Reading the financial news during the current pandemic certainly makes things sound harrowing. When scanning the headlines, we see discussions of market volatility, shrinking 401Ks, and imminent layoffs. It may seem the only options are to hunker down and try to ride it out or head for the safety of cash. The reality is market downturns and recessions often create opportunities. Many people might be surprised to find out that 57% of Fortune 500 companies were started during a bear market or recession according to a study done just after the last recession in 2008. This is made even more surprising by the fact the US economy has been in a bear market or recession only 31% of the time since 1855.
It seems inevitable that some of us will experience being permanently laid off from the jobs we held going into the pandemic. For many people, the initial task at hand is finding new work. But for those of us that have worked for companies that offer a 401K, there is another key decision to make. What should you do with your 401K after leaving your previous employer?
Depending on your circumstances there are often several options: 1) Leave it with your old employer; 2) Roll it in to your new employer’s (if you have one) plan; 3) You can roll it into an IRA; 4) You can cash it out – but the tax implications would be severe. Your decision will be guided by where you are in relation to your anticipated retirement date and how much downside protection you need in your retirement plan. Those closest to retirement generally need to have a larger portion of their assets protected.
If you need to make decision about your 401k as you exit your company, this can actually create an opportunity to incorporate downside protection into your retirement plan. If you are close to retirement or maybe even considering early retirement as a result of losing your job, you also need to look at how you intend to take income when you do retire. There are several vehicles that can help accomplish both protecting what you have and receiving guaranteed income in retirement.
Ultimately, it will be your decision on how to address your 401K. It’s important to remember that there are several options and where you are in your career trajectory can open a window of opportunity to address issues you will face in retirement. While you can’t control many of the outside circumstances created by the pandemic, you should be aware of all of your options prior to taking action.
Whatever you do, make sure that you fully understand all of the rules about exiting your existing 401K. Particularly, be aware of any time constraints that your previous employer has for people who are no longer employed. If you don’t make a decision or take action in a timely fashion, your previous employer may make the decision for you and move your 401K into the vehicle of their choice.
To learn more about retirement strategies during these times, or if you have recently become unemployed and have questions around your retirement, book an appointment today!