It would be wonderful if everyone could save 15% of their income for retirement their whole lives, every year like clockwork. Unfortunately, once you get such a savings plan going, life tends to interfere -- you get sick, lose your job, get a divorce, or experience some other crisis. In those circumstances, it's important to take steps to protect your retirement savings plan.
When a crisis happens
Nearly every life crisis has some kind of financial impact. Even positive events can have a negative effect on your bank balances. For example, having a baby is wonderful, but you can count on seeing your expenses skyrocket as a result. When expenses climb and income doesn't, you need to balance your budget by spending less or earning more. One of the most tempting expenses to cut in these circumstances is your savings plan.
The cost of cutting savings
The big problem with suspending your retirement savings plan is that it's very hard to get it going again and even harder to make up for the missed contributions. The whole point of putting in money as early as you can is to make the highest possible returns over time. Missing several months' worth of contributions will set you back by not only the amount you would have saved, but also the interest those investments would have been earning. And once you remove retirement savings from your budget, it will be very hard to squeeze them back in later on. For example, if your retirement plan calls for saving $400 per month and you get an average annual return of 7%, at the end of 30 years you'd have $485,131. The following table shows how missing a few contributions early on will impact your eventual savings.
|Number of Months You Don't Contribute||Total Amount of Missed Contributions||Amount Lost Over 30 Years (missed contributions + missed capital gains)|
As you can see, pressing pause on retirement saving may cost you far more than you might expect.
Better ways to cut expenses
Instead of slashing your retirement savings first, look for other ways to cut your monthly costs. First, go over your budget looking for any "fat" -- that is, goods and services you're not really using. That could mean a gym membership you aren't using, a subscription to a magazine you don't read, a wireless data plan you never max out, and so on.
If cutting the fat won't suffice, next look at expenses that you can get rid of for a few months without serious consequences. For example, you could suspend your cable subscription, commit to dining out no more than once a week, and put big vacation plans on hold until your finances are back under control.
Depending on the nature of the crisis, you may be able to find ways to increase the amount of money you have coming in. For example, if you're ill, then picking up a second job is out of the question, but you may be able to sell some stuff on eBay or ask a friend to hold a garage sale for you. eBay can be an especially good choice if you're selling items that you're an expert on. For example, if you decide to sell off your coin collection and you're an expert on currencies, you'll be able to post product descriptions full of technical info that will draw in fellow collectors. You can also use that knowledge to make some money off of simple arbitrage; an expert can tell when an item is underpriced, buy it, and then resell it at a higher value. Your expertise will be a constant advantage over buyers and sellers who lack your knowledge of the product and the market for it.
Another way to earn some side income is to monetize a hobby you're already doing. For example, if you spend a lot of time gardening, you may as well see whether you could make some cash off of your flowers and veggies at the local farmers market. You likely won't make a great deal of money from your hobby, but if you're already doing it for free, any money it brings in is a bonus. If you want to make serious cash, you'll need to expand your operation well beyond the hobby level and possibly invest in new equipment. For example, you may need to expand your garden plot to produce enough veggies to turn a profit, add some high-value crops like berries, or cultivate difficult-to-grow flowers such as orchids.
When that's not enough
In the worst-case scenario, you may have to go ahead and cut out your retirement contributions for a while. If that happens, it's important to sit down every month with your budget and check the figures to see if you can now restart your contributions. Getting back on track as soon as possible will minimize the damage to your retirement plan. And once your crisis is safely past and your contributions have resumed, you'll need to save extra to make up for the contributions you missed in order to stay on track for your savings goal. Don't feel like you need to put all those missed contributions in at once; it's usually much easier to spread them out over time. For example, if you missed $600 worth of contributions, adding an extra $50 or $100 each month will be much easier than trying to dump $600 into your retirement savings at one time. With patience and persistence, you'll have your retirement plan back on track no matter how dire the crisis.