In the wake of the pandemic, many Americans are becoming concerned about their families’ financial stability and actualizing their financial goals. A survey published by the National Endowment for Financial Education in April found that about 90 percent of Americans are experiencing financial crises resulting from the Coronavirus outbreak. 23% of the respondents identified not having sufficient retirement savings as a major concern for them.
However, despite the financial downturn and the resulting economic realities, there are concrete steps that Americans can take to increase their retirement savings and ensure they have adequate funds to cover necessary expenses like long-term care and health costs.
Here are some tips to save for retirement regardless of the market conditions:
Consolidate your 401(k) savings when you change jobs.
People leave their jobs for different reasons ranging from better pay to a more conducive working environment. Data from EBRI (The Employee Benefit Research Institute) shows most Americans are likely to change their jobs seven times or more during their working days. Cashing out your 401(k) every time you change jobs can decrease the value of your savings over time. According to the Boston College’s Center for Retirement Research data, this act can reduce your retirement savings by 25 percent.
To better illustrate this loss, the Retirement Clearinghouse, LLC, analyzed data from the retirement service industry. It found that if a 30 years old worker cashes out $5,000 from their 401(k) today, the individual will lose up to $52,000 that the said $5,000 would have accrued by the time they are 65 through compound interest (assuming a return rate of 7% annually).
Leaving behind your 401(k) account when you move to a new job can also diminish your plan. Even though your money will still be invested in the US retirement system, the said plan is still being subjected to fees even when you are likely not adding anything to it.
The New England Pension Consultants’ annual defined contribution (DC) survey showed the DC plans’ average record-keeping fee at $57. So, if the same 30 years old employee leaves behind $5,000 in their 401(k) account with a former employer, they will lose $2,052 in fees over the next 35 years.
But it’s not just the fees; the individual is also losing the compound interest that may have been gained from that $2,050 over the period. Assuming the account had a 7 percent return rate, the $2,052 would have increased to $8,488.07 over the period.
To minimize losses to your retirement account as you switch jobs, roll over your 401(k) savings from your previous employers’ plan to your new employer. Your plan will probably accept it. Over 95.6 of 401(k) plans do accept rollovers from other 401(k) plans, according to the Plan Sponsor Council of America’s 61st annual survey.
Ensure your current mailing address is on your 401(k) record-keeping files.
When you leave retirement savings in your previous employer’s 401(k) plan, the account may not remain there forever. The EGTRRA (Economic Growth and Tax Relief Reconciliation Act) of 2001 empowers defined contribution sponsors to rollover stranded 401(k) accounts of former employees containing less than $5,000 from their plans into safe-harbor IRAs.
However, these safe- harbor investment vehicles generally operate like the money market fund and have a low-interest rate. A typical safe-harbor IRA yields within 0.1% to 0.5% annually, which is also lower than the fees they charge.
Some safe harbor charges up to $50 or more in annual administrative fees, which is above the interest from a $1,600 investment with a 1 percent annual yield.
Sponsors of 401(k) plans must notify former employees that they have rolled their savings into safe-harbor IRAs. But if your details like address are not up to date on the plan record-keeper’s file, you won’t have the opportunity to prevent your savings from being depleted in safe-harbor IRA.
Also, plan sponsors can cash out savings stranded in 401(k) accounts with a balance of less than $1,000. But then again, if you have moved from your previous address, you may not receive the cheque.
Only Withdraw from Your Retirement Savings as a Last Resort
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law amid the Coronavirus pandemic. The act waives the penalties associated with early withdrawals from 401(k) accounts up to $100,000 until 31 December 2020.
The act aims to help individuals and families meet the financial challenges resulting from the pandemic. As noted above, making a premature withdrawal from your 401(k) account will drastically reduce the money you’ll have available during retirement.
To worsen the situation, many sponsors have been forced to decrease or end employer contributions. A Plan Sponsor Council of America’s CARES Act survey conducted in April shows that 16.3 percent of DC plan contributions are suspending the matching contributions. About 8.7 percent are reducing their matching contributions. This is why it’s important for retirement savers to avoid short-term withdrawal from their 401(k) if possible.
It’s important to preserve your plan so that you can enjoy financial security in retirement. Whatever you withdraw today is income that you have lost for the future.