As we assess the effects of a year we couldn’t have anticipated, many people may be concerned about changes they were forced to make in saving for retirement.  In a normal year (don’t ask me what that is), conventional advice would be to set aside 10% to 15% of pay for future retirement.  After a year like 2020, that expectation may be unrealistic and even as we can see the light at the end of the tunnel, many people are not yet back on their feet, financially speaking.  The Wall Street Journal published an article recently entitled “Don’t Panic Over Halt in Saving for the Future,” in which Anne Tergesen describes situations that may help assess the impact of a decrease in savings on your financial future.  She offers plenty of reasons why you shouldn’t panic.

Assess the impact

The effects of a decrease in contributions vary depending on your situation.  The regularity of your saving before as well as how long contributions were paused will have different impacts.  Age is an important factor too.  Skipping contributions made in someone’s 50s and 60s will inflict less damage because they “have less time to benefit from potential appreciation.”  By the same rule, skipping contributions at a younger age will likely do more damage and the loss will be greater.

Save if you can afford to

Though during periods of unemployment or reduced work money might be tight, various unemployment benefits and stimulus payments may provide a little wiggle room.  A financial advisor from Atlanta, Lee Baker, emphasizes the importance of setting aside six months of expenses in an emergency account.  To save for emergencies and retirement at the same time, contributing to a Roth individual retirement account may be a wise option.  This account allows for after-tax contributions and tax-free withdrawals at any time, except with earnings, which may have different requirements.  Roth IRAs are preferable to Traditional IRAs for the purpose of emergency savings because on the latter you must pay income tax on withdrawals in addition to paying a penalty if you are under 59½.

Make a plan to catch up later

In the case of temporary unemployment, one of the most realistic options may be to plan to catch up later, when things are more stable.  According to David Blanchett, head of retirement research at Morningstar Inc., a simple way to do this is pledge to save at least 50% of future raises.  Setting aside money from raises may also avoid lifestyle creep, which is when discretionary consumption increases on non-essential things as standard of living improves.  By avoiding this phenomenon, you may end up saving an even higher percentage.  Additional situations like children leaving home or delaying retirement also offer opportunities to catch up later on.  Postponing retirement can minimize or delay withdrawal from retirement savings or Social Security.  It reduces the number of years you will be forced to rely on your nest egg to support you.


The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.