No matter how much we plan, how much we avoid unnecessary risk, how prudent we are with our spending – financial setbacks can occur at any time. Learning how to adjust your retirement savings is the best way to guard against uncertainty and strengthen your financial well-being.
Types of Financial Setbacks You May Experience
Most people will experience some type of financial setback over the course of their lifetime. Preparing for these events can ensure that they don’t displace you so far off track that it is a struggle to regain financial control. Consider how the following may impact your financial situation:
Health issues—Health issues and emergencies can sometimes arise out of the blue. Medical procedures and tests can add up quickly.
Emergency—This can be anything from a storm evacuation, car accident, home damage, or theft. Unfortunately, some emergencies are tricky to prepare for financially.
Coronavirus—Covid-19 is a once-in-a-century event. The restrictions on movement and health protocols have left many economies battered.
Rising Debt Levels—Many people take on debt to purchase a car or a home. When inflation levels rise or the interest rate increases, this puts a strain on servicing debt. These setbacks can be difficult to avoid when you have little control over your income and budget.
How to Adjust Retirement Savings
When a financial setback strikes, taking action quickly can ensure that your financial well-being is protected. Below are a few methods to offset the financial blow.
Revisit your Retirement Contributions and Investment Allocation
A well-diversified retirement portfolio will get you through the worst of times. Depending on the severity of the financial setback, look at your percentage of stocks allocation to bonds and other investment classes. Either increase or decrease your contributions and set aside an emergency fund.
How to Manage a Withdrawal from 401(k)
When it’s time to withdraw from your 401(k) or IRA, look for a strategy that works for your budget and lifestyle.
- The 4% rule: With this rule, you withdraw no more than 4% of your savings. Furthermore, you will need to add 1-2% to adjust for inflation.
- Fixed-dollar withdrawals: This means taking a fixed annual amount over a specific period. Be sure to calculate your budget and expenses to determine the right amount to withdraw.
- Systematic withdrawals: In this plan, you only withdraw income made by the portfolio, such as interest and leave the core finances intact.
- The mixed strategy: Here, as the name implies, you can take various withdrawal approaches depending on your specific needs.
Applying these principles will give you a constant flow of income and also give you the confidence that your funds will last for a longer period of time.
How to Manage a 401(k) Loan
A 401(k) loan is a quick and secure way to gain access to cash in the short term. If you are in need, this may provide an option for you to access some of these funds before you retire. Managing a 401(k) loan includes:
- Taking out a loan if the stock market is down.
- Checking the ratio of the fee for the best deal.
- Choosing between a target-date and risk-based fund and which works best.
- Paying above the monthly installment to pay down the loan faster.
- Be sure to keep contributing towards your 401(k)! Remember you had a longer term goal in mind that you don’t want to lose sight of.
Delay Your Social Security Benefits
It is possible to delay your retirement credits, and it may be financially beneficial to do so. While you may start collecting social security benefits as early as age 62, you can also wait and enjoy a higher level of benefits. Retirement credits increase a certain percentage each month you delay starting the benefits, so if you wait until you are 70 to begin drawing on benefits, your amount will be higher than it would have been had you started collecting at age 62. To offset your retirement funds, delay claiming from your social security.
Adjust Your Financial Habits
Any financial setback will cause you to rethink your spending habits and your relationship with money. There are several ways to practice good financial habits:
- Rethink your spending: Take an objective look at your budget and look to reduce spending or where to find better deals.
- Reduce Debt: In a financial situation, look to pay off primary debts like student loans or car payments as soon as possible.
- Switch insurance providers: Shop around to see which insurers offer better premiums.
- Downsize/relocate: In extreme cases, you might need to find a smaller place or a cheaper area to live in.
- 💡For more ideas, check out our article on the Best Ways to Save Money.
Financial setbacks can happen at any time. Reevaluating your retirement plan will help you through tough times. Finding better fee structures, managing your loans, and reducing debt can help towards better financial security. By doing so, you can secure yourself and still live out your golden years comfortably.