How to Right Your Retirement Savings After Coronavirus Setbacks

For investors whose retirement savings have been disrupted by the pandemic, there's a path to replenishment in 2021 and beyond.

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The COVID-19 pandemic and shutdown upended our lives on multiple fronts. While enduring widespread unemployment and the economic downturn, many Americans leaned on their retirement accounts to help make ends meet. If you experienced retirement savings setbacks, consider using these strategies to refill your retirement bucket in 2021 and beyond.

Reassess your situation

“If you had to take a 401(k) loan or withdrawal, empty an IRA out or dig into your Roth, don’t worry, there are ways you can get back on track without it greatly affecting your retirement goals,” says Cameron Burskey, managing director of retirement security at Cornerstone Financial Services in Southfield, Michigan.

“The first thing you need to do is take a look at where you are today and where you need to be in order to accomplish your goals,” Burskey says. He recommends consulting with a financial advisor or planner to conduct a retirement income analysis, as the results can guide you on the right path.

Make a plan

Craft a monthly plan to rebuild your retirement fund, says Dan Hoffmann, managing director and financial advisor at Morgan Stanley in Chicago.

“Add a little extra each month above your normal contribution,” he says. “Set a calendar reminder every three months to nudge your contribution a bit higher. Big change is hard, but commit to small incremental changes to get your plan back on track.”

If you can, try to pay yourself back as soon as possible, advisors say. For those adversely affected by the pandemic, the Coronavirus Aid, Relief and Economic Security Act waived the extra 10% tax penalty associated with early distributions of up to $100,000 in eligible retirement accounts during calendar year 2020. You'll still owe income tax on your distribution when withdrawn, but you can get those taxes paid credited back if you recontribute your distribution within three years.

Lauren Anastasio, certified financial planner at SoFi in San Francisco, suggests working with an accountant to ensure your taxes are filed correctly to take advantage of this tax relief.

Anastasio also encourages consumers to repay 401(k) loans more aggressively.

“Paying that loan back sooner, assuming you can comfortably do so, will decrease your borrowing cost and put your money back in the market working for you sooner — a win-win,” she says.

Step up your savings

For some people, the pandemic has offered an opportunity to save. Maybe you haven’t traveled as often or spent as much money on dining out. Or maybe you’ve saved on gas by working from home.

“This is a perfect opportunity to continue the ‘less spending’ and start saving more into your 401(k), 403(b), traditional or Roth IRA,” says Lisa Bamburg, co-owner of Insurance Advantage and LMA Financial Services in Jacksonville, Arkansas. “The opening up of America doesn’t mean we have to return to bad spending habits.”

For people 50 and older, catch-up contributions for retirement accounts in 2020 and 2021 provide an opportunity to invest an additional $6,500 above the annual contribution limit of $19,500 for 401(k)s and an extra $1,000 above the annual contribution limit of $6,000 for IRAs, giving an extra boost to retirement savings.

“Consider contributing to a traditional, SEP or Roth IRA if you’ve lost access to a traditional employer 401(k),” says Ian Doll, certified financial planner and wealth advisor at RMB Capital in Chicago.

IRAs can be a good option for those who have "picked up supplementary income through freelance or one-off gigs,” he says.

Rolling your 401(k) plan over to an IRA might be a smart idea if the IRA account you choose costs less and you’d like more investment options, advisors say. Fees associated with IRAs and 401(k)s are an important consideration because the less you pay, the more you have left to invest.

Have a backup plan

Advisors generally consider pulling from retirement accounts to be a last resort. One pandemic lesson learned: A backup plan can combat the need to access funds earmarked for retirement during future financial crises.

“Establishing an emergency fund is critical — most Americans cannot cover an unexpected expense of $1,000,” says Hoffmann, of Morgan Stanley. “Having savings set aside for emergencies means you don’t need to tap your retirement accounts for financial surprises. I recommend three to six months of living expenses.”

Other advisors say you can start smaller, with a goal of building your emergency fund up to $500, and add to it over time.

Having a home equity line of credit in place can also help if you suddenly require cash.

“Borrowing from the equity in your home could be less harmful in the long term than borrowing from your 401(k) plan, for three main reasons,” says Paul Swanson, vice president intermediary distribution at CUNA Mutual Retirement Solutions in Madison, WI. “First, the interest you pay on a HELOC is tax-deductible, whereas it may not be deductible on a loan from your 401(k). Second, you aren’t taking retirement money out of the market and missing out on future returns. Last, with a home equity loan, you may be able to pay it back over a longer period, reducing your required monthly payments.”

Money saved from lower payments could be directed into your retirement account or used to build your emergency fund. Also, many home equity lines of credit don’t have penalties for prepayment, or paying the loan back early. However, there are some caveats to keep in mind: Your home is now backing your loan, your loan payments could increase if interest rates rise and, without discipline, you could overspend with access to a line of credit.

Similar to home equity lines of credit, Roth IRAs can also provide access to cash, advisors say. Roth IRAs are funded with after-tax contributions, and withdrawals are tax-free so long as the Roth IRA is held for over five years and withdrawals are made after the age of 59 ½. This greater withdrawal flexibility can be a perk if you need money unexpectedly.

If the pandemic reduced your income and moved you into a lower tax bracket this year, it could be an opportune time to convert your traditional IRA into a Roth IRA. You’ll pay less taxes to lock in withdrawal flexibility, which can benefit you later on.

Revisit your portfolio

Now is a good time to take a good look at the asset allocation of your investment accounts, advisors say.

The rapid market sell-off in March 2020 caused record-high trading levels with the majority of investors trading out of stocks and into fixed-income investments, such as bonds or money market funds, according to Rob Austin, head of research at Alight Solutions, a 401(k) record-keeper for large employers, in Charlotte, North Carolina.

Despite the market recovery, Austin said Alight hasn’t seen the trend reverse or investors reverting back to stocks from fixed income, which means those investors likely lost money because they missed the market’s rebound.

The moral of the story? When investing for retirement, it makes sense to have a longer-term view and avoid knee-jerk reactions.

Whether you made trades during this time or not, advisors say revisiting your portfolio is a savvy move whenever there’s significant market volatility because it’s likely that your portfolio allocation shifted around. It’s important to ensure your asset allocation remains appropriate for your goals, risk tolerance and time horizon, or length of time you have to invest before reaching retirement, and rebalance as necessary, advisors say.

For those within five years of retirement, consider ratcheting down investment risk, advisors say. That way, future unexpected volatility won’t throw your plans off, forcing you to readjust or make trade-offs just as you’re getting ready to retire.

However, the initial market downturn wasn’t all bad news. Those who stayed invested benefited from a quick and steep rebound, says Anastasio, of SoFi.

“Even if you stopped contributing to your plan, took a distribution or a loan, the great news is that the balance you had invested is likely worth more today than it was a year ago," she says. "So your money was still working for you even if you feel like you have a little bit of catching up to do.”

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