Experienced a pay cut? Here’s what to do next:
- Discuss a plan with family members
- Adjust your budget or create a new one
- Trim non-essential expenses
When you’re in your 20s and 30s, retirement can feel pretty far away. You know it’s important, of course, but it’s not always top of mind. Add in the fact you’re dealing with the immediate challenges of a recession and it can be even easier to let your retirement planning slide.
But there are plenty of reasons to prioritize retirement. The good news is you can do so without putting your other priorities at risk. That’s especially important for parents, who have a lot of financial obligations—to put it mildly. In addition to funding retirement, covering the rent or mortgage and paying bills, they have financial goals for their families, such as saving for college and ensuring the kids can participate in extracurriculars.
Striking this balance while prioritizing retirement is especially important for millennials, many of whom have a way to go on their stockpile. While 8 in 10 millennials have money saved for retirement, nearly half have saved less than $10,000, according to a report by the Insured Retirement Institute. Luckily, retirement planning is a marathon and not a sprint, so these young savers still have time to retire comfortably with consistent retirement contributions.
Looking at both their budget for today and their future goals, many parents are asking: How do I protect my retirement savings during a recession while also saving for my family?
To be honest, it can be kind of overwhelming to juggle all of these priorities while managing your 401(k) during a recession. Focus your attention by starting with your “why.”
Amy Blacklock, co-founder of financial blog Women Who Money, recommends you create a family financial mission statement to clarify your values and priorities. This statement should describe why your family is pursuing particular savings goals and how you’ll get there.
“If you know what your mission is for your family and yourself, it will help you stay on track when other things come up.”
Start a conversation with your family to determine your priorities and values. What you decide will then form your family’s mission statement. For example, a family may craft the following statement after talking about their goal of budgeting for retirement, Blacklock says:
“Our family’s financial mission is to save for a financially secure and fulfilling retirement. We will focus on annually maxing out our IRA contributions. We also aim to teach our children the ins and outs of money. We will steadily increase our retirement savings contributions so we may retire at age 60.”
By including objectives in your family’s mission statement, you will be regularly reminded of their importance, even as you deal with the challenges of protecting your retirement savings from a recession. Having clear objectives in place can help you stay focused on your goals, which is particularly important when you’re protecting your IRA or managing your 401(k) during a recession. It’ll also help you avoid the temptation to divert funds to other expenses, such as a bigger house or new car.
“If you know what your mission is for your family and yourself, it will help you stay on track when other things come up,” Blacklock says.
Your financial mission statement will help you keep a long-term perspective. This is essential for millennial parents, many of whom have lived through two recessions in their working lives.
Given that rocky past, millennials tend to have less wealth today than previous generations did at the same age, the Pew Research Center notes.1 The center found that the median net worth of households headed by millennials (ages 20 to 35 in 2016) was about $12,500, compared with $20,700 for households headed by boomers the same age in 1983. Gen X households at the same age had a median net worth of about $15,100. This disparity underlines the importance of protecting your 401(k) in a recession.
Andy Hill, founder of the blog and podcast Marriage, Kids and Money, learned this lesson first-hand during the Great Recession. During the housing crisis and subsequent 2008 recession, Hill owed $180,000 on his home mortgage, but the house’s value had sunk to $110,000. Getting out of that underwater mortgage required him to temporarily decrease funding to other financial priorities, including retirement.
“If you’ve been through a recession and you’ve been impacted, then you’re going to remember it,” he says. “I certainly did.”
For millennials like Hill, personal experience with a recession has prepared them for future challenges. They know how important it is to help protect your retirement savings from a crash.
While funding your retirement may seem like a long-term goal for you and your spouse, it actually helps your kids, too. “You have to take care of yourself first, or you run the risk of not being able to and sticking that responsibility on others later,” Blacklock says. When you put the burden on your children to support your retirement later on in life, they’re forced to divert the resources that they need to prepare for their own later years, she adds.
After all, while saving for college or a home is important, these costs can be funded through other means. For example, your kids can pay for college through scholarships, work-study programs or loans. But the same can’t be said for your expenses after you leave the workforce, Hill says.
“There are no retirement scholarships, unfortunately,” Hill notes.
When you’re in a recession, tough choices are inevitable. You may wonder: How do I protect my 401(k) in a recession while also paying my bills? With your financial mission statement in place and your reasons for saving top of mind, you can make these decisions with confidence.
Start by assessing your current situation. Did you or your partner lose your job, or take a hit to your income? It’s a scary situation, but avoid a knee-jerk response rooted in fear. Instead, review your current income and expenses to see where you can adjust your budget.
Take a look at your current spending. Housing, utilities, insurance, food and transportation all likely fall into the “need” category, while things like streaming service subscriptions, restaurant meals and gym memberships go into the “want” bucket.
“You need to cut out everything that is not a need to keep your family going,” Blacklock says. It won’t be easy, but remember that the pain of austerity won’t last forever. “As soon as your income increases, you can start adding things back in.”
Try paring back your spending to the essentials. If you can keep contributing to your retirement savings at the current rate after trimming your spending, that’s a smart way to go, Hill says.
For families still falling short, it may be time to tap into emergency savings to cover your essential expenses. Using your emergency fund to pay your bills can help prevent you from dialing back your retirement contributions. And it’s definitely a better bet than withdrawing your retirement savings, Hill notes.
For one thing, you’ll likely face early withdrawal penalties if you pull out your retirement savings early, Hill notes. That $50,000 in your 401(k) may look like a good chunk of change, but it’ll be partially eaten away by fees and taxes, he cautions. And just as importantly, removing that cash now can dramatically reduce your total savings in the future.
You can use a compound interest calculator to determine your specific return—and how it would be affected by pulling out your funds prematurely. For example, if you have $50,000 in your retirement savings today and plan to contribute $100 per month, your savings will total $494,000 in 30 years, assuming a 7% annual return. But if you take out $40,000 to spend now, leaving just $10,000 in the account, you’ll see a much different result. Even if you keep contributing $100 a month, your total savings will only hit $189,000—less than half the amount if you’d kept your retirement savings in place.
If you can keep contributing to your retirement savings at the current rate after trimming your spending, that’s a smart way to go.
When it comes to managing your 401(k) during a recession, that’s a strong incentive to keep your savings where they are. But in the end, you have to make the decision about what’s best for you and your family. If you’ve already cut your budget down to needed expenses, tapped into your emergency fund, researched new ways to make money and reduced your retirement contributions, well, you may consider withdrawing contributions from your Roth IRA or borrowing from your 401(k), Hill says. Just be sure you’ve exhausted all those options.
“If you’re in a dire situation, you’ve got to do what you’ve got to do, but there are so many things to do before you even consider that,” he says.
Even when you have your goals top of mind, it can be tempting to respond to market volatility by taking some sort of action, whether it’s withdrawing your funds or selling stocks to protect your retirement savings from a crash. But Hill recommends resisting that urge.
“There’s lots of swings, ups and downs, and they can be uncomfortable, but they’re not abnormal. This is reasonable volatility in the market. And in order to be a long-term investor, you have got to keep riding the roller coaster,” Hill says.
In other words, even if the market goes down, you can count on it eventually going back up. But you don’t want to miss out on that rise by prematurely withdrawing your funds. It’s important to keep your hands off your retirement savings to avoid locking in losses, but it also prevents triggering potential fees and unwanted tax implications.
“If you withdraw early or you sell, it’s going to be a lot more difficult to achieve those long-term retirement savings goals,” Hill says.
“By leaving your retirement savings alone, you’re allowing it to grow and you’re allowing your money to make money on itself,” Blacklock says. “The longer it’s invested, obviously the more money you’ll have.”
As you think about how to protect your retirement savings from a crash, you may be tempted to rebalance your portfolio given the ups and downs in the stock market. But it’s important to keep yourself from taking any abrupt action, Hill says.
“By leaving your retirement savings alone, you’re allowing it to grow and you’re allowing your money to make money on itself.”
Ideally, you should already have an investment policy statement in place that outlines how often you rebalance your portfolio, Blacklock says. This way you’ll know that on a regular cadence, say every six months, you’ll review the investments with your advisor to determine if you need to make any changes to your strategy.
If you don’t have this plan, now can be a good time to create one. Work with your financial advisor to assess your mix of stocks and bonds. That said, don’t try to rebalance on a faster scale than you’d initially planned for, Hill says, as you don’t want to overreact to market volatility. You want to keep a level head when protecting your 401(k) in a recession. In partnership with your advisor, keep a long-term perspective.
“Always, always, always work with your trusted financial advisor and make those decisions together,” Hill says.
Between job losses and uncertainty in the markets, it can be tempting to make rash decisions during a recession. But if you take a deep breath, assess your finances and reflect on your options, you can determine your next step with care.
For parents, that means finding a way to keep supporting your family while also prioritizing your long-term financial goals, including retirement. Protecting your retirement savings from a recession is the smart thing you can do, both for yourself and for your family.
Now that you know how to protect your 401(k) or other retirement savings in a recession, check out these top retirement savings mistakes to avoid.
1 “Millennial life: How young adulthood today compares with prior generations.” Pew Research Center, Washington, D.C. (February 14, 2019) https://www.pewsocialtrends.org/essay/millennial-life-how-young-adulthood-today-compares-with-prior-generations/
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