Why you should be adding money to your retirement account right now instead of panicking

Advertisement
Why you should be adding money to your retirement account right now instead of panicking
woman working

Thomas Barwick/Stone/Getty

Advertisement

As the novel coronavirus makes its way around the globe, leaving record-breaking economic fallout in its wake, it would be easy to become overwhelmed by dread. Maybe you've already caught yourself staring vacantly at your computer screen, mindlessly refreshing the window to try to catch your investments declining in real time.

But before you slip all the way into numbing paralysis or do something rash, let's return to the piece of advice that's been shared more than any other during the COVID-19 outbreak: Don't panic.

We'll leave the advice about your physical well-being to the healthcare professionals, of course, but when it comes to your financial well-being, there are some real, concrete, actionable things you can do that aren't just sitting around and feeling powerless.

At the top of that list? Contributing to your retirement account as planned.

Advertisement

Why keeping up with your retirement savings strategy is a good idea

When the market begins a slide like the one we're seeing now, it can be tempting to cut and run. But counterintuitively, there are some compelling arguments for using this time to get into the market rather than out of it, and they all come down to the simple strategy of dollar-cost averaging.

To explain, we spoke to Lynn Ballou, a Certified Financial Planner and partner with EP Wealth Advisors, who offered an apt comparison for our current financial situation.

"Over my career, I've noticed that it's very hard to get excited about buying investments when they fall in value so dramatically, even though we seem to have no qualms about going shopping for consumable goods when they are suddenly on sale," she said.

A precipitous drop in the value of a security is often referred to as a "falling knife" in the financial world, with investors sternly warned against trying to catch it. (An admonition to wait until the price of the stock "bottoms out" before considering an investment.) And while Ballou is hardly trying to undermine that advice, she does note that "not everything that's suddenly on sale has a potential sharp edge."

With Tax Day just a month away, now is actually a fairly optimal time to make your annual contribution to your retirement accounts, or even invest your bonus. Because prices are down, you'll get more shares for less capital, just like you'd be able to make more purchases with the same amount of money if you were shopping during a sale.

Advertisement

"It's time to evaluate what we'd like to own long term and look at the current pricing for those investments," Ballou explained. "If we liked them last month when they were 10% more expensive, why wouldn't we like them even more now?"

She emphasizes that now isn't the time to feverishly buy up investments any more than it's a time to divest yourself of them, and returns again and again to the theme of consistency.

If it looked good before, it should look good now. If you were planning on contributing to your retirement account before (and please do!), you should stick to that plan now. If you have an automatic monthly transfer set up from your main account into your retirement account, don't cancel it.

Even if it means gritting your teeth and not allowing yourself to look at your investments, try to stay strong, because it's in the moments when the market is suffering that dollar-cost averaging becomes the most logical approach.

Using dollar-cost averaging to your advantage while the market is falling

Dollar-cost averaging is an investment strategy in which you put a fixed amount of money into a given investment on a set schedule. (A prime example is that automatic monthly withdrawal that moves money from your main account to your retirement account.)

Advertisement

Ideally, this transfer is automatic, so it happens without you having to look or be influenced by the ups and the downs of the market. When steadily adhered to, dollar-cost averaging provides a consistency that cushions you during the most volatile of times. Read: right now.

Reassuringly, even as the Dow has dipped, Ballou hasn't seen her clients stopping or even curtailing their retirement contributions.

"Even though there are a lot of nervous investors out there, I think very few have stopped contributing to their retirement plans at work, meaning they are in fact dollar-cost averaging into these lower priced markets," she said.

In fact, she even advised that investors consider accelerating annual contributions for 2020, so long as "they are able to do so without bringing home too little income to pay the bills."

Those who haven't yet made 2019 contributions are perhaps the best positioned of all, as Ballou noted: "For those who haven't yet contributed to their IRAs for the prior tax year, you are looking at far better investment prices than even a few short weeks ago."

Advertisement

There are some circumstances where investing now wouldn't make sense

But while there are significant silver linings to be found in the current turmoil, it isn't all positive, and Ballou made sure to share some cautionary thoughts as well.

"There will be many hurt by the global economic freeze we are seeing, and soon," she explained. "Those whose livelihoods depend, for example, on the travel or hospitality business may suffer a substantial loss in take-home income."

She specifically urged that investors use this market slide to remind themselves of the importance of an emergency fund.

"Use this historic moment to create a plan to establish cash reserves and, if you need to use them, a future plan to rebuild and replenish those reserves," she said.

She also noted that if you're facing the possibility of income loss, now is probably not the best time to start investing - keeping your cash liquid means you'll be able to continue to pay bills and support your family.

Advertisement

As we brace for the full impact of the coronavirus, the air of uncertainty that's settled over the financial world can feel overwhelming. But as in other sectors, the advice of the hour is caution.

Now isn't the time to rashly buy or sell, or to suddenly prioritize short-term safety over long-term stability. It is the moment to take a calm, rational look at the assets in your portfolio to see what areas might benefit from some shoring up, and to make your retirement contributions while prices are low.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

NOW WATCH: 6 creative strategies to deal with student loan debt

{{}}