In recent blogs, we’ve discussed how important it is to have a retirement fund. However, in this time of uncertainty, thanks to COVID can you justify putting money away for a distant future when the present is filled with anxiety?
With some careful planning, you may be able to reboot your spending enough to set aside at least some money towards a future that will come true.
Revamp Your Budget or Set One Up
We are going to assume you have a budget already. If you don’t, your first step is to count every penny you spend for at least two weeks.
Sit down with your current income and expenditures and see if any of your spending can be cut. There may be a few dollars to set aside for retirement or you may find that you need to
cut some expenses.
Revisit your budget at least once a month. On the positive side, you may discover places where you were frittering away money that could be used for retirement.
Our goal is to set aside 10-15% of your income. That may seem like an unattainable goal. Take a look at your spending and see if there is anywhere you can cut so that you can put more money towards your retirement.
Your first goal, however, should be an emergency account with at least $1000 in it. Then you can
build toward your retirement.
Budgeting Tips:
Prioritize repaying high-interest debts such as
credit cards first, then focus on boosting emergency and retirement savings. Avoid early withdrawals from retirement accounts, which incur taxes and penalties impacting long-term growth. If facing financial hardship, consider credit counseling or debt management assistance instead of payday loans or
cashing out retirement funds.
Set Up An Emergency Fund
If you haven’t set up an
emergency fund, you may want to pause everything and start a separate savings account just for emergencies. After all, emergencies do occur from time to time. You should work on building up to $1000 as quickly as possible and using that for emergency expenses instead of using your credit cards. After saving up $1000, work more slowly for three to six months of income.
Your credit card may seem very tempting but it can rapidly put you in a worse financial situation. It is very easy to pull out a credit card and make up for financial shortcomings in one single swipe. The problem is that with interest and fees, your credit card can easily spiral out of control.
Instead, try to make up shortcomings by selling items, cutting back on spending, or trying to make a little extra money from a
side hustle.
Set Up a Retirement Plan
If you haven’t set up a retirement plan, now is the time. You can decide when you want to retire and how much you need to save for retirement. Again, a good financial planner can help you set goals and work towards them.
Retirement plans include:
- 401(k) – these are set up by an employer. You may contribute some portion of your pre-tax paycheck and that amount may be matched by the employer up to 6%. The money is then tax deferred until your retirement. If an employer offers a 401(k) with a match, always try to take advantage of it.
- Individual Retirement Account (IRA) – these can be tax deductible but in general, the contribution and any gains are taxed.
- Roth IRA – Contributions going into Roth's are taxed but growth is not taxed.
- Roth 401(k) – a combination of a Roth and a 401(k)
- Savings Incentive Match for Employees (SIMPLE) IRA – for small (less than 100 employees) businesses. Very similar to a 401(k).
- Simplified Employee Pension (SEP) IRA – for people who are self-employed and with no employees.
As you can see, retirement plans are pretty complex, and having a knowledgeable guide can save you money and help you reach your goals.
Keep Up Automatic Investments
If you have automatic deposits into a retirement fund, continue doing that if at all possible. Not only does it keep money trickling into your retirement, but it helps keep the habit of saving alive.
That money sitting in your 401 or retirement account may seem very tempting. DON’T DO IT! First of all, the CARES Act covers specific people and you do not qualify. There are also tax consequences for distributions, so speak with a certified financial planner before withdrawing any money.
Find a Financial Advisor
Getting professional guidance from a certified and knowledgeable advisor can be a huge step in getting your future in order. Your sister’s husband’s cousin’s best friend who dabbles in the stock market is probably not the best financial advisor. Instead, look for a certified financial planner who can guide and explain all your options.
Avoid Panic Sales of Investments
If you are invested in the stock market, you may feel like you are on a roller coaster. When the market is in free fall, you may feel like you need to sell before things crash. It is generally a good idea to hang on and ride or to talk with a certified financial planner to make certain that your investments are appropriate for your situation and plans.
Hold off on Retirement
While the stock market is volatile, you may want to hold off on retirement. You can still set aside funds but your retirement funds won’t take a hit from both the stock market and withdrawals. History suggests that the stock market will recover.
If retirement seems like an impossibility because you are so far in debt, you may need expert advice from the debt specialists at Pacific Debt. We can help understand all your options.
COVID-19 Assistance Programs and Updated Statistics
The COVID-19 pandemic has impacted personal finances and retirement savings for many Americans. Here are some of the key relief programs and policy changes to be aware of:
Student Loan Payment Pause
- Federal student loan payments have been paused interest-free since March 2020, currently extended through June 30, 2023.
- Borrowers should still pay loans if able, which goes directly to the principal.
- Private student loan relief depends on the lender. Contact them to inquire about assistance programs.
Mortgage and Credit Card Relief
- Homeowners impacted by COVID-19 can request forbearance to temporarily pause or reduce mortgage payments.
- Major credit card providers are offering payment assistance and waiving late fees to eligible cardholders. Check with the issuer.
Unemployment Benefits
- Enhanced unemployment benefits helped replace lost income for millions during pandemic shutdowns.
- Benefit duration and amount vary by state. Check your state's labor department website for the latest details.
Retirement Account Withdrawals
- Early withdrawal penalties on retirement accounts like 401(k)s were temporarily waived under the CARES Act through December 31, 2022.
- Withdrawals should be a last resort to avoid long-term impacts on retirement savings.
According to 2022 Federal Reserve data, 30% of Americans have increased credit card debt due to pandemic-related challenges, while an AARP study found 1 in 5 older adults have depleted retirement savings since March 2020.
Alternatives to High-Interest Loans
- Personal Loans -May offer lower rates depending on credit score and provider. Compare terms across multiple lenders.
- Nonprofit Credit Counseling -Certified counselors can help negotiate with creditors and develop debt repayment plans. Initial consultation is typically free.
- Balance Transfer Credit Cards -Moving existing credit card balances to a new card offering 0% introductory APR for 12+ months can save on interest. Watch for transfer fees.
- Debt Management Programs -A debt management program coordinated by a credit counseling agency can lower interest rates and provide a structured monthly payment plan.
Working with a Financial Advisor
Seeking guidance from a qualified financial advisor can provide expertise in managing debt, budgeting, saving for retirement, and more. When choosing an advisor, only work with fee-only certified financial planners (CFP) who are fiduciaries obligated to act in a client's best interest. Request a free initial consultation and inquire about total costs and compensation structure - fees should be transparent and affordable.
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