money How to protect retirement savings as stocks plunge on coronavirus fears
Fears over how the coronavirus, the respiratory illness spreading worldwide, are walloping stocks in ways retirement savers haven’t seen in years.
COVID-19, short for coronavirus disease 2019, so far is responsible for nearly 84,000 cases and almost 3,000 deaths worldwide, with more than 50 countries including the U.S. reporting isolated cases. As a result, the Dow Jones Industrial Index (DJIA) and the Standard & Poor’s 500 (GSCP) has plunged.
The index closed 0.82% down from the day prior on Friday after losing almost 11.5% since Feb. 21.
“It’s moments like these that truly test the individual investor’s resolve,” said Amit Chopra, managing partner at Forefront Wealth Planning and Asset Management. “Fear is the largest driving factor behind investment mistakes.”
Here are some tips from experts for various kinds of regular investors thinking about their retirement accounts:
Young investors: ‘A good buying opportunity’
If you’re young and retirement is many decades ahead of you, increase your contributions to your IRA or 401(k) during this sell-off, experts recommend. You’re essentially buying stocks at a major discount following this week’s rout.
You can contribute up to $19,500 this year into a 401(k) retirement account. For Roth and traditional IRAs, the limit is $6,000.
“It’s safe to assume that if you have a 10 or more year time horizon, this is a good buying opportunity,” said Andy Panko, owner at Tenon Financial LLC. “[Stocks] may get cheaper now and you may lose out in the long term.”
Those near retirement: Get ‘conservative’
The strategy is different for those investors who are nearing retirement, Panko said. If anything, the recent market volatility could serve as a good, allocation lesson. If a near-retiree is overweight in stocks, then a stinging market loss may prompt them to finally rebalance their portfolio in a more conservative way.
“You should sell some of your stocks and put it into conservative Treasury bonds and cash, not just because of the coronavirus, but that’s where you should have been in the first place,” Panko said. “This is exactly why you shouldn’t have all eggs in one basket.”
This applies to many baby boomers nearing retirement. A recent Fidelity study showed that 37.6% hold too much of their 401(k) investments in stocks. Fidelity recommends that those close to retiring should have 53% of their investments in stocks and the remaining 47% in less risky assets.
Even if you’re older and behind on saving, prioritize rebalancing your portfolio before chipping in to buy more stocks on the cheap to catch up on contributions, experts say.
“I think you should never try to invest your way out of a hole or savings gap, because it will add unnecessary risk that could create further consequences,” said Jason Colin Patrick, principal of Fiduciary Advisors in Newport Beach, California. “Even if markets are up or down, you should make sure they align with your overall goals.”
Time to harvest tax losses
Market drops offer another opportunity for investors: tax-loss harvesting, which helps to lower your future tax liability on investment gains and income.
For instance, you can use up to $3,000 in losses to reduce your taxable income. That means a smaller tax bill next year, and any remaining losses can be pushed to use in later years.
“People with taxable accounts can harvest this loss and get up to a $3,000 deduction after a quick drop like this,” said Matt Hyland, founder at Hylland Capital management.
If you use robo-advisors, such as Betterment, which rebalances your portfolio automatically, then the tax-loss harvesting is already done for you, said Nick Holeman, financial planner at Betterment for Business.
“We try to turn as many features on by default for most people such as tax-loss harvesting,” Holeman said.
‘Be wary of predatory advisors’
If you’re seeking advice from an adviser, practice caution during a tumultuous market. Jittery investors worried about the steep drop in stocks could be more vulnerable to advisers who are looking out for their own commissions rather than their clients’ best financial interests, Chopra said.
“Be wary of predatory advisors trying to put you into some sort of product that has a fixed interest rate and ties your money up, such as a fixed annuity,” Chopra said. “Make sure you research an investment first as this scare may be here today and gone tomorrow.”
Whatever you do: Don’t panic
Whatever you do, all experts agree on one thing: Don’t panic.
“A 10% decline may seem scary, but it’s not abnormal for it to happen,” Hylland said. “Make little adjustments now instead of doing something drastic.”
Dhara is a writer for Yahoo Money and Cashay, a new personal finance website. She can be reached at dhara.singh@yahoofinance.com. Follow her on Twitter @dsinghx.
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