Your retirement plans may have shifted in recent months as a result of the coronavirus, turbulence in the stock market, and a likely economic recession.
The pandemic has caused many people to make changes that could affect their future. Nearly 60% of Americans say the economic impact of the coronavirus pandemic has hurt their retirement savings, according to the results of a quarterly market perceptions survey conducted by Allianz Life. And almost half of the more than 1,000 respondents said they've either reduced the amount they're saving for retirement or stopped altogether.
Even if you didn't make a conscious decision to alter your retirement savings strategy, your financial situation and priorities could have shifted because of everything going on lately. "It's interesting because a lot of us don't realize this has changed about ourselves," says Dan Griffith, senior vice president and director of wealth strategy at Huntington Private Bank. "That's why it's important to go back to your retirement plan and run the numbers again."
Here's how to stay on track, given three possible scenarios.
If you're out of work or your income has been reduced, you may not have enough money to both cover your immediate expenses and continue to save for longer term goals like retirement. In that case, adjusting your savings strategy makes sense, given that you have more pressing concerns right now.
About 14% of Americans with retirement savings have taken money from retirement accounts as a source of immediate income during the pandemic, while another 13% of those with savings say they're planning to do so, according to a survey of more than 1,300 working or recently unemployed U.S. adults conducted by YouGov on behalf of Bankrate.
If possible, try to avoid dipping into your retirement accounts to fund immediate expenses and look to other sources first.
"If you're withdrawing money or cutting down on your contributions to your retirement account and investments simply because you have to buy food, that is the right thing to do," says Kelly LaVigne, vice president of consumer insights at Allianz Life. "But cutting down on these contributions just because you're scared is not the right thing to do."
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That said, if your retirement accounts are your only option, the $2 trillion stimulus package known as the CARES Act allows Americans to take a withdrawal of up to $100,000 from their retirement savings. That covers 401(k)s or individual retirement accounts, without the typical 10% early withdrawal penalty.
Be aware that there are some rules for coronavirus-related distributions. These withdrawals are available only in 2020 and only if your employer opts to allow them. In addition, the legislation gives Americans three years to either pay the income taxes due on the withdrawal or to pay back the money and not owe taxes on it.
That three-year time frame is very helpful, but you'll still need to be mindful of seizing on the opportunity to begin putting money back into your account, LaVigne says. And eventually, if possible, you should try to bump up your contributions even more to make up for this period of lost savings.
One silver lining of the coronavirus pandemic and related stay-at-home orders has been that Americans are socking away more money. The personal savings rate, or amount that people save as a percentage of their disposable income, surged to a high of 33% in April, according to figures from the U.S. Bureau of Economic Analysis. That's up from 12.7% in March, and nearly double the prior peak of 17.3% from 1975.
And some people already are seizing the opportunity to add more money to the market, according to the results of the aforementioned Allianz Life survey. In fact, 42% of respondents said now is a good time to invest, the highest level in a year, and 69% said they still feel optimistic that there's time to build wealth, even if the market continues to drop.
What's more, the survey results show that a majority of respondents want to have a better financial plan in place for the future and are looking at ways to better protect their portfolios, LaVigne says. That's a positive takeaway if people are figuring out how to make changes that will best prepare them for the future, he adds.
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If your expenses have gone down during the past few months, this might be a good time to review what you were spending money on previously, Griffith advises: "Your priorities may have shifted and you could realize you didn't need some of those luxuries anymore."
Seeing how little changes can add up can be a powerful motivator to save more money. Revisit your budget to see if you can increase the amount that you're contributing to your 401(k) or IRA and then tally up how those contributions will add up over time with Grow's retirement calculator.
Even if your income and the amount you're saving month-to-month has stayed relatively stable in recent months, it's still a good idea to check in to see if your goals or your tolerance for risk have changed.
"This is one of those experiences where people are looking around and saying, 'Oh, I need to think more carefully about diversification, fees, and debt,'" Griffith says. "I think it's also a good opportunity to think about what you could live on, what does work look like, and questions like that."
What's more, there may be opportunities to save for the future that you haven't previously considered, like funding a health savings account (HSA) or converting a traditional IRA to a Roth IRA, Griffith says.
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Finally, remember that whatever else has changed, the long-term prospects for the stock market have not. Historically, the U.S. stock market has delivered average annual returns of about 10%, and the market's swift recovery has been a good reminder to stay invested.
Let this period of turbulence prepare you for the future. "Don't panic and do something that you can't undo," LaVigne advises. "Selling just because it's a knee-jerk reaction that many investors have when things aren't going their way is possibly the worst thing they can do."
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