It is hard to find anyone who hasn’t been at least somehow impacted by the COVID-19 pandemic. Even if you were lucky enough to avoid the health crisis itself, your financial situation likely experienced some kind of change.
For retirement savers, the situation can look grim. According to Fidelity Investments, 165,000 people with 401(k) or 403(b) plans through the company took early hardship withdrawals in April alone. That’s more than twice the average number for that same time period.
But even those who were able to ride out the economic turmoil in the early days of COVID-19 without taking from their savings likely struggled, because they still saw stocks rapidly collapse. Even though markets have sharply rebounded since the early drop in March, many people panicked and switched to cash or bonds, leaving them unable to ride the rebound in stocks.
Bloomberg reported in mid-March 2020, right as COVID isolation was breaking out in the US, that investors had poured $137 billion into cash and cash equivalents as well as a record $14 billion into government bonds in the five days leading up to March 11. The market bottomed less than two weeks later. Meaning, those poor savers mentioned earlier only saw their stocks crash; they didn’t get to reap any of the benefits when they recovered in April and May.
So, that leaves many wondering: what do you do if your retirement savings lost value during COVID-19?
Fortunately, there are a few steps you can follow to get back on track.
5 Steps to Regain a Grip on Your Savings
1. Take Stock of Your Situation
Before you can move forward, you first must take stock of where you are. Age, level of savings, and retirement goals are all crucial in determining where you need to go next.
If you are in your 30s or 40s, you still have time. Even in the worst-case scenario that COVID-19 set your retirement back by a factor of years, your savings can still grow. Whatever your pre-COVID-19 savings plan was doesn’t necessarily need to change now.
Even if you are closer to retirement age and suffered a large setback, there still might be time. If you did switch from stocks to bonds or to cash, you might not have suffered as much. Most savers slowly switch over to less-risky assets the closer they get to retirement anyways.
Finally, you need to assess your current portfolio. If your plan was to put 60% in stocks and 40% in fixed income this year but find yourself with 100% bonds and cash, take note of this and adjust accordingly. You can’t meet your retirement goals if you don’t stick to your plans.
2. Continue Contributing the Maximum
Economic situations have definitely changed for millions of savers. Careers too have been altered and stalled. But if you can, there’s more reason than ever to continue contributing what you were or even more to your retirement savings.
According to NerdWallet, the stock market has returned about 10% on average every year for the last century. Even if returns fall to half that, and even if you only have 10 years left before you retire, your contributions will make a huge difference.
Just look at these two scenarios. If you only have $10,000 left in your savings, a 5% annual return will land you just $16,289 in ten-years’ time. But if you have $10,000 and contribute an extra $500 per month, you’ll end up with $93,785.
You might find this online calculator from Bankrate helpful to your own planning.
No matter if you are young or old, continuing to contribute will let you max out the benefits of compound interest.
3. Assess Your Risks and Goals
You should really do this every year anyways, even during years when markets haven’t been on a rollercoaster. But now as the dust settles slightly on the COVID panic, it is even more important to take a step back and figure out what level of risk you’re comfortable with. From there, you can set goals based on that assessment.
If you don’t take this time to assess just how much risk you are actually willing to take, it can be far too easy to give in and just hoard cash or not save at all. And in addition to risk assessment, a sober look at your goals will let you put your savings back on a path to reach them.
It’s a good time to consider the “100-minus-your-age” rule of thumb. A 30-year-old, for instance, would put 70% of his or her savings into equities. A 60-year-old would only put 40% of his or her savings into stocks.
By assessing your risk tolerance and goals, you can use this rule and adjust it to fit your own path to retirement.
4. Plan and Act
Whatever you decide is right for you, be sure to then act on it. Just coming up with a plan, whether it is for putting a specific amount of your savings into stocks or to start contributing a set amount each month, is a great step forward. But it means nothing until you actually start acting on it.
Set up automatic contributions if your plan allows it. Budget out and plan for your savings. Study your retirement plan’s specific asset options. Find what suits you best. But above all, get started.
If you suffered losses to your savings in 2020, it might seem difficult to start funding your retirement plan again. But it is the most important step you can take to get back on the right road.
5. Diversify and Follow Through
While assessing, saving, planning, and acting are all important steps highlighted by times of difficulty, COVID-19 also created opportunities for some people. Understanding how is a key way to ensuring you can benefit in the future.
For instance, both stocks and bonds fell when the market first began to panic and spiral, but then they both took off like nothing had happened at all.
As we now know, not all stocks and bonds acted in complete unison. The industry behind each stock mattered significantly. Technology companies like Amazon and Tesla have led the bounce higher. On the other hand, banks—which are now stuck with low interest rates—haven’t fared so well.
This gives us all a chance to look at ways we might want to diversify our portfolios. That includes alternatives outside of typical equity or bond mutual funds. If you have a self-directed retirement account (SDIRA), you might also want to look into other hedges and opportunities. Gold, for instance, recently set record highs. Despite trailing equity and bond markets for nearly a decade, gold savers look to come out of this period even better than before.
Finally, no matter what plans and additional assets you decide upon, you need to follow through. Stick with your plan and reallocate your portfolio annually. That is the only way to get back on track and reach for your retirement goals once again.
During the peak of the COVID-19 crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This made it easier and less painful for individuals affected by COVID-19 to use their retirement savings to ease the economic hardships of the pandemic. But with that there comes a cost.
As we continue to see spikes in early hardship withdrawals and 401(k) loans, savers are only adding to their retirement problems. Others who have kept their money where it was before the crisis have also seen their nest eggs ebb and flow this year.
But, at the end of the day, saving for retirement hasn’t fundamentally changed from before COVID-19 hit our accounts. These five steps remain your greatest weapons to get back on track and let your money get back to work for you.