Answering your questions about market volatility and retirement accounts
If you have investments and you faithfully contribute to your 401(k), you know (and expect) the markets will go up and down over time. It’s the nature of the beast.
But when the markets have bigger swings, it can make you a little uneasy. We understand that. Money and emotions are closely tied. Plus, you may be worried about job stability and looking to your retirement accounts for emergency cash.
We know you have questions. And while each person’s situation can be a little different, we want to help by answering some of most common ones we’ve heard from you.
During volatile times, it can be tempting to change how you invest in hopes of a better return. In the long run, you’re generally better off staying the course rather than trying to jump out of, then back into, the market. Read this case study about staying invested during market volatility.
No one knows that. But in the last 150 years in the United States, we’ve been through wars, pandemics, and political changes. What happened with each downturn? The market met its floor and recovered. You never know what that floor will be until it’s turned around, but you can look back at trends. Read about how staying invested may help you in the long run.
Even the worst market declines have generally been followed by a significant recovery. Did you know that one year after the market dropped in 2008/2009, it rebounded by 53.5%?1 Read more about the importance of staying in the market.
It’s not likely, but as an investor, it’s always good to use times like this to revisit the types of investments you hold. Asset allocation (holding different asset classes that don’t typically move in tandem with one another) can help mitigate some of the risk of a falling market. Since we’ve been on an upward trend for more than 10 years, it’s likely your portfolio may need some reallocation. Read about some ways that may help you be prepared when markets are volatile.
Presidential election years often bring volatility because of the uncertainty. Stick with a well-diversified portfolio focused on your long-term goals rather than on the near-term “noise” of an election.
First, make sure your asset allocation continues to be in line with your long-term goal. Saving for retirement generally requires you to trade near-term gains for what may be long-term benefits. Having a goal and sticking with it may help you keep perspective during ups and downs.
If your asset allocation is still lined up with your goals and your time horizon is longer than five years, then you likely don’t need to make changes and can ride out the market volatility. If not, then realigning based on your goals, risk tolerance, and how long until you’ll need the money will help you achieve long-term success. Read more about asset allocation.
What’s best for you really depends on your goals, risk tolerance, and how long it will be before you need to withdraw the money. Read our case study that shows how putting money in a CD vs. staying in the market played out five years after the Great Recession of 2008.2
If you’re bailing out of your investments when the market is falling—financially, the worst time to sell—then you may want to limit your exposure to stocks. Sticking with a more conservative portfolio (fixed income/bonds) may earn you more in the long run than trying to time the market in an aggressive portfolio that’s mismatched to your risk tolerance.
It’s good to know you have the right investment mix based on your comfort with risk and how long you have until you need your assets. Take this short quiz (PDF) to see if the risk level of your investments fits your investing profile. When you know how much risk you’re willing to take, you’ll better understand how much reward you could expect. Read more about why investment risk matters.
401(k) and IRA withdrawals and loan questions
If you’re not permanently let go from your job, you may be eligible to take either a loan or another qualified plan withdrawal.* If you’ve lost your job, you may be eligible for withdrawals.* Each plan is different, so log in to your account to see what’s available. If you have issues, our Participant Contact Center can help.
Tip: Looking for some emergency cash to get you through this hard time? Read 6 better options for emergency cash than an early 401(k) withdrawal.
* If allowed by your plan.
Due to the CARES Act, you may be eligible for a penalty-free withdrawal from your retirement plan (if allowed in your plan) or individual retirement account (IRA) if you, your spouse, or a dependent is diagnosed with COVID-19 or you have experienced “adverse financial consequences” as a result of the pandemic.
Qualification has expanded and you can also qualify if you experience adverse financial consequences as a result of:
- having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19.
- your spouse or a member of your household being quarantined, being furloughed or laid off, having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19.
- closing or reducing hours of a business owned or operated by your spouse or a member of your household due to COVID-19.
The CARES Act waives the 10% early withdrawal penalty on retirement account distributions. This applies to IRAs, 401(k)s, and certain qualified retirement plans and annuities.
The maximum you can withdraw collectively from your accounts is $100,000 in 2020, depending on what the plan allows. The usual mandatory 20% withholding for qualified plan distributions does not apply, but the income from these distributions would be subject to taxes over three years or one year, depending on what you decide. These distributions can be rolled over to a qualified plan or IRA within three years from the distribution.
Tip: Need cash to help you get through a transition period after being affected by COVID-19? Read 4 options to consider if you need emergency cash.
It depends on your retirement plan. If loans are allowed and your employer has agreed to it, the loan cap increases to $100,000 or 100% of your vested account balance, whichever is less. This is for loans taken within 180 days after the CARES Act was passed (March 27, 2020 – Dec. 31, 2020). Log in to your account to see if your plan allows it and if you're eligible.
If you have an outstanding loan from your retirement plan with repayment due in 2020, the CARES Act allows you to delay your repayments for up to one year. Future payments will be adjusted to account for the delay.
The CARES Act waives 2020 RMDs which can potentially be important if financial markets are slow to recover from recent declines. When you take an RMD, it’s taxable, so holding off is a way you may be able to reduce your income for 2020.
If you took your 2020 RMD dating back to January 2020, individuals now have until August 31, 2020, to do a tax-free rollover of an RMD withdrawn from a defined contribution plan or IRA outside of the normal 60-day window.
For IRAs, this repayment will not count toward the one rollover per year rule (if repaid to the same IRA). Additionally, a non-spouse IRA beneficiary may do a tax-free rollover by repaying the RMD to the same IRA. The extension of the rollover deadline to August 31, 2020, may also apply to certain 2019 RMDs taken in 2020. Talk to a tax professional to find out what options you may have.
Annuity payments and withdrawal questions
Yes, you can stop those at any time and resume in the future if you would like. We just need five days advance notice to stop a premium payment from coming out of your bank account.
Our goal is that you experience no interruptions in your payments. We know how important these payments are to you. It’s possible that may change due to circumstances outside our control, so we’re recommending all our customers who receive payments via check transition to direct deposit to avoid delays.
Yes, typically you can, but it depends on the type of annuity you own. Most of our deferred annuities offer a free surrender amount each year if you’re still within the surrender-charge period. And some of our income annuities allow for a one-time withdrawal in addition to income payments. Keep in mind that withdrawals from your retirement account can impact future earnings and future retirement savings.
Variable annuities can be more complex. If you’re receiving guaranteed lifetime income payments, an extra withdrawal can change future payments. It’s best to call your financial professional or us to make sure you understand any impact before taking a withdrawal from a fixed or variable annuity.
Maybe, depending on the type of annuity you own. The CARES Act waives the 10% early withdrawal penalty on retirement account distributions for "qualified individuals". This applies to IRAs and certain qualified retirement plans, including some annuities. The maximum you can withdraw collectively from your accounts is $100,000 in 2020.
Typically, a fixed deferred or variable annuity funded with qualified money would be eligible. However, there may be impacts to future payments or surrender charges that will still apply. Income annuities may only allow withdrawals in certain circumstances. It’s best to call your financial professional or us to make sure you understand any contractual impact before taking a withdrawal.
If you’re experiencing hardship, contact us to discuss your options.
- Call us at 800-852-4450
- For annuity owners in New Jersey, additional payment flexibility options were issued by the Governor of New Jersey (Executive Order No 123). Full details are outlined in this notice (PDF).
1 Instances of high double-digit returns were achieved primarily during favorable market conditions and may not be sustainable over time. Past performance is not a guarantee of future results. Source: Wilshire Compass. Reflects S&P 500® Index returns. The S&P 500 is an unmanaged index and investors cannot invest directly in an index.
2 Example for illustrative purposes. Returns related to a 2% interest-bearing CD. Market returns based on S&P index returns as of December 31, 2008 through December 31, 2013. Past performance does not guarantee future results.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification do not ensure a profit or protect against a loss.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options.
Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC. Principal Life and Principal Securities are members of Principal Financial Group®, Des Moines, IA 50392.