Do Not Beg, Do Not Borrow, Do Not Steal: Stay Invested

My brother’s 401(k) has gone up so much that he quit his job and is officially retired.

My brother deserves to enjoy his golden years. He always spent less than he made. He contributed the maximum to his employer-sponsored retirement account for 37 years. And he never borrowed a dime, except to buy his house.

He did it the right way.

And it turns out my brother has company.

Despite the coronavirus pandemic, lockdowns and a brutal bear market in early 2020, Fidelity Investments reported that as of the end of the third quarter of 2020, there were 262,000 Fidelity 401(k) customers with more than $1 million in their accounts.

That’s a whopping 31% year-over-year increase in “401(k) millionaires.”

The value of the stocks and bonds in their 401(k) and other investment accounts surged in value.

Many white-collar workers (further advantaged by being able to work from home) capitalized on historically low interest rates to refinance their mortgages. And they’ve enjoyed soaring home prices, too.

Winner and Losers

In the last year, during the COVID-19 pandemic, most high-income earners have had it good.

That’s not true for most Americans. ’’Fidelity is the custodian of 19 million 401(k) accounts. So, we’re only talking about 13/100 of 1% that have managed to accumulate a million bucks.

So don’t feel bad if you aren’t a 401(k) millionaire. You’re not alone.

In fact, most Americans took money out of their 401(k) last year to make ends meet.

According to a fresh Kiplinger’s survey of still-working Americans between the ages of 40 and 71 who had at least $50,000 in their 401(k), a worrisome 31% withdrew money from it last year. Another 27% borrowed money from their 401(k).

That’s a total of 58% that raided their retirement funds to meet immediate needs.

We’re not talking small potatoes, either. More than 80% of those who plundered their 401(k) took more than $25,000, and about a third took out more than $75,000.

Congress made it less painful to take money out of your 401(k) last year by the emergency provisions of the CARES Act.

The Coronavirus Aid, Relief and Economic Security Act waived the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to January 2020. Withdrawals are still taxed, but that tax bill is spread over three years. Plus, the loan limit is increased from $50,000 to $100,000.

I get that these are crazy — even desperate — times. We all have to eat. We all have to make rent or pay the mortgage. And we all have to keep up with our bills.

But raiding your 401(k) should be an absolute last resort. Money you take out today is money you won’t have for your golden years.

Don’t Stop Investing

In fact, you should be adding to your 401(k), not spending it.

Over any 10-year period, the odds of a higher market are 94%. In other words, you have a 94% chance of making money over the next 10 years if you stay invested.

Remember the dot-com crash of 2000-01? Recall the 2008-09 Global Financial Crisis? Those were brutal, painful times for investors. But it paid off, in spades, to keep investing.

The easiest way is with exchange-traded funds such as the SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA), the SPDR S&P 500 ETF Trust (NYSE: SPY) or the Invesco QQQ Trust (Nasdaq: QQQ).

Americans are getting vaccinated, and the world will return to normal later this year.

And that positive dynamic should push the stock market even higher.

Best wishes,

Tony