By Fran O’Rourke – KeyBank Capital Region Market President
The COVID-19 pandemic and resulting financial uncertainty have left their mark on retirement planning, from shifting savings habits to focusing on managing debt – and creating a better plan to survive emergencies.
Maybe you weren’t as far along in your financial preparations for retirement as you wanted to be. Or you had to hold off on developing a larger, long-term investment strategy. If so, now is the time for reevaluating the situation and making the income and savings adjustments needed to help build those retirement funds.
The financial effects of the COVID-19 pandemic have been like few others in modern times, triggering widespread layoffs and stock market volatility of historic proportions. By fall 2020, multiple surveys indicated many people were decreasing or even stopping their retirement savings as a result. To address a loss of income, it also became more common for people to dip into their existing retirement funds, exhaust emergency savings and even move back in with family to share expenses.
Where to Start
Financial hardships related to the pandemic have served as a reminder of the importance of having a plan and being prepared, and the KeyBank team has heard from a significant number of customers who want to know more about planning for retirement.
Fortunately, there are a few simple things you can do to save – and save consistently – in support of your future retirement and the lifestyle you envision, even if setting aside money isn’t top of mind for you right now.
First, replenish your emergency savings account for unexpected expenses. We recommend beginning with the goal of keeping $1,000 in a savings account you can use for emergencies, then building that up to approximately six months of your take-home pay. Consider enrolling in an automatic savings plan to help make it a habit. Additionally, try to keep a cash buffer in your checking account to avoid accidental overdrafts.
Plan for expected but infrequent expenses. Some expenses don’t occur on a monthly cadence, making them harder to budget for. Consider adding up expenses such as auto maintenance, gifts for holidays and birthdays, and travel. Then divide by 12 months and put those extra dollars aside. When that irregular event occurs, you and your bank account are ready for it.
If your workplace offers a 401(k), contribute to it – and if your employer matches your 401(k) contribution, save up to the match to capture your company’s contributions. Don’t stop there, however. Consider contributing the maximum for the most gain over the long term. You could also start an Individual Retirement Account (IRA) or a Roth IRA, both of which allow you to begin with small contributions and increase them over time as you are able.
Staying on Target
Clearly define your retirement goals by considering what you want from a typical day in retirement: Are you traveling overseas a few times a year, taking in Broadway shows in New York, or maybe upgrading your home with an art studio, exercise room or home theater? Your dream is yours alone – and no two retirements are alike.
A general rule of thumb is to estimate that every year, you’ll need between 70 and 80% of your pre-retirement income level to cover your retirement expectations, taxes and healthcare expenses. If you’re married, don’t forget to work your spouse’s earnings, retirement savings and retirement income into the equation as well.
All of these considerations will help shape and fulfill your retirement vision – whether you’re traveling the world or settling into your current home.
Audit your income and current retirement contributions regularly and review your expenses to see whether you can make adjustments that would allow for additional contributions to your retirement planning.
Consider other factors that will impact your retirement financially, including Social Security, healthcare options and alternative forms of employment. When it comes to Social Security, it may be tempting to claim it early – but the longer you hold out, the higher your monthly benefit will be.
Although Medicare eligibility begins at age 65, retirees may also find private health insurance before then through the Affordable Care Act’s federal exchanges. Finally, remember that retirement doesn’t have to be an all-or-nothing proposition: You may be able to bridge financial gaps with part-time or consultancy work.
What Else Should You Be Doing?
Do your best to pay off debt: For serious short-term needs, you may consider borrowing against your 401(k). That said, if you change jobs, don’t rush to cash out any existing 401(k): You can leave it invested, roll it over to a subsequent employer’s program or use it to start an IRA. Keeping that money invested will help keep it working for your future retirement.
Look for supplemental or incremental sources of income to boost your supply of short-term cash that would enable you to add to your retirement savings. You might take a part-time job, work as a consultant in your field, or turn your hobbies and interests into a means to earn cash through apps or websites.
To live the lifestyle you envision in retirement, you need a solid plan to get you there. Connect with a professional advisor who can help you navigate the way to the retirement that’s right for you.
About the author: Fran O’Rourke is President of KeyBank’s Capital Region Market. She may be reached at either 518-257-8733 or [email protected].
Why Save for Retirement When You’re Newly Married?
Planning and paying for a wedding can take up a lot of your time and financial resources, but it’s also important to keep your long-term savings goals in mind during this transitional period of your life. Combining two households may require adjustments to your financial habits, but you may also find greater opportunities to save for retirement. If you’re asking why save for retirement when you’re just getting started in a new life together, here are some reasons to stick with a budget and continue reaching toward your financial goals.
The Wedding Windfall
As of 2020, the average wedding gift is about $100 – $150 per guest. With this in mind, many young couples may not worry about overspending on everything from the reception to the honeymoon, perhaps with the plan of using monetary wedding gifts to help cover future expenses. But if you stick to a manageable wedding budget, financial gifts can then be put toward purchases needed to help start your life together, like a new car, furniture, or a down payment on a house. You may also want to save a portion of your wedding gifts and open a retirement account together. Given the investment time frame of perhaps thirty years or more, this lump-sum addition to your savings could make a sizable impact in the years to come.
Combined Incomes Makes it Easier to Save for Retirement
For the first time, you’ll be combining your income with another person, and working together to cover household expenses. Some line items in your budget, like home insurance or utility bills, probably won’t change much when you go from a one-person household to two. You may also get a financial break when paying for benefits like health or dental insurance if one of your employers offers less expensive coverage to married partners. Your newly combined household may lead to opportunities to increase the percentage of income you divert to savings and help you build your retirement accounts when you have a longer investment horizon.
Save Early, Before Life Gets More Expensive
While you may have a combined household income as newlyweds, remember that life will probably get more expensive. As a married couple, you may still indulge in weeknight takeout dinners and social gatherings with friends. But eventually, if and when kids enter the picture, your lifestyle will change once more. You may need a larger home, a larger car, and eventually, when little kids grow into big kids, your grocery bills may increase as well. Planning ahead for these changes and building your savings early in your marriage can help you through these changes when they happen.
