Millions of Americans have lost their jobs in the wake of COVID-19, and many who have managed to remain employed have struggled with income-related insecurity. Throw in the fact that the stock market crashed in a very big way back in March, and you'd think most people would be pulling back on retirement plan contributions and instead hoarding their cash in the bank.
But actually, recent data from Fidelity reveals that savers are not halting their retirement plan contributions. In fact, 88% of its plan participants put money into a 401(k) during 2020's second quarter, which represents a tiny drop from the 89% of savers who put money into a 401(k) one quarter prior. Not only that, but 9% of savers actually managed to increase their retirement contribution rate during 2020's second quarter.
If your income has taken a hit in the course of the pandemic, then you may have no choice but to cut back on retirement plan contributions. And if you're out of work completely, you may need every dollar you get your hands on to pay for basics while you ride out the current recession. But if you're still gainfully employed, then it pays to keep funding your IRA or 401(k). Here's why.
1. Time is your greatest tool for growing wealth
You might think that skipping a year of retirement plan contributions won't be all that detrimental in the long run. But actually, if you're years away from retirement, pulling back on savings right now could have major consequences.
Imagine you normally put $300 a month into your IRA, only you don't do that for the remainder of the year. Suddenly, your retirement plan has $1,500 less sitting in it. But that's not all -- if your IRA normally generates an average annual 7% return on investment (which is a few percentage points below the stock market's average), and you're 35 years away from retirement, you'll lose out on a total of $16,000 by virtue of skipping just a few months of contributions. Rather than let that happen, keep funding your long-term savings if you're in a strong enough financial position to do so.
2. There are tax savings to be reaped
The money you put into a traditional IRA or 401(k) goes in tax-free, which means you could substantially lower your near-term tax burden by contributing to one of these accounts. Or, to put it another way, if you contribute $5,000 to your IRA this year, that's $5,000 of income the IRS can't tax you on. The result? You may get a larger tax refund when you file your 2020 return, or you might owe the IRS less than you otherwise would. Either way, you stand to benefit.
3. You may be eligible for free retirement plan money
If you have an IRA, you won't be privy to employer matching dollars in your retirement account, but if you have a 401(k), you should know that company matches are still very much alive and well. Fidelity reports that 76% of workers received an employer contribution during 2020's second quarter, and that the average employer contribution amounted to $1,080. That's not a sum you should be quick to give up.
Many people aren't in a position to contribute to a retirement plan right now, but if you are, then it pays to keep at it. If you manage to power through the pandemic and maintain or, better yet, increase your savings rate, you'll bring yourself even closer to meeting your long-term financial goals.