Between massive unemployment and a volatile market, you might expect that many Americans may have put their retirement contributions on pause or at least decreased their contributions. But it turns out that for nearly one-third of Americans, this wasn’t the case. A TIAA survey of retirement plan participants conducted in late 2020 found that 31% of Americans actually increased their retirement savings amid the coronavirus pandemic. Here’s a look at why that may be — and why you should consider increasing your contributions, too.
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Some Americans Increased Their Contributions Out of Habit
For some retirement plan participants, increasing contributions is something they do on a regular basis — regardless of any external influences. Shelly-Ann Eweka, CFP, senior director at TIAA, recommends making it a habit to increase your contribution whenever you get a raise.
“If you were putting in 10% and you got a 10% raise, if possible, take all of it, but realistically, try to split it into thirds,” she said. “[Use] one-third of your raise toward paying down debt, another third for increased lifestyle expenses — because with inflation, costs go up — and then try put one-third toward savings [and/or] your retirement plan contributions.”
Some plan participants may also have boosted their retirement contributions after reviewing their annual cash flow. Since many Americans saved more during the pandemic, this could mean they had more wiggle room to up their contributions. Or if they had debt to pay off and were able to do so with the extra cash, that could also be a motivator to contribute more to retirement plans.
“If you just finished paying off a debt, immediately take some of that debt money and increase your retirement plan contributions,” Eweka advised.
Retirement Income Calculators Also Motivated Americans To Contribute More
Of those who increased their contributions and cited that they were motivated to do so, 48% said they were influenced by a retirement income calculator or projection, the survey found.
“Retirement income calculators show how much income you’re projected to receive for your lifetime,” Eweka said. “That retirement calculator includes your Social Security, your pensions if you’re fortunate enough to still have one, or if you can turn some of your investment assets into a guaranteed income or withdrawals from investment assets. Some calculators will also do some ‘stress testing’ — testing the projections based on market assumptions.”
These calculators can be a useful tool to identify whether or not your contributions will enable you to retire when you want and maintain your desired lifestyle. When they show something that’s not aligned with your goals, this can be an indication that you need to start contributing more.
“Let’s say you spend about $5,000 a month now, and it’s projecting that you’re going to have $3,000 a month in retirement — that’s a significant gap,” Eweka said. “That’s a huge red flag. Once that gap is identified, that’s when you have to decide how you’re going to fill that gap. I recommend that people work with a financial advisor so that you can plan how you’re going to meet that gap. There’s no magic. You’re going to meet the gap by working longer, saving more and spending less — a combination of the three.”
Aside from habit and retirement calculators, other motivations for Americans to increase their retirement contributions in 2020 include information in their plan statement, information or advice they received from another source, information or advice provided by their employer or plan provider, a one-on-one meeting with a financial advisor, and group meetings or seminars for employees at work.
Although 31% of Americans Increased Retirement Contributions, 14% Decreased Theirs
Unsurprisingly, some Americans decreased their retirement contributions in 2020. Some did so as a result of financial hardships that came as a result of the pandemic. This could be a personal job loss or the job loss of a partner. For some of these Americans, “they had no choice,” Eweka said. “They had to reduce it because they needed the cash flow in order to keep the lights on.”
Others reduced contributions in anticipation of a future job loss.
“A lot of people had the fear, is my job next?” Eweka said. “Looking at their emergency money, like, how am I going to pay my bills if my job ends? So they’re like, I’m going to stop contributing so I can start putting more money into that cash account.”
If you’re one of the Americans who decreased their retirement contributions due to a lack of an emergency fund, Eweka said to prioritize building this fund ASAP.
“Start small,” she said. “If you can, build one paycheck amount. [The typical] emergency fund recommendation is six months of expenses, and that’s daunting for a lot of people — start with one paycheck. Keep going, and the next thing you know you’ll get to those six months.”
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