Due to the impact of COVID-19, unemployment has hit record highs. If you're one of the millions of Americans who no longer has a job, you may have a lot of questions about how best to handle your new financial circumstances.
One of the most important of these likely centers on whether you should keep saving for retirement. Putting away funds for your future is a vital financial goal, but is it one you should keep working toward when you no longer have a job?
How to decide whether to save for retirement when you're unemployed
There's only one question you need to answer when deciding whether to continue making retirement investments when you're out of a job: Can you afford to?
If you aren't able to pay your bills or cover the essentials, such as food, housing, utilities, insurance, home and car repairs, debt repayment, and transportation costs, you can't worry about saving for retirement. You need to use every penny to meet your basic needs.
Likewise, if you have no emergency fund, you can't afford to save for retirement until you do. Surprise expenses are an inevitability of life, and if you have no money to cover them, you need to save some. Otherwise, you could find yourself forced to borrow at a high interest rate, or to sell investments and make a withdrawal from your retirement account when something unexpected happens -- neither of which are good options.
When you're unemployed, your emergency fund should ideally be heftier than normal as you don't know how long it will take you to find a job, or if you'll be able to do so before unemployment benefits run out. So unless you have several months of essential living expenses saved up, focus on putting any extra money toward your emergency fund first and foremost.
But if you've got your needs met and have money for a rainy day, investing for retirement should be your very next priority above any type of non-essential spending. While it may not be fun to divert whatever is left of your entertainment, dining out, or travel budget to retirement savings, doing so is important. There are always free sources of entertainment available, but if you pause your retirement savings, you can't get back the time you lost. You'll not only miss out on putting away the money you should've been saving during the period you're out of work, but also on the compound interest you could've earned -- and that can add up to a really big number.
How to put away money for retirement without a job
If you were saving for retirement using your workplace 401(k), you'll need to find a different solution if you're now unemployed. Fortunately, you can still score tax breaks for retirement savings by investing in an IRA. In 2020 you can make deductible contributions of up to $6,000 in an IRA (or $7,000 if you're 50 or over and eligible for catch-up contributions). However, you have to have earned income from a job or self-employment of at least that amount in order to make those maximum contributions, unless you're married and your spouse has enough excess earned income to allow you to make spousal IRA contributions.
Your eligibility to make deductible IRA contributions is also subject to income limits if you or your spouse has a workplace retirement plan. Of course, if you're unemployed, you probably won't have a workplace plan, so you don't have to worry about this unless your spouse does and your household income is $196,000 or higher. As long as you're below that threshold, you can score a generous tax break that you don't want to pass up.
Don't sacrifice your retirement savings if you don't have to
If you've got funds available to cover your costs and some left over, continuing to make retirement account contributions while unemployed can ensure you stay on track. And by using an IRA, if you're eligible, you can save on your taxes this year while making contributions that ensure your period of unemployment won't affect your future as a retiree.