Retirement probably isn't top of mind if you've lost your job due to the pandemic, but there's no denying the present circumstances will affect your retirement plans. It might be stressful to think about, but anticipating how this might affect your future is an important part of getting yourself back on track.
Here are three questions you should ask yourself about your retirement savings if you've recently lost your job or you've been laid off or furloughed due to the pandemic.
1. What should I do with my retirement savings at my old job?
Those who have been laid off or furloughed probably don't have to do anything special with their savings, but if you've lost your job, you must decide whether to leave your retirement savings where it is or roll it over into an IRA.
Leaving it where it is seems more convenient, but it might not be your best option, particularly if your old retirement account charged high fees or limited you to investment options that didn't suit you. Rolling your money over into an IRA gives you greater freedom in how you invest your savings, and if you choose low-cost investments, like index funds, you might be able to lower your fees too.
Set up an IRA to house your funds if you don't already have one. Then, reach out to your old retirement plan administrator to learn how to transfer your savings to your IRA. There may be a one-time transfer fee for doing this. These funds will come out of your retirement account balance.
2. Do I need my retirement savings to live on right now?
Taking early withdrawals from your retirement account is not ideal, but it could be your best option right now if you're struggling to pay your bills. The government has waived the penalty on withdrawals under age 59 1/2, and it's giving you up to three years to pay taxes on COVID-19-related distributions. That could make it a superior way to get the money you need compared to taking on debt and potentially ruining your credit.
Explore all of your other options before you tap your retirement accounts, though. See if you qualify for unemployment benefits and exhaust your emergency fund if you have one. Consider a side hustle to bring in some extra cash and talk to your creditors about hardship assistance. Many companies have instituted special policies for those affected by COVID-19. Just make sure you understand the terms and when you must begin making payments again.
3. How much do I need to save per month going forward?
You must redo your retirement plan if you're unable to stick to your existing plan right now or you've had to take money out of your retirement account to cover your living expenses. It might not make sense to do this until you have a steady source of income again, but keep it in the back of your mind until then.
Unless you plan to work longer, the cost of your retirement will likely stay the same, but you'll have to save more per month going forward to make up for the months you aren't able to save or the money you withdrew from your account. Make note of your current retirement account balance and enter this, along with your estimated life expectancy and annual expenditures, into a retirement calculator. Use 5% or 6% for your estimated annual rate of return so your plans aren't derailed if your investments grow slowly.
The calculator should give you a rough estimate of how much you need and how much you must save each month to reach your goal. If that's not feasible, consider altering your retirement plan. Working a few extra months or years reduces the cost of your retirement while also giving you more time to save. You could also plan to cut your expenses in retirement, though this is a riskier strategy because you can't always be sure you'll be able to keep your spending low.
Retirement might be a long way off for you, but the decisions you're making right now still affect it. Thinking through the above questions carefully can help you stay on track for your goals or get back on track if you've fallen behind.