COVID-19 put massive financial strain on many Americans, nearly overnight. According to data from GOBankingRates, 45% of Americans have nothing saved and 69% have less than $1,000. This left many with very few accessible credit options, which resulted in quickly depleting retirement savings accounts.
COVID-19’s impact on retirement
The CARES Act provisions opened up the opportunity for retirement plan participants to withdraw from their accounts tax-free, as long as they repay the account in the designated time period. This provision closes on Dec. 31, 2020, but many plan sponsors and consultants have been counseling employees to utilize other financial resources rather than tap their retirement benefits. This can become a dangerous, and expensive, credit option because many will find it difficult to amass the required funds to put the savings back into their retirement plans.
COVID-19’s impact on financial health will be long-term, even as employees return to work. An April Betterment survey found that more than half of respondents believe they’ll need to tap into their long-term savings in a year or less (if they haven’t already) and 43% believe it will take six months or longer to recover financially from the financial impacts of the pandemic.
According to MetLife’s 18th Annual U.S. Employee Benefit Navigating Together: Trends Study 2020, 55% of employees expect to postpone their retirement due to their financial situation. Data from FinFit shows a 20% decrease in employees that were contributing to their 401(k) prior to COVID-19, as employees feel they need to redirect these funds to handle their financial situation.
Read: Good news: Suspended 401(k) matches are being restored
Preparing an effective saving strategy
During challenging times, it might seem difficult to develop or maintain a savings strategy — but taking the time to find the most effective solution allows for financial growth and future stability. The best recommendation I can give to employees before they change or stop their retirement contribution (or any savings contribution for that matter) is to talk to a financial counselor. Impartial, professional guidance can make a world of difference because it provides a new lens through which to view personal finances. Sometimes it’s difficult to assess your own finances objectively but speaking with a financial coach or adviser can help you develop a budget, organize existing finances, and find ways to save more. A few small adjustments can add up to a nice monthly sum, allowing you to maintain your contribution or even increase it.
The future of financial planning
An annual New Year’s Resolutions Study conducted by Allianz Life found that only 13% of respondents said they are including financial planning as a resolution for 2021, the lowest percentage since 2009. Why has future financial planning taken such a back seat? It could be in part to many employers suspending or reducing employer contributions this year (73%). However, the good news is that many employers are planning to reinstate employer contributions over the next 12 months. As an employee, talk to your employer about their plans for your retirement program before you make any decisions to eliminate your contributions. If an employer is offering a match, this is one of the easy ways you can maximize your retirement savings.
There are many ways to invest funds in your retirement account. If you take on more risk now, the rewards tend to be greater over time. However, the likelihood of losing money increases as well. It is important to gauge your risk tolerance. Ensure you understand the risk and are comfortable with the potential losses. The longer the timeline is between your current age and retirement age, you may opt for riskier investments in your portfolio since your investments will have time to withstand the volatility of the market. Tools like an online retirement calculator are great because they provide a quick snapshot of what your 401(k) will be worth based on your current level of investment. This is a good conversation starter with a financial counselor. It is also best to be honest and realistic with yourself about how much money you will need to fund the retirement life you desire. The worst thing you can do is underestimate the amount you’ll need to maintain your lifestyle. Once the income stops coming in, it will be too late to contribute to your retirement account.
Now is the time to save, take advantage of employer-sponsored programs and maximize tax-free savings contributions.
David Kilby is chief executive and president of FinFit, a financial wellness benefit platform.
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