The Coronavirus pandemic and subsequent shutdowns sent shockwaves through the economy. Whether or not they remained employed, many Americans needed to tap into their retirement savings to help make ends meet. If you found yourself in this position, it can be unclear how to rebuild your accounts and where to begin.
Following COVID-19 shakeups, we recommend following these tips from Nerd Wallet to help ensure your retirement savings stay on track:
Reassess your situation
During 2020 or 2021, you may have needed to take out a loan, withdraw from your 401(k), empty out an IRA, or dig into your Roth – this doesn’t mean that your retirement goals are forgone.
Before making a plan, get a clear picture of where your finances are at currently and where you need to be to reach your retirement goals. A financial advisor can help you review all your accounts to create a roadmap for the future.
Make a plan
To rebuild your retirement fund, make a monthly plan. A simple way to help replenish lost retirement savings is by adding a little extra each month to your monthly contribution, and every three months nudge the number a little bit higher, as your financing allows. Small incremental changes over time are much less straining than trying to pay up the gap all at once.
However, if you can replenish your losses, you should. If your finances were affected by the pandemic, you can tap into the Coronavirus Aid, Relief and Economic Security Act. This act waives the extra 10% tax penalty associated with early distributions of up to $100,000 in eligible retirement accounts during calendar year 2020. Withdrawn distributions will still owe taxes, but you can be credited back if you recontribute your distribution within three years. Make a plan to meet with a financial advisor and a tax advisor to take advantage of this distribution.
Set up your savings
One silver lining that many have found in the pandemic is less money spent on travel, dining out or gas. If you found yourself in that position during 2020, now is a great time to continue many of those habits moving forward. Saving money by cooking at home instead of going out to eat, for example, is money that can be re-invested toward your retirement fund.
If you’ve lost access to an employer 401(k), consider setting up a traditional, SEP or Roth IRA. You may also want to consider switching from a 401(k) to an IRA if the associated fees with an IRA are less and the benefits are similar. Speaking to a financial advisor will help you identify the right retirement account for your current needs.
Have a backup plan
Coronavirus setbacks have highlighted how important it is to have an emergency fund, so that when disaster strikes you need to pull less from your retirement accounts. Another recommendation from Nerd Wallet is considering a home equity line of credit:
“Borrowing from the equity in your home could be less harmful in the long term than borrowing from your 401(k) plan, for three main reasons,” says Paul Swanson, vice president intermediary distribution at CUNA Mutual Retirement Solutions in Madison, WI. “First, the interest you pay on a HELOC is tax-deductible, whereas it may not be deductible on a loan from your 401(k). Second, you aren’t taking retirement money out of the market and missing out on future returns. Last, with a home equity loan, you may be able to pay it back over a longer period, reducing your required monthly payments.”
Money saved from lower payments could be directed into your retirement account or used to build your emergency fund. Also, many home equity lines of credit don’t have penalties for prepayment, or paying the loan back early. However, there are some caveats to keep in mind: Your home is now backing your loan, your loan payments could increase if interest rates rise and, without discipline, you could overspend with access to a line of credit.
Meet with a financial advisor first to figure out if this option is viable for your situation.
Revisit your portfolio
With all the turmoil and shakeups in 2020, it’s more important than ever to revisit your portfolio. Even if you didn’t invest, it’s likely that your portfolio allocation shifted around during the market volatility.
Even if your retirement savings experienced setbacks as a result of Coronavirus, there’s plenty of time to right course and come up with a plan to strengthen your retirement account.
Our financial advisors at Greater Midwest Financial Group are committed to helping you balance your present and future finances so you can live comfortably and confidently well into the future.
Greater Midwest Financial Group is a financial advisor firm serving St. Paul, Minneapolis and the wider Twin Cities area. We specialize in wealth management, retirement planning, asset management and other personal finance needs.
