What does Election Day mean for my 401(k)?
Elections mean uncertainty, and we often see that play out in the market in the form of volatility — ups and downs that can wreak havoc on the market, your 401(k), and your nerves. When market volatility happens, what should you do, and not do?
Keep reading for:
- What Election Day could mean for your 401(k)
- Five big 401(k) mistakes people are likely to make during this election
- How to manage your election-related financial stress (and look out for your retirement)
2020: Retirement security is a bipartisan issue
The 401(k) in the national spotlight
Perhaps more than any other President in recent history, President Donald Trump mentions the 401(k) in public comments, including during a State of the Union address, a job report, a Presidential debate, not to mention on twitter:
While the 401(k) is a topic of national conversation, it’s been on the backdrop of significant events with financial implications.
Three worst days for the Dow
On the market side of things, in 2020, we’ve seen the Dow Jones days have the three worst point drops in U.S. history (March 9, 12, and 16).
Introducing: The CARES Act
In response to the pandemic, we’ve seen the passage of the CARES Act, including the creation of Coronavirus-Related Distributions (CRDs) that waive the 10% early withdrawal penalty up to $100,000 if you or a loved one have been diagnosed with COVID-19 or if you’ve experienced a significant blow resulting from COVID-19, such as being furloughed, laid-off, etc.
If you took a CRD, it may have been to alleviate the financial strain you’re facing today. But, draining retirement accounts means that this pandemic will transform our finances for decades.
The Election: What does Election Day mean for you and for your 401(k)?
- Expect some ups and downs: Whether you have a 401(k) with Human Interest or another provider, it’s likely that you’ll see ups and downs in the coming weeks, especially if the outcome of the election is uncertain for a number of days (or longer).
- Think about your long-term: Don’t let the post-election hubbub change your plans for your hard-earned retirement savings. Unless retirement is right around the corner for you, it’s likely to balance out over longer time horizons. (Note the recovery from other big market drops in the chart above, e.g. the Dot Com Bubble Burst at the start of the millennium and the Great Recession in 2008.)
- If Biden is elected: During the campaign, Biden has proposed to replace today’s tax deductions with a flat tax credit and to introduce an automatic 401(k). While there aren’t specifics around what that might look like, it could be more universal access to a powerful retirement savings tool.
- If Trump is re-elected: He’s mentioned ideas of tax cuts, especially for the middle class, to incentivize economic growth. The vision for these cuts isn’t clear but could encourage retirement savings. In addition, it’s likely that he’ll continue to use the 401(k) and market performance as an indicator of how he’s doing in the role of President.
- What if I don’t have a 401(k)? If you don’t have a 401(k) through your employer, you’re not alone. Millions of hardworking employees, especially those at small businesses, don’t have the opportunity to save for retirement at work — and they miss out on all the tax advantages that come with it. If your employer doesn’t offer one, here’s our Guide to Asking Your Manager or Boss for a 401(k).
Five big 401(k) mistakes that people are likely to make near the election
No matter where you fall on the political spectrum, you’ve worked hard to build up your retirement savings. Elections can get investors jittery, with the market (and your heart) jumping up and down. What should you do, and not do? Although we can’t predict the markets, we can learn from these 5 common mistakes.
1. Moving to cash or bonds — it means missing out on recovery
Analysis from Blackrock shows that people have tended to move their money to cash in election years. The returns that come with money market funds tend to be comparable to interest earned on CDs or savings accounts — and those rates are at lows right now. Moving money to bonds, too, can mean that you could miss out on growth when the stock market recovers.
Moving to cash can cost you big time: Let’s say you had $100,000 in the stock market in February 2020, before the market drop with the start of COVID-19.
- If you pulled it out in April, when the market dropped, you would have lost 15% — with a nest egg worth roughly $85,000 today.
- If you had kept that $100,000 in the market through today, you’d actually be up roughly 3% and have roughly $103,000 today.
Of course, we can’t predict the markets, but a long-term, disciplined strategy can help you weather the ups and downs without reacting emotionally to short term volatility.
2. Withdrawing money
Taking money out when the market is down not only puts a halt on your long-term financial strategy, but the results can lock in your losses. That means, your financial trajectory could be altered and affect you for years to come. You might hear about this when people are talking about “chasing performance” or trying to “time the market”. Based on historical data, you get better results when you just stay in, i.e., it’s about time in the market, not timing the market.
3. Stopping contributions
Waiting to see what happens may seem like a prudent decision, but it might not be best over the long-run. Continuing to make the same contributions during market down and upswings is a strategy called dollar-cost averaging, and it can actually help with long-term results because you are buying at a discount.
4. Getting caught up in the short-term
Short-term volatility has very little effect over the long term (revisit that DJIA chart above). Focus on the long-game, not performance chasing (time in the market vs. timing the market). Keep reading for more on how to handle emotions and seek peace of mind when it comes to your financial future. Since World War II, there have been 12 bear markets, each lasting an average of 14.5 months. In contrast, your 401(k) is for your retirement. A milestone that, for most people, is probably longer than a year or so in the future.
5. Doing something
It may sound odd but it’s actually better to do nothing. That doesn’t mean that doing nothing is easy. Especially if you check your account during a market event, and find that your balance has taken a hit. Here are some tips on how to handle the ride.
How to manage your election-related financial stress (and look out for your retirement)
It’s easy to say, “don’t panic,” but in reality that can be pretty hard. So far this year (thanks, 2020), you’ve had a lot of chances to practice building up your resilience in dealing with market ups and downs. Here are a few ideas for what you can do to reduce your election-related financial stress:
- Know you’re not alone. Money stress is the biggest kind of stress, with 73% of Americans saying it’s #1. Knowing that others are grappling with this can make it easier to bear.
- Set a calendar reminder. Rather than making a drastic move today, make a plan for reviewing your 401(k) (and other financials) later this year to get you ready for 2021. Setting it and forgetting it (for now) can help you avoid making costly mistakes that will shortchange your future.
- Turn to technology (no, we’re not talking social media). Read more about robo-advice and automating your investment strategy (see also Our investment philosophy).
- Write out a longer-term financial goal. Whether it’s saving for retirement, building an emergency fund, or just getting out of debt, focus on one goal and break it down into a plan outlining what you’ll do each month in 2021 to get there.
- Talk about it. Talking about our finances is something that few of us do. Whether you’re worried that you’ll do something taboo, feel uncomfortable, or be in uncharted territory, just talking with someone about our worries about money can help to relieve some of the anxiety.
When it comes to the 2020 election outcome and your 401(k), both will require the same skillset: Being patient as we wait for the result.
- What to Do When Your 401(k) Loses Value
- Donald Trump and Your 401(k): The Effect of the 2016 Presidential Election
Interested in getting a 401(k) for your company? Learn how to find the right 401(k) provider.
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.