The COVID-19 crisis has made a lot of people change their financial priorities. Some are boosting their emergency funds. Others are paying off high-interest debt. And 16% of Americans have made a similarly smart move at a time ridden with fear and doubt: They've increased their retirement plan contributions, according to a new TD Ameritrade survey. Not only that, but 31% of Americans are considering ramping up their IRA or 401(k) contributions due to the pandemic.
If you're out of work right now or have suffered a decline in income, then you may not be in a position to save for retirement at all, let alone increase your contribution rate. But if your income has held steady thus far during the pandemic, then it pays to ramp up on the long-term savings front.
Why now's a good time to save more for retirement
At a time when the stock market is subject to wild swings, you'd think more people would be itching to avoid it. But volatility also brings opportunities to load up on quality investments -- both in a retirement account as well as a traditional brokerage account. If you boost your retirement plan contributions now, you'll have a chance to buy investments when they're more affordable and grow a lot of wealth over time as a result.
Furthermore, we don't know how long COVID-19 will be with us. Right now, we're in the midst of a recession because of it, which means unemployment is at a high and countless workers are at risk of landing on the chopping block if things don't improve. It could easily be another year before a vaccine is made widely available, if not longer, and if a second wave of infections hits hard, it could hinder what hopes we have of a swift economic recovery. Therefore, if you boost your retirement plan contributions now, it may take some of the pressure off if your income takes a hit a few months down the line and you're forced to stop funding your IRA or 401(k) for a while.
Finally, if you save in a traditional IRA or 401(k), as opposed to a Roth, the more money you put in this year, the less tax you'll owe the IRS. And a lower tax burden could come in handy should you find yourself having a harder time financially at any point in the coming year.
It's natural to step back and hit pause on your retirement plan contributions at a time when the entire country is operating in crisis mode. And to be clear, if you're not set with emergency savings, those should take priority over your IRA or 401(k). Specifically, you should aim to have around six months' worth of living expenses in the bank in case your job does goes away in the course of the pandemic, because that way, there's a good chance you'll avoid unhealthy debt when your bills come due. But if you have a solid emergency fund and a steady paycheck, consider putting some extra money into your retirement plan. It's a move that could serve you very well for many years to come.