Starting a 401(k) in the middle of the coronavirus may seem counterintuitive or at least far down on the list of tasks to accomplish while you’re sheltering in place.
Thinking about retirement account funding is one of the smartest things a millennial or a member of Generation Z could do right now. Even if you are a latecomer to putting together a retirement fund, like Generation X members, it’s seldom too late.
There is one notable exception. If you think you’re going to lose your job because of the coronavirus' economic impact, or if you’re struggling to pay your rent and living paycheck to paycheck, you may want to hold off contributing to your retirement savings until your situation improves.
The smart play right now, if you feel like your earning power is on shaky ground, is to save your money and wait until times are a little more stable. A good rule of thumb is never to invest money that you may need in a few weeks.
Projections suggest that millions of jobs will be lost by the summertime, which means that a lot of people could be struggling to pay their bills due to lost wages. Additionally, the stock market has taken a recent hit, which means that 401(k)s have lost money as of late.
If you have a pretty good sense that your job will still be here once the coronavirus takes its leave, here are four compelling reasons to invest in a 401(k) right now.
Reason 1: This isn't the end of Wall Street
There is a good reason many people are concerned about their retirement accounts right now. It is sobering to see numbers in a retirement account with a negative mark in front of them, especially if you have accumulated some wealth over a lifetime of work. The more money you have, the more money you stand to lose.
As the threat of the pandemic eases, the economy will likely recover, and economists have predicted a faster recovery than the last recession. That’s because the economy going into the coronavirus crisis was more robust than it was going into the recession of 2008. During those days, the economy was weaker, with housing bubbles and subprime loans adding to the problem. Today, the economy is generally only sick because people are getting sick.
As Robert Gauvreau, a certified public accountant and founder of Gauvreau & Associates, points out, “Whenever there is a downturn in the economy, there presents a great opportunity for investment and to ride the economic wave back to the norm. In the history of the global stock markets, there has always been a recovery from a downturn.”
Chris Hughen agrees. He is an associate professor of finance at the University of Denver, Daniels College of Business.
He says, “After our last big bear market during the great recession, so many younger investors were highly risk-averse after they saw what happened to the stock market, which bottomed out back in March of 2009. People were so burned, and so many young investors didn’t invest, and they missed out on one of the greatest bull markets ever in the stock market.”
A bear market is bad, signalled by declining stock market values. A bull market is good (which is why people say they’re “bullish” on a stock), in that stock market values are going up.
Reason 2: There are deals to be found
While the current dip in the stock market may be worrisome for people who've been investing in their 401(k) for years, it could be an ideal time to start investing.
Don’t wait to invest until the stock market goes up again. Because the values of stocks are low right now, you’re going to be able to buy more stocks with the money you apply every month into your 401(k). If the stock market was near its all-time high, your money would not go as far, because the stocks would be valued higher, so you would be able to buy less.
Your money is going to go a lot further right now than it would if the market was high. While some people who invested when the stock market was high will be too stressed out to look at their 401(k) statements until the market improves, if you start when the market is low, you'll have an opportunity to watch your account balance go up.
In the long run, the stock market has always recovered if you have had time to wait.
Reason 3: Employer-matched money
Not all employers will match contributions, but if you do work for a company that offers matching contributions and you don’t invest in a 401(k), you’re missing out on getting free money from your employer. It’s important to save and invest. How you save and invest often isn’t as important as the fact that you’re doing it.
If you work for an employer who matches the funds you put into a 401(k), you're doubling what you can put away for retirement. You may be able to go over the annual 401(k) maximum contribution limits that the Internal Revenue Service has set up. The most you can contribute to your 401(k) in 2020 is $19,500 (or if you're 50 or older, $26,000). But, again, employer matches legally take you well over those limits.
A traditional IRA (where the tax benefits are upfront) or a Roth IRA (tax benefits come later) are also worth investing in now — because, again, they're connected to the stock market. However, your holdings may also include other investments like corporate bonds or money market funds. And if you're putting money into a 401(k) or an IRA or mutual funds right now, your retirement fund will be purchasing far more shares than it would if the market was up.
Reason 4: More time to research and sign up for a 401(k)
If you're working in the health care field or another sector deemed as "essential" during the coronavirus outbreak, it's understood that you're moving at breakneck speed and don't have time for a decent night's sleep, let alone pondering your retirement. But if you're social distancing, sheltering in place, quarantining or self-isolating, and if you've meant to start a retirement account, this is one of those tasks for which your future self will thank you.
If your employer has an online portal that has information on topics such as benefits and 401(k) contributions, start there. You should be able to find information on how to sign up for your 401(k). If you’re directed to your company’s human resource department, try to contact someone there. Even though your office may be closed, if employees from your company are working from home, you may be able to talk to your HR representative and find out how to get started with your retirement account.
If you're a job-secure freelancer, visit the websites of financial services companies such as Charles Schwab, TD Ameritrade, Fidelity Investments, Blooom and other companies handling personal retirement accounts to learn more about retirement accounts for self-employed workers. You should be able to set up a retirement account online, without having to meet in-person with a financial advisor.
Considerations for opening your 401(k)
Now that you’re ready to start up your 401(k), there are a few things to consider and know about before you do.
You may need to wait
If you haven't been on the job for a full year, you may have to wait until your first anniversary with the company to sign up. You may have to wait for your company's open enrollment period, which generally takes place for a month or two at the end of the year. However, the company you work for may allow you to open a 401(k) or change your contributions right now, depending on their policies. If you're self-employed, you can open your retirement account anytime.
There are fees involved
There are fees associated with all 401(k)s. It's still worth opening one, but you'll want to pay attention to these fees and make sure you understand how they are applied. They are usually fair and are used to administer your account, so fees aren't a bad thing in most cases.
Decide how much money you're comfortable investing
While some experts may say to aim to put 10% to 20% of your paycheck in your 401(k), most people don’t start out that high. You may want to aim for 5% or even less. If your employer will match your contributions, it's usually a good idea to save at least the minimum amount that they will match.
Start with an amount that’s manageable to you. You can always increase the amount after a few months once your budget adjusts to having that amount taken out of your paycheck before you ever see it.
Put your 401(k) on autopilot
Once you understand how 401(k)s work, starting yours should be straightforward. Designate the amount of money you want to put into it, and set it up so that it comes out of your paycheck (or bank account, if you’re self-employed), automatically.
Money should go into the account via automatic withdrawal so the money routinely goes into your retirement account without you having to think about it. Putting your 401(k) on autopilot and forgetting about it is very important, says Ryan Decker, an assistant professor of economics at North Central College in Naperville, Illinois.
“One should not attempt to time the market and instead commit to contributing a certain amount every month, or every week,” Decker says. “No one knows what’s going to happen today, or tomorrow, in the market, so why time it? Just continually invest. Time in the market is more important than timing the market.”
Take charge of your finances during a time of uncertainty
"The best time to invest for the long-term is yesterday," Decker says. Starting your 401(k), IRA or another retirement account as early as possible, even during these uncertain times, is a meaningful, concrete action you can do for yourself and your family.
If you have a secure job and available funds, planning and taking action for your retirement during the coronavirus can help give you a sense of control, continuity and hope for the future.
Geoff Williams has been a freelance journalist since the 1990s, mostly specializing in personal finance and small business issues. He writes for MoneyGeek and other publications.