The coronavirus pandemic took a toll on the physical and mental health of many Americans. For many, it also hurt their retirement health. According to The Four Pillars of the New Retirement,* one in three of those planning to retire say COVID-19 has delayed this decision.
Your retirement health starts with your goal: when you want to retire, how you want to spend your time, and your desired lifestyle. After all, how much you need to save for retirement is driven by how much you want to spend in retirement.
If the pandemic derailed your retirement health (or you just want to improve your retirement readiness), you can still work to catch up. Here are some tips to help get your retirement strategy back on track:
- Take advantage of your employer match. If your employer offers a matching contribution for a 401(k) or other employer retirement plan, you should contribute at least enough to earn the full match. It’s effectively “free” money, and there are few, if any, investment options that can compare with the value of an employer match.
- Increase your contributions by at least 1% annually. Many employers offer a feature that allows you to automatically increase your contributions each year. Or you could challenge yourself to increase your contributions annually. While 1% may not seem like much, small increases over a long period can have a meaningful impact on your retirement readiness. And if you time the increase with a salary increase, you may not even feel the impact in your paycheck.
- The “B” word: budget. Having a clear understanding of your current spending and how it may impact your future spending is critical to achieving your long-term financial goals. Look for areas to cut spending, and redirect that cash to your retirement savings. Budgeting can also help you build an emergency fund, which can help ensure your retirement savings remain untouched when the inevitable unexpected expense occurs.
- Pay back COVID-19 distributions and plan loans (if applicable). The CARES Act allowed individuals impacted by COVID-19 to take penalty-free distributions and higher loan amounts from their retirement accounts. If you took a COVID-19 distribution, you have up to three years to pay it back. Doing so will increase your retirement account balances and allow you to recover any taxes paid on the distribution. If you took a loan instead, consider accelerating your contributions to pay it down faster. This will increase the account balance on which you earn tax-deferred growth and reduce the amount of interest and fees you ultimately pay.
- Contribute to an IRA. If you don’t have a retirement plan through your employer or you’re already contributing the maximum amount, you can increase your retirement savings by contributing to an IRA. In 2021, you can contribute up to $6,000 if you have taxable compensation, plus additional amounts if you’re age 50 or older (see below). Depending on your tax rate, it may make sense to contribute to a Roth IRA.
Source: Edward Jones
Take advantage of catch-up contributions if you’re age 50 or older. For 2021, individuals age 50 and older can contribute an additional $1,000 to an IRA, for a total of $7,000. They also can contribute an additional $6,500 to an employer retirement plan above the $19,500 basic limit, for a total of $26,000.
- Re-evaluate your priorities. According to The Four Pillars of the New Retirement, more than three-quarters of Americans say they have refocused on what’s most important in life due to the pandemic. Maybe this means more time with family, pursuit of a passion or new hobby, or simply the freedom to spend your time how you want. You may be more willing now to make trade-offs in retirement that can lower your spending needs.
Whatever your priorities, aligning your retirement strategy with them will better position you to achieve the retirement you desire. And the earlier you plan, the more flexibility you typically have with your strategy. Your financial advisor can partner with you to make sure your retirement strategy is aligned to what’s most important to you.
* Age Wave/Edward Jones study, March 2021.
Katherine Tierney is a Senior Retirement Strategist on the Client Needs Research team at Edward Jones. The Client Needs Research team develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy. Katherine has more than 15 years of financial services and retirement experience. She is a contributor to Edward Jones Perspectives and has been quoted in various publications.