Planning for Retirement after a Setback

by | Sep 28, 2021 | Retirement Planning, Smart Financial Tips

The best-laid plans may often go awry, but that doesn’t mean you have to throw in the towel. When it comes to planning for retirement, setbacks can seem frustrating. But if you have had to withdraw from your 401(k), put an extended pause on your investments, or drain your IRA, you are not alone.

Early in the pandemic, millions of Americans faced new challenges regarding retirement planning, whether due to job loss, changes in family income, or stock market anxieties. While many people are now recovering from these effects, others are still in a position that makes it difficult to save for the future.

Whether your retirement planning struggles have arisen during the pandemic because of a major life transition, or you have long felt the effects of a lagging financial plan, there are ways to get on track.

Common setbacks when planning for retirement

Life setbacks, like temporary job loss, unexpected expenses, or the loss of a loved one, can lead to savings setbacks that have a ripple effect on your retirement plans.

  • Withdrawing from retirement accounts
    Some people choose to withdraw from their 401(k) in an urgent financial situation. During the pandemic, the borrowing limit doubled to $100,000. However, withdrawing from retirement accounts before age 59 ½ means you will pay a penalty and taxes. You may be able to pay yourself back over time, but many stop contributing when making loan payments, putting them even further behind. It can be difficult to recover without a clear path ahead of you.
  • Investing little or investing later in life
    Investments need time to grow. That means benefiting from the power of compounding, which is the name for the snowball effect in finance, where an initial amount grows and is reinvested, gaining momentum over time.
  • If you are not investing enough or started investing late in life, you may face long-term difficulties in getting on track. By the time you reach retirement age, you may need to work longer, sell the family home, or be tempted to take more risk with your assets.
  • Halting or reducing contributions
    This can occur because of an urgent financial situation or even divorce. Commonly, one spouse handles the finances for the couple, and the other spouse is unaware of their financial situation. After a divorce, they may not even know where assets are located, let alone how much they need to contribute to retirement.

Revisit your investments and contributions

It takes planning to get where you need to be to retire comfortably at a certain age. If you have fallen behind, however—by not contributing the maximum or not contributing enough to get the full employer match in your 401k, for example—you may be able to make up for some or all the shortfalls.

Some options include the following:

  • You might be willing to take on more risk with your assets, but this is typically recommended only for those who are young enough to be able to recover from market downturns.
  • You can also take steps to reduce spending and save more after-tax money.
  • On a more personal level, an ideal option might be to invest in yourself, searching for a better job with higher pay and better benefits.
  • If you are paying for your adult children’s education, you can relieve yourself of that expectation by having them take out student loans. If you want to help at a reduced level, you can pay the interest on the loans so the debt doesn’t grow while they are in school. While this may seem a severe step, in the long-term, it will help avoid being a financial burden to them later in life. Having some “skin in the game” may also help them take their education more seriously.
  • You can also consider downsizing or moving to a less expensive area to increase your savings.

Document your recovery plan

Your recovery plan depends on your specific financial situation. You may need to alter your long-term goals to plan for a later retirement, or you may be able to get right back on schedule after a few years of work.

Either way, it’s important to have a plan for financial recovery so you can move forward with confidence. This recovery should include an emergency fund, so you won’t have to worry about your retirement during temporary financial stress.

While getting your plan into place, you should understand your expenses and lower them wherever possible. Consider working with a financial professional to learn how to start saving more and get a handle on non-essential spending.

A financial advisor can help you get clearer on your financial goals. From there, you can work together to outline next steps and feel confident about your retirement planning.

At Team Hewins, we’re on your team. Contact a financial advisor to get your financial plan in action and move forward after a savings setback.

Team    Hewins,    LLC    (“Team    Hewins”)    is    an    SEC    registered    investment    adviser;    however,    such  registration  does  not imply a certain level of skill or training, and no inference to the contrary should be  made.  We  provide  this  information  with  the  understanding  that  we  are  not  engaged  in  rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.