You might be tempted to treat your retirement savings like a slow cooker—just set it and forget it. But if your recipe for retirement amounts to signing up for your employer's 401(k) plan and letting it simmer for 40 years, you could very well end up underwhelmed.
That’s because all sorts of changes can impact how you maximize retirement savings while minimizing headaches. “From a retirement perspective, any life event is a good time to check in and reassess your strategy,” advises Deborah Meyer, a Certified Financial PlannerTM and CEO of WorthyNest LLC. What sort of ‘life events’ are we talking about here? Well, for starters, anything you set up a registry for (weddings and babies!), but also things like starting a business, moving abroad, switching careers or going back to school.
Big life changes might require saving more for retirement, while at the same time dramatically impacting how much money you’re able to save each month. Though your savings plan should be tailored to your individual needs, keep in mind these rules whenever a big life change shakes things up.
When a life change limits your ability to save, do so wisely
Many financial planners will urge you to set aside 20% of your pre-tax earnings in your employer’s retirement plan (sometimes less if you’re starting to save earlier in life). But let's be real—there may be periods in your life when that simply isn't possible. Having a new baby or buying a home can necessitate scaling back your savings, as can a temporary bout of unemployment or underemployment. “Especially when people get married and start a family, they may find there are a lot of big expenses that they’re not prepared to handle right away,” cautions Meyer.
“Rather than dropping your retirement savings to zero, try to still invest enough each month to earn your employer’s 401(k) match (if offered),” explains Meyer. “Even if you’re really stretched thin, you want to continue to get that match because it’s like free money.” For those without an employer, remember that future savings and current budgeting go hand-in-hand. If you’re feeling pinched, a financial app like Mint or Digit and a plug-and-play budgeting resource can help you stick to the monthly plan—while still saving what you can.
Switching jobs may require a switch in your retirement savings
“Quitting one career to pursue a new field is a top reason why clients 35-and-under are quick to brush off their standard retirement plan,” says Kristen Euretig a Certified Financial PlannerTM and founder of Brooklyn Plans. “Millennials may have a different career trajectory than previous generations that would work one job for 40 years. Job hopping is more common, as is leaving the 9-to-5 office life to go freelance.” In fact, millennials are more likely to work freelance than any older generation, with 40% active in the side-gig economy.1
Though you can usually keep your funds parked in an old 401(k), it may be more profitable—and carry fewer fees—to roll accounts from past employers into one IRA (individual retirement account).
“If you’re making the move to freelance, you won’t have the option to sign up for another employer-sponsored plan, but that doesn’t mean you should hit the pause on savings,” says Euretig. Setting up an IRA—or SEP IRA (Simplified Employee Pension IRA) if you’re a small business owner—lets you sock away money for your future—while possibly lowering your tax bill now.
When you have more money to invest, show your gray-haired self some love
Perhaps that latest promotion came with a fatter paycheck, or maybe you had a windfall like a sizable inheritance, or moved to a city where the cost of living is much lower. Anytime financial good news comes along, think about maxing out your 401(k) contribution or opening an IRA to supplement your employer-sponsored plan—or ideally both. Total annual contributions to all of your accounts in plans maintained by one employer can be up to $58,000 for 2021 ($64,500 including catch-up contributions)2, and if you have that much to put away, it could also help to decrease how much you owe Uncle Sam come tax day.
“For some accounts, you’d pay taxes now, and for others you’ll pay taxes in the future,” explains Euretig. “That diversification helps protect you against potential tax changes that might happen between now and retirement. You’re kind of hedging your bets.” But that approach, as Euretig puts it, is ‘varsity league,’ and you'll want to consult an accountant or financial planner to hash out the specifics and to make sure you're meeting all the contribution guidelines. Either way, you shouldn't feel hemmed in or limited by your 401(k)—it's only one of many ingredients that can add up to a successful retirement recipe.
Interested in having a more in-depth retirement planning conversation?
Talk to a Truist Wealth advisor.