Tens of millions of Americans have lost their jobs since the COVID-19 pandemic began, and many who remain employed are struggling with income insecurity. Toss in the fact that the stock market crashed in a massive way back in March, and it would be natural to expect that a whole lot of people would be pulling back on their retirement plan contributions and hoarding their cash in the bank.
But actually, recent data from Fidelity reveals that savers are not halting their retirement plan contributions. In fact, 88% of its plan participants put money into their 401(k)s during 2020's second quarter, which represents a tiny decline from the 89% of savers who put money into a 401(k) a quarter prior. Not only that, but 9% of savers actually increased their retirement contribution rates during Q2.
If your income has taken a hit in the course of the pandemic, then you may have no choice but to cut back on saving for retirement. And if you're out of work completely, you may need every dollar you can get your hands on to pay the bills while you attempt to ride out the recession. But if you're still gainfully employed, then it pays to keep steadily funding your IRA, 401(k), or both. Here's why.
1. Time is your greatest tool for growing wealth
You might think that skipping a few months or a year of retirement plan contributions wouldn't be all that detrimental to your results over the long run. But actually, if you're decades away from retirement, pulling back on saving right now could have major consequences.
Imagine you normally put $300 a month into your IRA, only you don't do that for the remainder of 2020. In January, your retirement plan will have about $1,500 less sitting in it. But that's not all -- let's postulate that your IRA normally generates an average annual return on investment of 7% (which is a few percentage points below the stock market's average). Thanks to the magic of compound growth, that 7% can really add up. If you are in your late 20s or early 30s, and 35 years away from retirement, at the end of your career, you'll wind up with $16,000 less simply through skipping those few months of contributions. Rather than letting that happen, keep funding your long-term savings if you can.
2. There are tax savings to be reaped
The money you put into a Traditional IRA or 401(k) goes in pre-tax, which means you could substantially lower your near-term tax bills by contributing to these accounts. To put it another way, if you contribute $5,000 to your IRA this year, that's $5,000 of income the IRS can't tax you on come April 15. The result? You'll either get a larger tax refund when you file your return, or you'll owe the IRS less than you otherwise would. Either way, you stand to benefit.
3. You don't want to forego free money
If you have an IRA, you won't be getting employer matching dollars for your contributions to it, but if you have a 401(k), those company matches are still very much alive and well. Fidelity reports that 76% of workers saving through its plans received an employer contribution during 2020's second quarter, and that the average employer contribution amounted to $1,080. That's not a sum you should be quick to give up.
Many people aren't in a position to contribute to a retirement plan right now, but if you are, then it pays to keep at it. If you can power through the pandemic and maintain your savings rate -- or, better yet, increase it -- you'll be putting yourself in a better position to meet your long-term financial goals.