It is not a secret that the stock market had a rough start to the year. Sometimes when we see our balances going down, we have a gut reaction that makes us feel like we need to do something. As someone who is familiar with the Raytheon Technologies (RTX) 401(k) plan as a previous employee and now advisor to prior colleagues, I have some general guidelines to consider. Please note that everyone’s situation is different and your time horizon, cash flow needs, and other factors should be considered in consultation with your financial advisor and/or CPA. Despite the ups and downs we’ve been living through, sometimes patience is the best option.
Current Situation #1:
You have some working years ahead of you, your emergency savings is fully funded, you have a plan in place and cash set aside for any upcoming large expenses, and you find yourself with more than enough cash.
Option: Consider maximizing.
If you are not currently maximizing 401(k) contributions, consider increasing to a point that does not put a strain on your cash flow. It is a good time to buy more stocks when prices have come down as a normal part of the market cycle, which better positions you for the eventual recovery.
Maximize 401(k) contributions by contributing up to $20,500 if you are under age 50 or up to $27,000 if you are 50 or older (2022 limits).
- Currently, RTX matches 60% of your contribution up to 6% of your salary (including bonuses unless you make a change to your contribution prior to bonus payout). Please note that Savings Plan contributions and company matching are going to be changing to an age-based approach effective January 1, 2023.
Consider excess 401(k) contributions and Roth Conversions on eligible balances: The Raytheon Technologies 401(k) allows after-tax contributions beyond the limits mentioned above. If you do not work at RTX, check with your employer if you have this option.
- This option allows you to contribute a total of $61,000 in 2022 by aggregating the employee contribution, employer match, and excess contributions. In this example, to fully maximize would look like the following considering a salary of $150,000:
- Savings Plan participants may convert some or all of their eligible balances to a Roth account within the Plan. Roth account withdrawals are tax-free and there are no required minimum distributions (RMDs) at age 72 such as those on pre-tax 401(k) contributions, which are fully taxable.
- Please note legislation may alter this option at some point in the future.
- You want to be mindful of not exceeding total allowable contributions or understanding if the benefits team will automatically stop contributions once the limit is reached.
Review your investment allocation: Ensure your mix is diversified and aligned with your long-term goals. Additionally, you have the option to take advantage of net unrealized appreciation (NUA), which is a tax savings strategy if you have RTX stock in your 401(k). Also be mindful of how much company stock you have, as you want to limit your exposure to any one company, especially the one at which you are employed.
Current Situation #2:
You are feeling the impact of higher inflation to your bottom line. Your emergency savings are funded but you may not have any surplus cash. You may have put a hold on any large upcoming expenses for now. The current market and economic conditions have been weighing on you.
Option: Stay the course.
Consider continuing the contribution to your 401(k) of at least up to 6% of your salary so the free money from the employer match is not left on the table. This guidance will need to be revisited with Savings Plan changes which are effective on January 2023.
If you already have a balanced allocation that is aligned with your long-term goals, continue to target this allocation. If not, consider reaching out and CCMI can assist with finding the right balance using the funds available in the plan.
Current Situation #3:
You are feeling very stressed out about the current market and economic conditions and may be losing sleep over it. You do not have emergency savings or it is running low. Other factors have come up that require more cash.
Option: Temporarily change.
If you have been contributing to your 401(k), you may need to temporarily reduce contributions to help see you through this period.
Avoid “going to cash.” Stocks do not fall to the ground, nor do they grow to the sky; this is all a normal part of the market cycle and it’s normal to feel uneasy. Now is the time to stay put unless you have an unusual situation that requires a change to your allocation.
If you are unable to stay the course and end up making a change to either your contribution or allocation, schedule reminders to reassess your situation. The turnarounds happen quickly and it would be unfortunate to miss out on any growth for too long. Think about the Global Financial Crisis of 2008, when there was a 57% decline from top to bottom; in hindsight, it would have been a good decision to stay invested as you would have missed out on the market appreciation since then had you “gone to cash.”
While this blog provides various options and general guidance, your 401(k) is a major piece to your financial puzzle and decisions around it should not be taken lightly. Certain issues we’ve seen include underfunding, overfunding, misalignment of the allocation with goals, improper levels of risk in both directions, and over concentration of company stock, to name a few. These issues, which can have an impact on important goals like your target retirement date, can be avoided with a disciplined approach and a plan in place. I’m happy to have a complimentary conversation to talk through your 401(k) options. Contact me anytime.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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