When experiencing a pay cut, what investments (401k, college savings) are best to reduce or stop until your financial situation improves? 

If you are dealing with a decrease in cash flow, it is important to prioritize where you are putting your resources. This may mean taking a break from saving and investing altogether, for a period of time. If you are able to maintain some of your contributions, think about prioritizing retirement funding over college savings. Parents often have a hard time putting themselves first, but the reality is that there are several ways to pay for college, but very few ways to fund retirement. One of the best gifts you can give your children is your own financial independence in your retirement years.

I’m still raising my children and now also taking care of my parents. How can I financially manage both?

Navigating your time as part of the “sandwich generation” is all about finding balance, which begins with setting goals. Having a robust understanding of your family budget and your parents’ financial circumstances is a great place to begin. Once you better understand what the financial demands being placed upon you truly are, you can start to set specific goals and assign them an order of priority. Make sure to give yourself a break, too. Every phase of life is its own season, and priorities will shift over time. It’s ok if you can’t “do it all,” all of the time! Your clear list of goals will help you refocus on things you’ve had to neglect when your budget allows.

With the reduction in penalties for withdrawing your 401(k) right now, should I do that to help during this crisis? I’m in my early 30s, my income is down dramatically, and retirement is not something I’m focused on right now.

An effective way to address the need for additional funds is to tap emergency funds for cash. This means to use funds from a savings or money market account. These accounts can be replenished after the COVID crisis is over. Another strategy is to do a deep dive on reducing expenses. Pay your mortgage or rent, but trim all discretionary expenses so that your income stretches farther. Your 401(k) is to use when you no longer earn a paycheck and need it to generate income for you in retirement.

I lost my job (or had my hours/pay cut) and know that fees to pull my 401(k) have been waived. Should I do this or keep my investments and let the market recover?

If you are out of work and facing a financial emergency because of coronavirus, it can be tempting to cash out of your 401(k), but we believe this should be a last resort.

There’s an opportunity cost to using your retirement savings, so you want to be sure that you’ve exhausted all other options. For some perspective: a $100,000 balance today could be worth $386,968 in 20 years, assuming a 7% annual rate of return.

Now is a good time to tighten your belt, see if you can cut your budget back to the essentials. Also, be sure to contact your utility and loan providers; many are willing to suspend your monthly payments to assist you during this difficult time.

If I have the cash flow to make investments now, where is the safest place to put my money?

If you are considering putting cash to work in an investment, several considerations help to shape the right choice for you. First, consider your goal(s) for the invested money. What do you want the money/investment to do for you? Second, consider by when you anticipate needing to withdraw the invested money—either a portion of it as income, or all of it. In other words, what is your investing timeframe? And third, evaluate the risk of various investments before choosing the options that may help you to achieve your goals, while assuming a comfortable amount of risk.

I was planning to retire soon but now I am unsure. Should I hold out and rebuild my 401(k)?

If your investment allocation is appropriate and you had enough money to retire prior to the market downturn, this bout of volatility should not upset your long-term planning. A good retirement plan includes the anticipation of market volatility and other potential bumps in the road.

One helpful strategy for retirees to consider is to keep a year’s worth of living expenses in cash. This extra cash can be used to generate income during severe market downturns rather than stressing an invested portfolio by taking income distributions during a recession.

Ideally, if you’re planning to retire in the next few years, you already have a good investment plan in place for those inevitable market fluctuations.  If you haven’t created a plan yet, now is a good time to work with a financial advisor to make sure that you are approaching retirement with confidence.

Entrust Financial LLC®
Wayne, PA | Phone: 610-687-3515 | Fax: 610-687-3595
Financial Advisors Serving in Pennsylvania: Montgomery, Chester, Philadelphia and Delaware Counties
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