The financial crisis that has come with COVID-19 has taken a significant toll on the balances of 401(k)s across the country. The uncertainty of how much this pandemic is going to effect the economy in the future has many people asking what they should be doing with their 401(k) to mitigate further potential losses.  This applies to people who are still working and contributing to their plan as well as people who may have lost their job during this crisis.  Below you will find guidance that may help you make decisions concerning your 401(k) as this financial crisis persists.
 
Re-Evaluate Your Risk Tolerance-WITH A TWIST
Most people think risk tolerance is about how much money you are willing to lose, but I think it’s more than that.  Risk tolerance is more about how much time you have to make up the losses you have endured.  For example, losing 10% in a year requires an 11.2% return the next year to bring you back to where you were.  Sustaining a 30% loss requires a 42.9% return in the next year to get back to even.  Depending on the amount of loss sustained, it could take five or six years to get back to where you started.
 
Get professional management
The reason people benefit from professional management is because of their ability to mitigate risk during a crisis like this.  Professional managers use their knowledge and vast amount of resources  to adjust the holdings within the portfolio to better capitalize on the current economic cycle.
 
Roll into an IRA
This is a tax-free exchange and can provide a multitude of benefits such as more investment options, decreased fees, and the addition of professional management.  Let’s face it. Most of us are not qualified to manage our own assets during a bull market, let alone something as complex as the COVID-19 driven financial crisis.  
 
Consider an annuity
Annuities offer guarantees from stock market losses while still providing the ability to share in the upside of stock market gains.  There are many different types of annuities that are designed to meet certain goals such as guaranteed income, accumulation opportunities and safety.  Annuities are not as liquid as other investments, but often allow 10% of the asset to be withdrawn each year with no penalties to the policy owner.  It’s important to find a balance between the safety an annuity can offer and the liquidity offered by other investments.
 
Take Action
It can be really easy to simply close your eyes and hope this crisis will pass quickly, but the reality is that we won’t know the negative effects this crisis will have on corporate earnings and interest rates for a long time.  Be proactive and develop a plan that will better reflect your goals at this new stage of your life.
 
Schedule a virtual appointment with our office today to evaluate where you are at and help to plan for where you want to go.  The initial appointment will last about 45 minutes and is strictly used to gather all the facts.  Any recommended changes will be addressed in subsequent appointments.
 
Written by Marc Montini, IAR and Owner of Montini & Company Tax Advisory Group.

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