determine whether or not the early distribution qualifies for an exception to the 10% penalty rule. The best course of action is to have a conversation and talk through the financial impact of an early withdrawal prior to making the distribution request.

Besides your 401(k), what funding sources should you consider for emergency expenses?

Maintaining an emergency fund of at least three to six months of living expenses can provide a cushion for unforeseen circumstances, including unexpected home repairs, medical bills and income replacement if you lose your job.

Learn more about other savings tips. A savings or money market account may be a great place to start.

Is there anything you can do to dampen the effect of volatility?

Having an adequately diversified portfolio – exposure to equities and fixed income – can be an effective approach. It’s important to review and reassess the allocations within your retirement portfolio, especially during times of volatility. If you are already invested in a properly diversified, long-term strategy, stay the course and discuss your financial plan with an advisor.

How should your risk tolerance change as you approach retirement?

Your risk tolerance should change as you approach retirement. Generally speaking, a portfolio will likely look different for someone who is a few decades away from retirement versus someone who is just a few years away. Typically, portfolios should take on less risk as you approach retirement.

If you are in or near retirement, or if downturns cause you anxiety, you may need to re-evaluate your risk tolerance. Seek guidance from your financial advisor to help you determine the proper balance of stocks and bonds best suited to your comfort level in relation to risk and your personal circumstances.

Should you change your contribution levels?

A good rule of thumb is to look at your savings strategy during any life changing event, including the current pandemic. Are you in alignment with your retirement goals and does the current contribution rate meet your needs? If it makes sense, you can consider increasing your contribution rate to take advantage of the market turmoil. Remember that it is important to live today while saving for tomorrow.

Use our 401(k) Savings Calculator as an additional resource.

Although the entire world is facing the ramifications of an economic downturn, you can remain confident in your financial future. In the short term, set realistic expectations with the understanding that you may see lower returns. If you need help evaluating your current financial plan or determining your next steps, get in touch with your advisor or find one today.


Melissa Olson

Melissa Olson

Officer Wealth RPS Participant Education Specialist | Johnson Financial Group

As a Wealth RPS Education Specialist, Melissa serves as the education coordinator for Johnson Financial Group’s Retirement Planning Services (RPS) team.

This publication is for educational purposes only. It is not a recommendation to buy or sell any investment. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your own professional advisors with respect to your particular situation.

Johnson Financial Group is a privately-held financial services company and marketing name for its subsidiaries Johnson Bank, Johnson Wealth, and Johnson Insurance.