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The coronavirus crisis has many companies scrambling to conserve cash. Many are temporarily reducing how much they contribute to employee 401(k) plans.
If your company halts its contributions, what does this mean for you?
Employers do not have to match their employees' retirement contributions, though many of them do as a benefits perk. A recent study by Vanguard found that half of plans come with a company match.
During economic hardship, it may make financial sense for employers to temporarily halt retirement contributions before taking more serious measures, like reducing health benefits, said Dennis Nolte, certified financial planner and vice president of Seacoast Investment Services.
Your retirement savings can take a significant hit without an employer contribution. Employers offer to match an average of 4.3% of worker pay, based on the same Vanguard study. While that may not sound like much, it can add up over time, thanks to compound interest.
This isn’t a new tactic. Many U.S. employers cut back on 401(k) contributions during the 2008 recession, and reinstated them years later, said Nolte.
If you’re already contributing to a 401(k) plan, don’t stop. Take advantage of any extra cash flow you may have from not commuting and eating out to replace your company’s match.
“If your company suspended its employer match, and you have a stable job and feel confident that your company can weather the storm, you should continue to contribute to your 401(k),” said Melissa Brennan, certified financial planner at Vogel Financial Advisors.
If you’re undergoing financial hardship or want to pad your emergency savings, try reducing your contribution amount before stopping contributions altogether. For example, if you’re currently giving 10%, try scaling back contributions to 8% or 6% of your pay. While saving for retirement is important, so is addressing current financial needs.
Here’s how much you should be saving for retirement.
You may still be able to contribute to an individual retirement plan, either a Roth IRA or traditional IRA, said Jay Spector, certified financial planner and wealth advisor at Barton Spector Wealth Strategies. Compared to 401(k) accounts, IRAs often offer larger investment options and lower fees.
“You will be much better off in the long run by continuing to invest through an IRA,” he said.
Using an IRA may also lower your taxable income. The IRS has pushed the IRA contribution deadline (as well as the tax filing deadline) to July 15, giving taxpayers an extra 90 days to make a contribution and potentially claim a deduction on your 2019 tax return.
Another option? Using a brokerage account to invest on your own. You won’t get the tax deferral benefits of a 401(k) or IRA with a brokerage account, but it’s a good option to put away some post-tax dollars. You can purchase several types of investments through brokerage accounts including stocks, bonds, mutual funds and even certificates of deposit.
The recent $2 trillion stimulus package allows employees to withdraw up to $100,000 from their retirement plan penalty-free. Investors can also take a 401(k) loan of up to $100,000.
But just because you can, doesn’t mean you should.
Early retirement withdrawals diminish future retirement earnings, as they will no longer accrue value from compound interest, said Nolte.
Even withdrawing your money a few years earlier than planned could significantly reduce the future value of that money. So think hard before you shortchange your future retirement. Your retirement fund should be seen as a last resort after you’ve exhausted all other sources of savings.
“It’s a complicated answer,” said Nolte. “What is your income looking like this year if you’ve been laid off? How much other liquidity do you have? Ask yourself these questions before you withdraw.”
Image: Giorgio Travato
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