COVID-19 has turned the U.S. economy on its head, battering the stock market and forcing millions of workers into unemployment. But while the crisis is no doubt affecting your short-term financial plans, it may, unfortunately, throw a wrench into a lot of people’s retirement plans as well. Here are a few reasons your retirement could be affected — and what to do about them.
1. Paused retirement plan contributions
If you’ve been laid off due to COVID-19, you may be entitled to unemployment benefits. And thanks to the CARES (Coronavirus Aid, Relief, and Economic Security) Act, weekly unemployment benefits are getting a $600 boost and are also being extended by 13 weeks on top of what your state allows for.
But let’s be clear: Even with that boost, some workers will still be missing a chunk of their income by virtue of replacing their regular paycheck with unemployment benefits. If you’re one of them, you may have no choice but to hit pause on your 401(k) or IRA contributions until your financial situation improves.
What impact could that have? Imagine you normally contribute $500 a month to a retirement plan, only you don’t do that for a period of six months while you’re out of work. That means you’ll wind up with $3,000 less in retirement savings, which may not seem like a huge deal. But if your retirement plan normally generates an average yearly 7% return on investment, and you’re 35 years away from retirement, you’ll actually miss out on $32,000 in potential retirement income when you factor in that growth. And that’s a large chunk of money to give up.
The solution? Let yourself off the hook right now if you can’t swing retirement plan contributions, but pledge to ramp up once you’re gainfully employed once again. If you increase your savings rate after you’re back on your feet, you’ll have an opportunity to make up for a period without contributions, especially if retirement is many years away.