Setbacks in pandemic savings? Here’s how to rebuild your retirement

1612519454_social.jpeg

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

The pandemic and the shutdown of COVID-19 changed our lives on multiple fronts. While enduring widespread unemployment and the economic recession, many Americans relied on their retirement accounts to help make ends meet. If you’ve experienced retirement savings setbacks, consider using these strategies to top up your retirement deposit in 2021 and beyond. Reassess Your Situation “If you were to take a 401 (k) loan or withdrawal, empty an IRA, or research your Roth, don’t worry, there are ways to get back on track without greatly affecting your retirement goals,” he says. Cameron Burskey, managing director of retirement security for Cornerstone Financial Services in Southfield, Michigan. “The first thing you need to do is see where you are today and where you need to be to achieve your goals,” says Burskey. He recommends consulting with a financial advisor or planner to conduct a retirement income analysis, as the results can guide you on the right track.Make a plan Create a monthly plan to rebuild your retirement fund, says Dan Hoffmann, managing director and financial advisor to Morgan Stanley in Chicago. “Add a little more each month on top of your normal contribution,” he says. “Set a reminder on your calendar every three months to increase your contribution a little. Big changes are difficult, but commit to making small incremental changes to get your plan back on track. “If you can, try to get back as soon as possible, advisers say. For those adversely affected by the pandemic, the Aid, Relief and Coronavirus Economic Security waived the additional 10% tax penalty associated with early distributions of up to $ 100,000 in eligible retirement accounts during calendar year 2020. You will still owe taxes on your income distribution when you retire, but you can get those taxes paid back if you repay distribution within three years. Lauren Anastasio, a certified financial planner at SoFi in San Francisco, suggests working with an accountant to make sure your taxes are filed correctly to take advantage of this tax break. Anastasio also encourages consumers to repay loans 401 (k) more aggressively. “Pay off that loan sooner, s Assuming you can do it comfortably, it will lower the cost of the loan and put your money back on the market by working for you sooner, a win-win situation, ”he says. Increase your savings For some people, the pandemic has provided an opportunity to save. Maybe you haven’t traveled as often or spent so much money on dining out. Or maybe you’ve saved gas by working from home. “This is a perfect opportunity to continue ‘spending less’ and start saving more in your 401 (k), 403 (b), Traditional or Roth IRA,” says Lisa Bamburg, co-owner of Insurance Advantage and LMA Financial Services at Jacksonville, Arkansas. “The opening of the United States does not mean that we have to return to bad spending habits.” For individuals age 50 and over, Recovery Contributions for Retirement Accounts in 2020 and 2021 provide the opportunity to invest an additional $ 6,500 above the $ 19,500 annual contribution limit for 401 (k) s and an additional $ 1,000 above of the $ 6,000 annual contribution limit for IRAs, which add an extra boost to retirement savings. “Consider contributing to a traditional IRA, SEP or Roth account if you have lost access to a traditional 401 (k) employer,” says Ian Doll, certified financial planner and wealth advisor at RMB Capital in Chicago. IRA accounts can be a good option for those who have “earned supplemental income through freelance or one-time jobs,” he says. Rolling over your 401 (k) plan to an IRA might be a good idea if the IRA you choose costs less and you want more investment options, advisers say. The fees associated with IRAs and 401 (k) accounts are an important consideration because the less you pay, the more you have left to invest. Have a backup plan. Counselors generally consider withdrawing from retirement accounts as a last resort. A lesson learned from the pandemic: A backup plan can combat the need to access funds for retirement during future financial crises. “Establishing an emergency fund is critical – most Americans cannot afford an unexpected expense of $ 1,000,” says Morgan Stanley’s Hoffmann. “Having savings reserved for emergencies means that you don’t need to use your retirement accounts looking for financial surprises. I recommend three to six months of living expenses. “Other advisers say you can start small, with the goal of increasing your emergency fund up to $ 500 and building it over time. Having a home equity line of credit can also help if you suddenly need cash. “Borrowing from your home equity could be less damaging in the long run than borrowing from your 401 (k) plan, for three main reasons,” says Paul Swanson, vice president of broker distribution at CUNA Mutual Retirement Solutions in Madison, WI. “First, the interest you pay on a HELOC is tax deductible, while it may not be deductible on a 401 (k) loan. Second, you are not taking the retirement money and losing future earnings. Lastly, with a home equity loan, you may be able to pay it back over a longer period, lowering your required monthly payments. ” See: Everything You Need to Know About a Home Equity Line of Credit Money saved with lower payments could go into your retirement account or used to build your emergency fund. Also, many home equity lines of credit do not have penalties for prepayment or for paying off the loan early. However, there are some caveats to keep in mind: Your home now supports your loan, your loan payments could go up if interest rates go up, and without discipline, you could overspend with access to a line of credit. Like home equity lines of credit, Roth IRAs can also provide access to cash, advisers say. Roth IRAs are funded by after-tax contributions and withdrawals are tax-free as long as the Roth IRA is held for more than five years and withdrawals are made after age 59½. This increased withdrawal flexibility can be an advantage if you need money unexpectedly. If the pandemic reduced your income and moved you to a lower tax bracket this year, it could be an opportune time to convert your traditional IRA to a Roth IRA. You’ll pay less tax to ensure retirement flexibility, which can benefit you later. Review your portfolio Now is a good time to take a good look at the asset allocation of your investment accounts, advisers say. The rapid market sell-off in March 2020 sparked record levels of trading with most investors trading stocks and fixed income investments, such as bonds or money market funds, according to Rob Austin, head of research at Alight Solutions. a 401 (k) records manager for large employers, in Charlotte, North Carolina. You may be interested: How to Invest in a Market Bubble Despite the market recovery, Austin said Alight has not seen the trend reverse or investors return to fixed income stocks, which means those investors they probably lost money because they didn’t see the market recover. The moral of the story? When investing for retirement, it makes sense to take a longer-term view and avoid knee-jerk reactions. Whether you’ve traded during this time or not, advisers say revisiting your portfolio is a smart move whenever there is significant market volatility because your portfolio allocation has likely changed. It’s important to make sure your asset allocation remains appropriate for your goals, risk tolerance and time horizon – or the time you have to invest before reaching retirement – and rebalance as necessary, advisers say. For those within five years of retirement, consider reducing investment risk, advisers say. That way, future unexpected volatility won’t ruin your plans, forcing you to readjust or compromise just as you prepare to retire. Also read: The biggest risks retirees face today The initial market slowdown wasn’t all bad news, however. Those that remained invested benefited from a sharp and rapid rally, says SoFi’s Anastasio. “Even if you stopped contributing to your plan, took a distribution or a loan, the good news is that the balance you invested is probably worth more today than it was a year ago,” he says. “So your money was still working for you, even if you feel like you have a little work to do.” More from NerdWallet Tiffany Lam-Balfour writes for NerdWallet. Email: tlambalfour@nerdwallet.com.