I am a 28 year old single male with approximately $ 100,000 invested between my 401 (k) and Roth IRA. I’m following the news closely. I believe the stock market will collapse again between COVID, our political situation and climate change.
The amount I owe on my mortgage is also $ 100,000. I wonder if I should withdraw my investments now and use them to pay off my mortgage. The way I see it, the stock market is basically playing, but there is a guaranteed return if I can use it to pay off my house because I’ll be saving money on interest.
I have no debt other than my mortgage. Is that a good strategy?
-Preparing for a crash
The fact that you are a 28 year old homeowner with $ 100,000 retirement savings shows me that you made smart choices with your money. But even smart people occasionally have bad ideas. This is one of those times.
You are right that the stock market will crash again as crashes are perfectly normal. The stock market is corrected a little less than once every two years – which means it is falling 10% or more. A bear market, defined as a 20% decline, happens roughly every seven. Historically, the market has always recovered over time.
My advice to you would be much different if you were 58 or 68 years old. That doesn’t mean I would tell you to panic and sell all of your investments when you were older, but I want you to look carefully at how you are taking a lot of risk so you don’t need your money before this recovery occurs.
But you’re 28. You probably have three or four decades to go to retirement, which means your investments have plenty of time to recover from the inevitable dips and troughs.
Withdrawing your retirement money at 28 is like creating your own personal stock market crash, even if the stock market goes up. You pay a 10% early withdrawal penalty for money withdrawn from your 401 (k) plan, as well as any Roth IRA earnings that you touch. Add the tax bill and the blow to your wealth could be a lot harder than the temporary damage from a crash.
Because of the taxes and fines, it would take you well over $ 100,000 to pay off that $ 100,000 mortgage. You’d also weigh 10% off the average annual return on the stock market to save on debt that you could easily pay less than 3% for at current mortgage rates.
Yet I understand why you are tempted to do what you suggest. In unpredictable times, we all want security. If you are only focusing on the next few months or years, paying back your home seems like a solid bet given the peace of mind that you will not get a mortgage payment. In the meantime, the stock market is a gamble if you invest due to daily fluctuations. Any day, an investment in the S&P 500 index yields 53% of positive returns – which means it’s slightly better than a crapshoot.
In the long run, your chances of success are much higher. Over a 10 year period, you will get positive returns 94% of the time. And at no point in the history of the S&P 500 would you have lost money if you had kept the money invested for 20 years, even if you had invested at the height of the market and sold after a crash.
Let’s focus on what you can control during these crazy times, and the stock market isn’t one of them. What you can do is make the next crash as painless as possible for you. The best way to do this is to build an emergency fund that can cover your expenses for at least six months. That way, you don’t have to tap into your investments when you need cash right after you’ve fueled the market.
One thing to keep in mind is that the stock market only shows what investors are thinking and not the reality of what is happening. How many times have we seen the stock market rally this year when the world was on the verge of implosion?
COVID-19, American politics, and climate change are very real reasons for concern. But don’t assume that the people who talk about what this means for the stock market know more than you do.
If you really do lose money at night, be sure to read the Risk Tolerance Questionnaires you probably completed when you opened your 401 (k) and IRA. Your answers will be used to determine how aggressively your money will be invested. Make sure that the answers you choose accurately reflect how you view the possibility of short-term losses. Typically, you want to aggressively invest in your 20s and 30s. However, if the idea of a crash worries you very much, it may be worth sacrificing higher returns for your safety.
Robin Hartill is a certified financial planner and senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].