Saving for retirement in a pandemic: What you need to know to successfully contribute to a 401k and IRA this year

The global pandemic thrust many retirement savers into precarious financial situations. Many had to make the tough choice to prioritize day-to-day expenses over saving for their futures and contributing to a 401k and IRA. The CARES Act relaxed rules around early withdrawal penalties, making it easier for investors to borrow against their future retirement. In a recent study by Fidelity, it was reported that more than 700,000 people took a distribution between April 1 and June 30, accounting for 3% of the company’s eligible 401k and 403b plan participants. And while many savers acted early on in the pandemic in order to stay afloat, the dust hasn’t settled yet. Retirement savers are still looking to balance their urgent financial needs with their future aspirations.

When addressing larger expenses in everyday life, many people often utilize “borrowing” techniques to help them achieve their financial dreams and goals. They apply for mortgages to buy a house, take on car loans to purchase a vehicle and take out school loans to pay for their education or their children’s education. Unfortunately, as important as retirement is, we can’t “borrow” to ensure our financial futures. The onset of COVID-19 and the widespread impact it’s had on every aspect of life has made the thought of future savings challenging. With so much financial uncertainty, it’s easy to think short-term. However, it’s more important than ever to keep retirement in mind and keep contributing to a 401k and IRA.

Steps for prioritizing your retirement

A great first step toward prioritizing retirement, regardless of the challenging environment, is to participate in a retirement plan that factors in your life goals and any potential challenges. Employer-sponsored retirement plans can be an ideal vehicle for saving for retirement and takes the burden off of the individual saver to figure out a strategy on their own. Here is a retirement checklist with a few tips on how to maximize the benefits of contributing to a 401k and IRA this year. 

1. Take advantage of “free” money. If your employer sponsors a retirement plan, why not take advantage of this offering? Many companies also offer to match a portion of what you contribute to a 401k or IRA, so it’s vital to make sure you’re contributing enough to qualify for that match.

2. Use the power of compound interest. Particularly during tough financial times, like those we are currently experiencing, savers may need to pare down what they can contribute to a 401k and IRA. Even if you’re only able to save a little bit right now, that small amount will go a long way in getting you toward your retirement goals. When it comes to saving for retirement, the most valuable tool you have on your side is time. Generally, the longer your money is invested, the more time it has to grow and the more prepared you will be when retirement arrives.

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3. Resist the urge to withdraw. When you borrow from your retirement plan, that money is no longer invested in your plan. That means that you will miss out on any potential account appreciation and the benefit of compounding returns.  Many savers are searching for solutions to get through these uncertain times. It’s important when choosing the right amount to contribute to a 401k and IRA to take into account your future goals while keeping in mind your current financial needs.

4. Adjust as your life changes. On the flip side, if you are lowering your deferral rate or the portion of your paycheck you contribute to a 401k or IRA during hard times, you should then increase that rate when times are good. It’s vital to check in and assess your financial circumstances from time to time to make sure the amount you're contributing makes sense.

5. Escalate contribution rates in line with annual salary adjustments. As you are assessing your financial picture over the course of your career and deciding how much to contribute to a 401k and IRA, make sure you pinpoint the times when it makes sense to bump up the contribution amount. For example, many people will get an annual salary increase. When you know your paycheck is going to be higher, don’t forget about your retirement! This is a great time to increase your deferral rate without seeing any changes to your paycheck.

Keys takeaways

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Thinking about what you want out of retirement may not be top of mind for many savers right now but it should always be a factor in your larger financial plan. Contributing to a 401k and IRA is a great way to save and accumulate wealth over time, even if you think the amount you are contributing is small.

The bottom line: keep contributing whatever you can. Pausing your contributions or even withdrawing from your retirement accounts could be detrimental to your future financial stability. If you must take a withdrawal, be sure to talk to a financial professional to ensure you’re being as strategic as possible, keeping tax considerations in mind and coming up with a plan to restore the savings you’ve withdrawn.

Take action today

Our team at Unified Trust is ready to help you achieve your retirement goals. We know your financial life might be causing you a great deal of stress, especially given the events of 2020, but we’re here to make sure you have a plan in place that makes you feel secure now and into the future.

For more information on how to get started contributing to a 401k and IRA, visit our Resource Center. We’ve also taken your concerns about the pandemic to heart, and have compiled some Investor Resources that will help you get through this challenging time. At Unified Trust, we strive to put our clients at ease by making sure they know they have the backing of a trusted partner, dedicated to helping them reach their full financial potential.

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