Retirement Savings: What You Need to Know

It’s Not Just About the Match

When it comes to retirement savings, many employees are missing out on more than just the match. Fewer than 20% of participants use their employer’s financial wellness tools, which can help with building emergency savings, paying down debt, and getting personalized advice. These tools can increase the likelihood of contributing more to your 401(k) and taking steps towards retirement readiness.

The Power of Financial Wellness

According to financial expert Ms. Brestowski, participants who engage with their financial wellness tools are more likely to increase their contributions to their 401(k)s and take positive steps towards retirement readiness. By helping people deal with financial pressures, you can remove barriers that get in the way of saving for retirement.

Tapping Your Savings Before Retirement

Sometimes, retirement investors can be their own worst enemies. They do the hard work of saving, but then withdraw their money early to cover current cash needs. According to the Employment Benefit Research Institute, anywhere from a third to nearly half of 401(k) savers withdraw part or all of their money following a job change. Additionally, Vanguard research showed that 13% of workplace savers borrowed from their accounts last year, and 3.6% took hardship withdrawals.

When to Tap Your Savings

Not every early distribution or loan is a mistake. Emergencies happen, and debt can become overwhelming. If you’ve been laid off and need the funds to get by, or you have high-rate credit card debt, a distribution might actually be the best use of your funds. However, it’s essential to compare the payoff of using the cash now against the potential gains you’d give up in your 401(k).

The Math Matters

According to Ms. Benz, the straight math typically favors staying the course. For example, if you withdraw $5,000, it will grow to $50,300 in 30 years or $108,600 in 40 years, assuming 8% average annual returns. However, math won’t pay unforeseen medical bills or cover living expenses if you’re out of a job for an extended period.

Rebounding from an Early Withdrawal

The key to rebounding if you do need to tap your account early is to mentally recommit to retirement once the crunch has passed. Treat any withdrawal like a loan that you’ll pay back with interest. As long as you go back to saving within the structure of a 401(k), the power of compounding will do the rest.

Conclusion

Retirement savings is a crucial aspect of securing your financial future. By understanding the importance of financial wellness, avoiding early withdrawals, and making smart financial decisions, you can set yourself up for success. Remember to prioritize your retirement savings and avoid dipping into your account unless absolutely necessary.

FAQs

Q: What is financial wellness, and why is it important?
A: Financial wellness is the ability to manage your financial resources effectively to achieve your goals. It’s essential because it can help you deal with financial pressures, increase your contributions to your 401(k), and take positive steps towards retirement readiness.

Q: How many people use their employer’s financial wellness tools?
A: Fewer than 20% of participants use their employer’s financial wellness tools.

Q: What are some common reasons people withdraw from their 401(k) accounts early?
A: Some common reasons include emergencies, debt, and job changes.

Q: Is it ever okay to tap my 401(k) account early?
A: Yes, in some cases. For example, if you’ve been laid off and need the funds to get by, or you have high-rate credit card debt, a distribution might actually be the best use of your funds.

Q: How can I rebound from an early withdrawal?
A: Treat any withdrawal like a loan that you’ll pay back with interest. As long as you go back to saving within the structure of a 401(k), the power of compounding will do the rest.

Q: What are some tips for staying on track with my retirement savings?
A: Prioritize your retirement savings, avoid dipping into your account unless absolutely necessary, and make smart financial decisions.

Author: www.nytimes.com

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