As companies cut 401k matches to slash costs during the coronavirus pandemic, American workers are losing a valuable tool to save for retirement.
While many of these measures taken by nationwide retailers to small businesses are temporary, they still reduce how effectively you can prepare for retirement. Experts offered advice on how employees can weather this setback, so they can still dream about a comfortable retirement in their golden years.
Don’t get discouraged from saving
While a match, or “free money” from your employer, may entice you to contribute to a 401k, it shouldn’t be the only reason. You should continue automatically contributing even if your company has stopped for now.
“The major benefits are the automatic savings without you having to actually do anything,” said Amit Chopra, managing partner at Forefront Wealth Planning and Asset Management. “And the tax benefits of having money saved pre-tax, and growing tax deferred until retirement when in theory you should be in a lower tax bracket.”
This year, you can contribute up to $19,500 to your 401k. Adults who are 50 and older can contribute up to an additional $6,500 this year.
Take advantage of cheaper shares
If possible, it’s time to sock away more in your 401k, said Edward Snyder, president at Oaktree Financial Advisors.
“It's a tough break, but don't stop contributing. In fact, if you can afford to, contribute more,” Snyder said. “This can help make up the difference from the lost employer match, but also you are buying shares right now cheaper than you could have bought them a couple of months ago.”
Start contributing to an IRA account
Another option is contributing to an IRA, which tends to have lower management fees and more investment options than a 401k, said Danielle Harrison, certified financial planner located in Columbia, Missouri. You don’t need to roll over your 401k; just start contributing to an IRA on the side, while the match is suspended, Harrison said.
“If the employer starts matching a few months later, I would most certainly begin contributing [again] at least enough to get the match,” Harrison said.
You can contribute up to $6,000 in an IRA if you’re under 50, and up to $7,000 if you’re 50 and older. Another benefit is that you can convert a traditional IRA into a Roth, a post-tax savings account, and grow your investments tax-free for your future years. You can withdraw funds without taxes or penalties as long as the money is invested for five years.
“There are many do-it-yourself options with very low fees, such as Vanguard, Fidelity, or Schwab,” Harrison said. “You can also look at working with a financial advisor, but please make sure to do your homework.”
Build emergency cash, instead
If you’re like many Americans and don’t have much in emergency savings, then it may be time to suspend your 401k contributions to build up cash reserves if your employer cuts the match. Likely, your company is facing financial difficulty and could start laying off or furloughing workers, said Dennis Nolte, certified financial planner at Seacoast Bank.
Only 41% of Americans have $1,000 to cover an emergency, according to a recent poll by personal finance site Bankrate.com.
“Building some cash in tough times is a good strategy, as the next layoff or stock market crash could seriously affect your family finances,” Nolte said. “Without a match, it’s less compelling to put money in when you’re worried about paying a car repair.”
Read more information and tips in our 401k section