If you are one of the millions of Americans who have been hit hard by the virus and left your job, you may have a lot of questions coming to your mind about how to handle your new financial circumstances and save for your retirement as well.
One of the most pressing concerns of those who went unemployed is whether they should keep saving for retirement when they are clobbered by unemployment. Saving funds for your future is smart, but is it the real one you should be concerned about when you no longer have a job?
Should you save for retirement when you’re unemployed?
When this question comes to your mind that you should save for retirement when you’re unemployed or not, you must ask yourself, Can I afford to do so?
Suppose you are finding it hard to pay your bills or cover the cost of essentials like food, housing, utilities, insurance, home and car repairs, debt repayment, and transportation costs. You shouldn’t worry about saving for retirement. You must use your money to meet your daily needs.
If you don’t have an emergency fund, you can’t afford to save for retirement until you have it. There are circumstances when you find yourself stuck in making surprise expenses, and if you have no money to handle that situation, you need to save some for that as well. Otherwise, you would force yourself to borrow cash at a high-interest rate or sell investments and take withdrawals from your retirement account when something surprising occurs in your life—all of these aren’t good options.
When you are not employed, your emergency fund should be higher than average as you don’t know how you are going to bear your daily expenses and how long it will take you to get a new job. It would help if you had several months of living expenses to focus on something extra than the emergency fund.
If you’ve saved enough money for a rainy day, you must start investing in your retirement savings above any non-essential savings or spending. It may not look fun to move whatever is left of your entertainment, dining out, or travel budget to your retirement savings, but doing this is essential. There are so many free entertainment sources near you, but if you don’t save for your retirement, you can’t bring back the time you lost. You’ll miss an opportunity to save your money for your hard time and the compound interest you might earn- that can add up to a significant number.
How to save money for retirement without a job?
Before unemployment, if you were saving for your retirement account using your 401(k) workplace, you may look for a different solution. Luckily, you can still score tax breaks for retirement savings if you invest in an IRA. This year, you can make deductible contributions of up to $6,000 in an IRA. If you have earned income from your job or are self-employed and earn a profit, you can make maximum contributions unless you’re married. Your spouse receives excess earned income to make spousal IRA contributions.
If you are eligible for deductible IRA contributions or not, depend on your income limits if you or your spouse has a workplace retirement plan. If you are unemployed, you may not have a workplace plan, so you don’t need to worry about this unless your spouse or household income is $196,000. If you are under the threshold, you can take a generous tax break.
Don’t use your retirement account savings if you have other options
Using retirement account savings should be your last option. If you have funds to cover your daily expenses and some leftover income, you can continue contributing to your retirement account while you are unemployed. You can use an IRA if you’re eligible and save on your taxes this year and make contributions to ensure that your unemployment period won’t affect your future retirement.
