Getting your retirement savings back on track
During 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 the COVID years, 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.
Maintain your leaner budget while you catch up
With income restored, you might be tempted to splurge after making sacrifices for previous years. 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 has been a long road and you deserve a few indulgences.)
Focus first on restoring emergency savings
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.
Raise your 401(k) or 403(b) contribution percentage if you
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.
Speak with a financial professional about rebalancing your portfolio
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.
Lump sum amounts such as tax returns could be used to reduce existing debt
That is a smart idea, and something to consider if you get 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 2023, you’re allowed to contribute up to $22,500, or $30,000 if you’re 50 or older, to a 401(k), and the maximum amount allowed for an IRA is $6,500 or up to $7,500 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