the employment gap what to do between later unemployment and retirement

What To Do Between Later Unemployment And Retirement

Losing your job or taking a break from work can have a significant impact on your retirement savings. This is a situation that millions of Americans continue to face, whether due to pandemic-related layoffs or personal choices. Just like women who take time off to raise children or care for family members, those who experience gaps in employment may find themselves struggling to secure a comfortable retirement.

The Impact of Employment Gaps on Retirement Savings

Let’s consider the example of a 35-year-old woman earning $50,000 annually. If she were to take a year off from work and saving for retirement, a Fidelity survey suggests that she would accumulate around $733,125 by the age of 67. This assumes she saves 9% of her paycheck with a 3% employer match and a 4.5% real rate of return. In comparison, someone in the same situation who does not take a break would have approximately $839,594 saved for retirement by the age of 67. That’s a difference of over $100,000, which only increases if you earn or save more in a year.

While these numbers may seem discouraging, it’s important to note that taking a break from work and missing out on participating in a company retirement plan isn’t the end of the world. Rob Greenman, a certified financial planner and chief growth officer at Vista Capital Partners, highlights the need for a thoughtful plan to get back on track.

How to Catch Up with Retirement Savings

If you find yourself needing to make up for lost time in saving for retirement, the first step is to get back to work as soon as possible. Nadine Burns, a certified financial planner and CEO of A New Path Financial, advises resuming your saving efforts and possibly increasing your contributions to replenish your retirement accounts. For example, consider contributing 15% of your income to your employer-sponsored 401(k) plan instead of the usual 10%.

In 2021, the maximum contribution limit for a 401(k) plan is $19,500. However, individuals above the age of 50 can save an additional $6,500, bringing the total contribution limit to $26,000.

Additionally, Burns suggests considering an individual retirement account like a Roth IRA. Many Americans are eligible for Roth IRAs, with income limits of $140,000 or less for single filers and $208,000 or less for married couples filing jointly. Contributing to a Roth IRA can provide an additional avenue for saving.

Catch-Up Contributions for Older Workers

Older workers who decide to reenter the workforce can take advantage of catch-up contributions. If you are over the age of 50, you can save an extra $1,000 on top of the regular Roth IRA limits. This means you can contribute up to $7,000 per year.

The Importance of Timing

The timing of your employment gap also plays a role in retirement planning. According to Geoffrey Sanzenbacher, an associate professor of economics at Boston College, older workers who have been laid off during this recession are more likely to retire early rather than reenter the workforce. This early retirement may result in lower retirement savings and the need to draw on Social Security earlier than planned, reducing the amount received throughout their lifetime.

Sanzenbacher emphasizes that every year you claim Social Security earlier than planned leads to an 8% decrease in income permanently. Therefore, it’s crucial to assess your savings and determine if you have enough to delay claiming Social Security to avoid further income reduction.

On the other hand, younger workers who have little to no retirement savings and experience time out of work face significant setbacks. This interruption can result in lower incomes throughout their careers and a missed opportunity for long-term compounding interest to build a substantial nest egg. Sanzenbacher advises catching up on saving later in life to compensate for these gaps.

Seeking Professional Advice

It’s worth noting that many Americans experience gaps in their retirement savings regardless of their employment history. Even with consistent employment, saving enough for retirement can be challenging. If you’re concerned about your long-term savings due to unemployment or other circumstances, working with a financial planner can provide valuable guidance. They can assess your current situation and help you develop a plan to get back on track.

According to Ashley Folkes, a certified financial planner and director of marketing and growth strategies at Bridgeworth Wealth Management, having a financial plan in place as early as possible is beneficial. A financial planner can offer accountability, objective opinions, and adjustments to your plan throughout different life stages.

Remember, planning for retirement is an ongoing process, and seeking professional advice can help ensure a comfortable and financially secure future.


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