Why Now Is the Best Time to Look at Your Retirement

by Sherry Hao, Controller, U.S. Money Reserve

While the markets are a bit chaotic, now might be the right time to take a look at your retirement portfolio.

If you’re like most Americans, 2020 has been a doozy for your personal finances. Pandemic cuts, job losses, and a crazy, disconnected market have all taken their toll on our ability to save and plan for the future. Yet as the Oracle of Omaha (aka Warren Buffett) always says, “Be fearful when others are greedy and be greedy when others are fearful,” and it’s an adage that especially rings true in 2020.

This year has proven to be one of the more volatile and out-and-out odd years on record, Add in the layers of social injustice, a dramatic and profoundly partisan election, and continued unknowns around the pandemic’s growing danger, and we have a perfect storm of the unknown. While most financially savy people are no strangers to market swings, they may perceive this year as more intense than usual — and it has been. That doesn’t mean you should set your retirement plans by the wayside, however. Here’s why now is the best time to take a look at your retirement.

Time Is Your Friend: The More You Have, the More Money You Can Retire with

The driving force behind saving for retirement works off the backbone financial idea of the time value of money and compounding. This idea states that money you have today is worth more than an identical amount sometime in the future, but only if you move it into an account that earns some kind of interest — which is where compounding comes in.

If you can start putting money aside in the early days of your career, you have a better chance of reaching your retirement goals by the time you’re ready to leave the workforce. This illustrates the value of diversification over time. You can put money in riskier funds, stocks, and bonds early on, so that you don’t need to risk as much as you approach retirement. Every dollar you move into these areas now will earn more money because you will be able to earn it for longer. That also means you’ll have to put away less now to reach your goals later. Sounds like a pretty good deal, right?

Sadly, today’s young workforce isn’t taking advantage of this adage. A 2018 study by the National Institute on Retirement Security showed that two out of three adults ages 21 to 32 had not started saving for retirement. That’s partially because many young workers don’t qualify for employer-sponsored retirement savings and partly because of the crushing burden of student debt. Many young people simply don’t have the extra income to consider putting aside a nest egg for their golden years.

Recessions and Downturns Are Good Occasions to Put More (not Less) into Your Retirement

While many economists at top banks continue to warn of a double-dip recession in 2021, that doesn’t mean you shouldn’t allocate more for your retirement now. While you may be tempted to pull your retirement funds out early or reduce your contributions, now is not the time to get cold feet. When it comes to retirement funds, slow and steady always wins the race — stay the course, and you are likely to make it to the other side unscathed.

But…Don’t Pick Individual Stocks

Sure, you can find some “deals and steals” on the stock market today, though the entire market has become increasingly divorced from current economic realities, but if you’re new to this area, you shouldn’t just pick individual stocks. Even seasoned pros and financial experts warn against it — simply because no single person can truly time the stock market.

According to Business Insider, more than 800,000 new investment accounts were created between the start of the pandemic and May of this year. Yet as I have said before, the only way to win at this game — especially when it comes to retirement — is to have a long-term buy and hold plan. Increasing your contribution to your diversified retirement funds is the right move right now.

Be Sure to Max Out Your IRA This Year (and Get a Tax Break)

Since we’ve all had to get a bit more nimble when it comes to our finances this year, you may have to rethink the vehicle you use for your retirement. Perhaps you got caught up in the 401(k) matching cuts that some businesses made as a result of COVID-19 losses. Maybe you lost your job. Either way, now is not the time to stop thinking about how best to retire comfortably — and that might mean contributing to an IRA instead of an employer-supported 401(k). In many cases, most people have both types of accounts to help them reach their goals, but for 2020, the IRA certainly provides the most bang for your buck.

Why you might ask? For one, you can deduct the $6,000 to 7,000 (depending on the type of IRA, your age, and income) that you put into an IRA on your taxes. Secondly, compounding rules apply to IRAs, too — which means that the sooner you contribute, the more you can earn in the longer run.

How to Contribute to Your Retirement The Right Way in 2020

Whether you are just starting to contribute to your retirement or have been at it for a while, 2020 is undoubtedly the year to stay the path. Here’s how to contribute to your retirement the right way this year.

Do the Math

You need to do some simple math to figure out just how much you might need to retire. First, you need to take your age into account. The older you are, the more money you’ll need to contribute to ensure that you’ll hit your goal by the time you reach retirement age.

Second, while most retirement planning models talk about focusing on your earnings to figure out what you might need to live on into retirement, it actually pays to shift your thinking and focus on what you spend. A good rule of thumb to figure out just how much money you might need for retirement is to take your annual spending and multiply it by 25. That’s the size of the nest egg you’ll need in order to safely withdraw about 4% of it per year to live on during retirement.

Once you have that number figured out, you can factor in how long you want to work and what exactly retirement might look like for you. The current pandemic has changed the way people live and work — which will also change the way we retire. Maybe most of us will work through our golden years. Perhaps, as a result of the pandemic, we won’t take as many fancy trips abroad. Maybe we’ll choose to live closer to our kids rather than retiring to Florida or Arizona. It’s essential to take a close look at the things we want in retirement so that we can plan for those costs accordingly.

So what costs should you consider? Everything from housing and healthcare costs to travel and basic needs costs. No one wants to have to rely on the kindness of friends and family when they reach retirement age, and no one knows what the future holds for the state of the world — but if you plan now, you’ll be in a far better position when you hit age 65 (or whatever age you have chosen to retire at). It’s vital to protect your assets now, stay the course, and look at smart, steady ways to ensure that you will have plenty of cash as you reach retirement. No matter what happens as the global pandemic continues, by staying slow and steady and taking advantage of all the retirement tools at your disposal, you can be sure that you’ll have a comfortable, healthy, and long retirement ahead of you.