Unemployment can derail retirement savings. How to get back on track


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Stopping work, whether planned or unplanned, can have a major impact on your retirement savings.

As of September, there were still 2.7 million Americans unemployed for 27 weeks or more, according to the latest employment report from the United States Bureau of Labor Statistics.

The situation for those who have struggled to re-enter the workforce after a pandemic-related layoff is similar to that of women who have decided to take time off to raise children or care for other family members. the family, which also affects retirement savings.

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For example, if a 35-year-old woman who earns $ 50,000 a year took a year off work – and saved for retirement – she would end up with about $ 733,125 at age 67, according to a Fidelity survey that assume she saved 9% of her paycheck with a 3% match with the employer and an actual rate of return of 4.5%.

A person in the same situation who didn’t take a sabbatical would end up at age 67 with $ 839,594 in retirement savings, according to the study. That’s over $ 100,000 of a difference from a savings break of just one year, an amount that increases if you earn or save more in a year.

“That doesn’t mean that taking a break from work and not participating in a corporate pension plan is the end of the world,” said Rob Greenman, certified financial planner and chief growth officer and partner at Vista Capital Partners at Portland. , Oregon. “It just means that some work needs to be done to develop a thoughtful plan on the due diligence required to get back on the horse.”

How to catch up

If you need to make up for lost time in retirement, one of the first things you need to do is get back to work as soon as you can, said Nadine Burns, CFP, President and CEO of A New Path Financial in Ann Arbor. , Michigan.

Then start saving as much as you can again, to make up for lost time or to replenish your retirement accounts if you need to make a withdrawal due to Covid. Try to put more than you normally would in an employer sponsored 401 (k) plan, such as contributing 15% of your income instead of 10%.

The maximum that a person can contribute to a 401 (k) plan is $ 19,500 for the 2021 tax year. Workers over 50 can set aside a total of $ 26,000 in their 401 (k) ( k) in 2021, unchanged from 2020.

You can also consider an individual retirement account to save more, such as a Roth IRA, according to Burns. Many Americans are eligible for Roth IRAs – for the 2021 tax year, single filers must have a modified adjusted income of less than $ 140,000 per year and married income jointly filing must be $ 208,000 or less for open and contribute to the account.

Eligible individuals can contribute $ 6,000 per year if they are under the age of 50.

Seniors can also benefit from catch-up contributions, in particular if they have decided to resume a professional activity. For 2021, you can save an additional $ 1,000 on top of the usual Roth IRA limits if you are over 50. This means you can save $ 7,000 per year.

Timing matters too

The age at which you have an employment gap is also important, according to Geoffrey Sanzenbacher, associate professor of economics practice at Boston College and a member of the Center for Retirement Research.

According to data from the Center for Retirement Research, older workers who were laid off during this recession are more likely to retire earlier than trying to re-enter the workforce. This means they can retire on less than they planned and can qualify for Social Security sooner than expected, reducing the amount they can receive for the rest of their lives.

“Every year you claim earlier than you would have, earnings are 8% lower forever,” said Sanzenbacher. This means that if you are planning to retire early, you should check to see if you have saved enough not to join Social Security so that you do not further reduce your income.

On the other hand, younger workers who have saved very little – or who haven’t started saving for retirement at all – can be significantly slowed down by downtime. It can mean lower income for the rest of your career and miss out on years of compound interest that would help you build a long-term nest egg.

“It’s important that if you have a time when you’re not saving, there are times when you catch up later in life,” Sanzenbacher said.

People who have a job interruption in the middle of their career will still lose some of their retirement savings, but will be somewhat protected by the money they have already contributed, which will continue to accumulate in the market .

Ask for help

Granted, most Americans end up with gaps in their retirement savings, and even with a regular job, they may not save enough to retire when they want to.

If you’re out of work and worried about your long-term savings, working with a financial planner can be a big help in assessing where you are and how to get back on track.

“You need to review what your goals are in your plan and how it was carried out,” said PSC Ashley Folkes, financial advisor and director of marketing and growth strategies at Bridgeworth Wealth Management in Birmingham, Alabama.

The sooner you can put a financial plan in place the better, and it can come in handy at every stage of life, according to Folkes.

“A planner can give you accountability, an objective second opinion and encouragement to adjust your plan accordingly,” he said.

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