During an economic crisis like the COVID-19 pandemic, many people had to put their retirement plans on hold, or even borrow from retirement accounts, in order to afford household bills.
If you were among those who had a financial setback during last year, your first order of business could be to regain your financial footing once you’ve resumed working or found an alternative source of income.
Not contributing to retirement savings now could mean losses in the years to come. The sooner you can refocus on your long-term goals, the better off you may be once your retirement comes around. The following strategies may help you get your retirement savings back on track:
With income restored, you might be tempted to splurge after making sacrifices for the last year. If possible, though, don’t fully revert to your old spending lifestyle right away. If you can keep spending less for a few months longer even as you earn more, it could help you recover. You may be able to pay off debt and replenish accounts that you might have depleted, all while regaining your financial confidence. (Of course, it’s OK to treat yourself a bit, too – it’s been a long road and you deserve a few indulgences.)
During the pandemic, 43% of consumers with emergency funds had to tap into it; and for those laid off or furloughed, the number rose to 64%, according to a survey by MagnifyMoney.1 Building (or rebuilding) your rainy day fund will help protect you for the next crisis or unexpected situation. The last thing you want is to be caught off guard financially should some other emergency occur. Experts generally recommend stockpiling enough cash to cover 3-6 months’ worth of expenses. This can seem overwhelming, but don’t let that deter you. Aim for that first $1,000, which can cover most out-of-the-blue expenses like a home or car repair or a medical bill, so you don’t have to resort to credit cards or loans. Then, keep funding your emergency account a little at a time. Setting up automatic transfers to pay yourself is an easy way to save consistently.
People who needed to bring home more cash, such as if a spouse or partner lost income, might have decided to reduce or stop their 401(k) or 403(b) contributions. Though this temporary boost of cash might have helped at the time, once you’ve regained your financial stability, consider going back to a higher contribution. In fact, if you can afford to, raise the percentage so you can catch up from the months in which you saved less.
It’s always a good idea to do a check-up on your portfolio to make sure that your asset allocation still fits your goals. Though the market bounced back, it was still a volatile year that could have caused shifts, and your financial professional may recommend moving some of your investments around or leaving it as is. Make an appointment to review where you're at, and where you're headed.
During the first round of stimulus, about 35% of people used some of that payment to tackle existing debt, according to an analysis by the Federal Reserve Bank of New York.2
That is a smart idea, and it’s something to consider if additional stimulus checks arrive, or if you end up getting a refund on your taxes. If you ran up any high-interest credit card balances during the pandemic, knock those down as much as possible since they can become a burden that won't go away with just minimum payments. Once you are debt free, if you have leftover cash from a windfall, consider making an extra contribution to your 401(k) or IRA. For 2021, you’re allowed to contribute up to $19,500, or $26,000 if you’re 50 or older to a 401(k) and the maximum amount allowed for an IRA is $6,000, or up to $7,000 if you're 50 or older.
Bumps in the road are inevitable during your working life. The key is to learn from the experience and put yourself in a better position for the next crisis. Though your immediate needs always have to come first, don't lose sight of the impact that today's decisions can have on your future. Work with a financial professional to help guide you on your road to recovery.
1 “43% of Consumers with Emergency Funds Tapped Those Savings Amid Pandemic,” MagnifyMoney™ written by Devon Delfino; December 2020
2 “How Have Households Used Their Stimulus Payments and How Would They Spend the Next?” Liberty Street Economics from Federal Reserve Bank of New York, by Olivier Armantier, Leo Goldman, Gizem Koşar, Jessica Lu, Rachel Pomerantz, and Wilbert van der Klaauw; October 2020