From furloughs to layoffs to pay cuts, our financial lives have become more uncertain than ever. The truth is that when getting through today is difficult, planning for tomorrow can feel impossible. Now, some employers are cutting company match on 401k plans and there is talk of possible impacts on future social security benefits.
Where does that leave all of us? The good news about our retirement savings is that, for many of us, time is on our side. With time, we will recover from this. Don’t let the uncertainty of today impact your long-term thinking. Let’s all take a deep breath and follow the steps below to update your retirement plan and take back control of your financial future.
Focus Less on the Headlines and More on What You Can Control
Major headlines across news organizations have managed to capture and increase our fears surrounding the pandemic. While fear can be a great motivator in the short term to keep us safe, it can also wreak havoc on our ability to make the best long-term decisions. From panic-selling stocks to impulse shopping, these decisions can leave us with dwindled savings and debt.
Instead, turn off your phone, shut your laptop and take a break from the news. Then, review and evaluate the financial choices you’ve made in the last several weeks. Are you overspending and building a balance on your credit cards? Are you checking your investment accounts too often? Be honest with yourself. Turn your focus towards building a plan that can guide your money decisions throughout this time. This can include creating a budget, putting credit cards away, and using only your debit card, revisiting your investment strategy once to make sure you’ve invested appropriately, and then commit to looking at your accounts less often.
You obviously can’t control everything that’s happening, but you can change your response. Making better choices today will mean you’re in a better position to recover financially once this crisis is behind us.
If Your Employer Match is Reduced, Reevaluate All Your Financial Goals
As businesses continue to struggle during this pandemic, some employers are having to rethink employee benefits, including the match on employee retirement contributions. The employer match can really boost your retirement savings and losing that option can feel like a big setback.
Firstly, you want to make sure that you understand all the details and don’t be afraid to ask questions. Then, take a big picture approach to evaluate your financial situation. Do you have high-interest debt? Do you have a cash cushion? As financial planners, we are always telling clients to contribute enough to their retirement accounts to get the full employer match because it is free money and can greatly increase your savings. If that option is suddenly taken away from you, then other goals may need to be prioritized. You should try not to stop contributions altogether, but you may want to cut back to use that extra cash in paying down high-interest debt and build a small cash cushion.
If you do decide to reduce retirement savings, make sure you use the extra cash wisely. Set up automatic payments to your credit card or automatic transfers to your savings account. Don’t think of it as extra money you can spend. Once you have tackled these goals, increase your retirement contributions with the goal of eventually saving 10 to 15% of your income.
Only Take an Early Withdrawal as a Last Resort
When the CARES Act was signed into law in March, it became easier to access retirement accounts early without incurring a penalty. The law states that “individuals affected by COVID-19 can withdraw up to $100,000 from employee-sponsored retirement accounts like 401(k)s and 403(b)s, as well as personal retirement accounts, such as traditional individual retirement accounts, or a combination of these. The 10% penalty will be waived for distributions made in 2020.”
If you’re facing a layoff or prolonged furlough, knowing that you have a safety net can be a big comfort. However, you should only access your retirement funds when you’ve exhausted all other options. Taking an early withdrawal can really hurt your future retirement goal for two major reasons.
One, you’ll be missing out on future growth in the account. For example, $10,000 today could be worth $76,122.55 in 30 years, assuming a 7% annual rate of return. Two, you could be selling when the market is down, which means you’ll lock in a loss and miss out on a future rebound.
As the health and economic impacts of this pandemic continue to unfold, there will be ups and downs. You’ll need to remind yourself to take a step back and revisit the financial plan you’ve put in place.
After all, the basics of creating a successful retirement strategy haven’t changed: avoid high-interest credit card debt, have (at least) a small cash cushion, avoid taking early withdrawals, create an investment strategy and stick with it, and most importantly, save as much as you can, even if it means starting small.