If you’ve been furloughed or laid off from your job, your entire financial plan may have changed in an instant. But just because you’ve hit a detour doesn’t mean you should lose sight of your destination or derail your long-term plans overnight.
As a result of the global coronavirus pandemic, general panic over the unknown, and social distancing measures, recent job losses have soared to numbers we haven’t seen in this country since World War II. So, if you have lost your job recently, you are certainly not alone. Along with more than 38 million other newly unemployed people, your fellow Americans are all looking forward to a quick resolution, swift rebound to the economy, and plenty of new jobs.
But until you land your next great career opportunity, and while you have time to reflect and review your personal financial situation, you might be questioning how retirement planning fits into the equation.
What Should I Do With My 401(k)?
If you have an existing 401(k) account with your old employer, you may be wondering what to do with the funds in your account now. Fortunately, you have several options available, so you’ll want to carefully consider the potential costs and benefits to each.
If you have more than $5,000 in your account, you can leave the money in the 401(k). While you will no longer be able to contribute to the plan, the benefit is that the money can stay invested there, grow over time, and you don’t have to take any extra steps to manage it. The catch is that your investment options will remain limited, and you may have to go through your former employer to get paperwork and make changes, which can be awkward.
Another option would be to roll the funds from your account into another 401(k) or IRA. If you have another employer, even if it’s a part-time job while you are looking for full-time work, their 401(k) could offer benefits that wouldn’t be available to you otherwise, so be sure to look into this option. If not, rolling your 401(k) into an IRA has advantages such as possibly offering more investment options than you would have if you leave it with your old employer. But be mindful of the fact that to roll it over, you will actually have to sell the investments in your existing 401(k) and then invest in the new IRA. In periods of market volatility, like the one we’re currently in, this could be risky.
Hopefully, your severance payment, unemployment insurance, and emergency savings will carry you through until you get another job. Ideally, you would not want to tap into your retirement savings early; however, if you don’t have a choice and need the money to cover your necessary bills, you do have the option to cash out the funds in your 401(k).
Typically, withdrawing money from a 401(k) account comes with significant penalties of 10% and you are taxed on the full amount of your distribution as income. But the CARES Act passed in response to the COVID-19 crisis temporarily allows you to withdraw up to $100,000 from your account without penalty and allows you to spread out the tax impact of the withdrawal over three years.
You’ll need to ensure you meet certain criteria so check with your former employer and do your due diligence. And keep in mind, not only would you be cashing out while the market is low but you will also miss out on the opportunity for your invested funds to be regained and grow over time.
Saving for Retirement While Unemployed
If you are not strapped for cash during your period of unemployment and your basic needs are taken care of, you are in the fortunate position to keep your financial plan on track, including continuing with your retirement savings. In fact, it’s important to recognize that skipping your retirement payments would be a mistake. If you can still set aside money for retirement, you should; think of retirement as a necessary expense.
However, it’s also important to note that to make eligible contributions to a retirement account, you need to have actually earned income in excess of the contribution. In other words, if it turns out that you are without a job for much of the year, this could limit how much you can put aside with tax savings.
Keep in mind, investing in retirement accounts generally offers a tax break — either taking a tax deduction now or allowing for tax-free withdrawals in retirement, depending on the type of account. Over time, the tax benefits of retirement contributions can help you save a ton of money. But each year has a given contribution limit that doesn’t roll over, so skipping your contribution while you’re out of a job means you’ll miss out on those savings and gains forever.
The good news is, you have a number of options available as employer-based retirement accounts really should not be your only retirement savings vehicle.
A traditional individual retirement account (IRA) is similar to a 401(k) and allows you to make contributions that will be deducted from your taxable income. A Roth IRA also allows you to put aside money for retirement but you pay taxes upfront so you won’t be taxed when you withdraw the funds in retirement.
If you are freelancing, consulting, or taking independent contractor gigs while searching for full-time employment, you can take advantage of retirement accounts designed for self-employed people, such as a solo 401(k), SEP IRA, or SIMPLE IRA.
There are also a number of creative ways to save that many people have not considered. If you are married and your spouse is still employed, you can have them ramp up their 401(k) savings. Plus, a health savings account (HSA) can be used to set aside money, taking advantage of tax benefits that can be used for healthcare expenses at any point, and the funds can be used as you wish in retirement.
If you don’t have sufficient earned income this year, you can still invest for retirement, even without the tax advantages of a retirement account. Set aside funds in a regular brokerage account or high-yield savings account with an eye towards your long-term growth strategy.
If money is tight and you can’t afford to set aside extra funds, take a closer look at what you’ve already invested. Again, do everything you can to avoid withdrawing your retirement funds, but that doesn’t mean you can’t touch your account. Even if you are unable to add to your retirement accounts this year, you can ensure your portfolio is optimized with the right mix of investments based on your retirement time horizon.
Conclusion
Losing your job, particularly during a financial crisis, can be a sudden and scary blow to your overall financial plan for anyone. But remember that on the journey to retirement, there will always be bumps in the road.
If you are reading an article about retirement planning after losing your job, chances are that your careful planning and diligent savings have ensured that your immediate financial situation is not dire and you have sufficient emergency savings to hold you over until the job market recovers. This is not to make light of your concerns, but to serve as a reminder to stay the course. Keep saving, keep investing, and stay focused on a brighter future.
Monica Szakos Cramer is a Senior Financial Adviser and Partner with Asset Preservation Strategies, Inc. (APS) in San Diego, California. Monica specializes in financial planning and empowerment through education. Her expertise revolves around technical and fundamental investment analysis. APS is a financial advisory firm that works with business owners and entrepreneurs, people nearing or in retirement, and strategies for women in wealth. Learn more about them online at asset-preservation.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.