COVID-19 Is Causing Steep Drops in Retirement Account Balances

• Author: Kelly Cooke
• Posted: 2024-08-05

Once people get past the direst coronavirus issues such as health concerns, unemployment, and for some, just plain making sure that they have food to put on the table for their families, many are taking a look at their retirement accounts. What they see can be alarming. These accounts are being largely impacted as a result of the coronavirus pandemic wreaking havoc on the United States economy. Fidelity Investments listed an average decrease of 19% in 401k balances from Q4 2019, and an average decrease of 14% in IRA balances.

This leaves many Americans worried about what is in store for their retirement savings. Many are considering whether they should take any type of action as they see these balances drop. Additionally, plummeting account balances are not the only factor accounting for losses to these accounts. Some companies, to cut costs due to being impacted by the coronavirus, have discontinued employer matching programs. Individuals experiencing financial difficulty have also had to cut back personal contributions.

Investment experts have provided the following general guidelines when it comes to your retirement savings during this pandemic. For information specific to your situation, please consult a professional financial advisor.
 

Don't Panic

It is stressful any time you are dealing with a large loss when looking at your finances. History has shown, however, that given time, the stock market will typically rebound after a volatile market. Retirement accounts are considered long-term investments, and while balances naturally fluctuate in these accounts over time, they typically will eventually end up with a profit. Those under age 55 and not planning to retire in the next decade have plenty of time for their plans to rebound. If you are approaching retirement age, speak with an investment professional to help make the smartest decision for these funds.
 

Don't Withdraw - Unless You Really Need To

Seeing balances fall during recessions, particularly one that came on so swiftly and is impacting so many, can cause people to panic or react by withdrawing all their funds. However, the smartest move is not to withdraw, unless you truly need to.

If you withdraw your funds now, you could face losing a lot of retirement dollars from compounding interest, one of the biggest benefits of a retirement account. Compounding interest is interest calculated on the principle of your investment, which would be the contributions made to your retirement account, along with all of the previously accumulated interest. Also, if not withdrawn for the correct reasons, you could face stiff tax penalties.

If you are experiencing financial difficulty due to the coronavirus and need to access your retirement funds, the Coronavirus Aid, Relief and Economic Security Act, commonly referred to as the CARES act, has put in place some special provisions for retirement accounts for 2020, discussed further in the next section.
 

CARES Act Provisions for Retirement Accounts

As this pandemic is causing an increasing number of businesses to close, and people have been laid off or lost their job, country leaders have recognized that many people need to access funds in their retirement account. As part of the CARES act, many of the barriers and penalties were removed to make this easier.

- The 10% early withdrawal penalty will not apply to coronavirus-related distributions, up to $100,000 per person, from retirement accounts and IRAs. Federal income tax withholding is not required on these distributions,
- Coronavirus-related withdrawals can be taken any time in 2020 and can be repaid for up to 3 years without incurring federal taxes. Click here to read more about the qualifications needed to be considered a corona-virus related withdrawal.
- Required minimum distributions are suspended for 2020.
- The $50,000 loan limit for qualified plans is increased to $100,000. Participants can also delay existing loan repayments for up to one year.

Please check with a retirement professional to get additional information for your specific situation.
 

Continue to Contribute

Even if your company has stopped matching, it is still beneficial to contribute to your account. As your contributions enter your account, you continue to earn compound interest on your account. Your account will continue to grow as the market recovers. You may even be able to contribute more now and purchase stocks while prices are down.

Many states are starting to open their economy on May 1st. Hopefully, as businesses begin to resume and the economy slowly gets back to normal, Americans will see their retirement accounts bounce back up as well. It is best to remain patient, both with daily life during this pandemic as well as with your retirement account balances.