So, you’ve blown your retirement savings — what happened? Perhaps, as your spouse keeps pointing out, it’s because you started drinking Dom Pérignon in place of water after hearing a rumor that Gwyneth Paltrow does it. More likely, you dipped into your retirement savings early because you were thrown one of life’s many curveballs, such as a flood that you weren’t insured for or a prolonged illness.
Regardless, the good news is that your lack of savings isn’t the end of the world. You might be disadvantaged in terms of time — an important asset in saving for your golden years — but there are steps you can take now to prepare for a happy, prosperous retirement.
Last updated: Aug. 8, 2019
You Bought a House
There’s a lot to be said for home ownership, and plenty of people decide to draw on their retirement savings to achieve that dream. In fact, a down payment on your first home is one of the things that the IRS will waive its early-withdrawal penalty for if you decide to make use of your 401(k) or IRA. However, doing so can put you in a tough spot by removing funds you would otherwise expect to commit to your retirement planning.
Solution: Plan To Downsize in Retirement
As reasons for drawing down your retirement savings go, this one is among the most sensible. You’re not really giving up that money from your retirement account as much as you’re shifting it from one investment vehicle to the another. In fact, depending on where you buy, you might even get a better return than your 401(k).
Regardless, if you needed to wipe out your retirement fund to afford your house, it might be prudent to make downsizing your living situation in retirement a part of your plan. Selling your home to move to a smaller house or a condo can mean a sizable infusion of cash into your nest egg right when you’ll need it the most.
Went Back to School/Sent a Kid to College
Getting a college degree can often be the key to building your career. As such, pulling money out of your retirement account to continue your education could be worth it. For that matter, many parents will see prioritizing their child’s future career over their 401(k) as a pretty obvious choice.
Fortunately for you, paying for education costs is another form of early withdrawal that won’t trigger the additional tax penalty from the IRS.
Solution: Boost Your 401(k)/IRA Contributions
You can make up a lot of ground by increasing how much of each paycheck you’re routing into your 401(k) — or by contributing more to your IRA — especially if you’re making more money because of your new degree. Even if it’s your child’s education you’re funding, look for ways that you can be more aggressive in saving and investing more of your income. It might mean living a little leaner in the present, but it could be well worth it in the long run.
Had an Unexpected Medical Emergency
Even if you have health insurance, an unexpected medical issue can quickly result in your out-of-pocket costs soaring, not to mention the possibility of having to miss an extended stretch at work. Fortunately, you can probably take an early withdrawal without having to pay the additional tax penalty, but you will have to accommodate for that elsewhere.
Solution: Cut Back on Retirement Expenses
Increasing your retirement fund is just one way of ensuring you’ll be ready when you stop working. Planning on a leaner life after retirement can also help you stretch what you have as far as you need. And that doesn’t necessarily have to mean making painful cutbacks. Strategically paring down your expenses can just mean prioritizing what really matters to you. You might even consider moving somewhere with a lower cost of living for an easier time making ends meet.
Paid for a Wedding
No matter what your wedding planner might insist, you don’t have to spend a lot of money on a wedding. That said, there’s a reason why so many people choose to do so anyway: it’s an important moment in their — and/or their childrens’ — lives and they want to make the most of it. And hey, you’re hardly the first person who decided spending lavishly on their big day is worth it. If having your dream wedding is more important to you than your dream retirement, that’s your choice, but you will need to make some adjustments.
Solution: Delay Retirement
Of course, one great way to ease the financial pain of wedding bliss is to plan on putting off your last day at work by a few years. This can help you in three key ways. Firstly, you’re buying extra time for your investments to keep growing. Secondly, you’re getting several additional years of salary, which can make a big difference, especially if you’re taking advantage of the higher annual contribution limits available for older Americans. And finally, putting off retirement will mean boosting the size of your monthly Social Security check, providing a stronger income stream. If you retire at 70, you’ll get 132% of the monthly benefit you would have gotten at 66.
Got a Divorce
The financial consequences of your relationship ending might be the last thing on your mind as you’re getting divorced, but that doesn’t mean you can completely overlook them. You had probably planned your retirement around a shared life with your significant other, so divvying up your assets will probably mean having to adjust your expectations considerably.
Solution: Reduce Expenses
As hard as your transition from married life can be, it might also be a good chance to take a long hard look at your spending and find areas to cut back. You might find that your housing situation is going to change or there’s one less car payment you have to worry about, giving you a great chance to free up more space in your budget for contributions to your retirement accounts.
Made a Big Investment That Didn’t Work Out
The relationship between risk and potential return in investing is usually pretty direct, so the opportunities for the biggest windfalls often come with the highest probability that you’ll lose everything. As such, that big play you made to fund your luxury retirement could blow up in your face and make it a lot harder to fund your basic retirement. Maybe you got sucked up in the bitcoin craze or helped a family member fund their new business venture only to see it all collapse. Regardless of why, taking big chances with your money can always end up breaking bad, but it doesn’t have to mean disaster.
Solution: Find Another Source of Income
However it is that you saw your investments go very wrong, one potential solution is to just find another income stream to pad your earnings. With more money coming in, you’ll have a lot more to route to retirement accounts and reinvest in the sort of low-risk bonds and index funds that you can rely on.
And there are a lot of options for finding additional income streams that can fit around your full-time job. If you’re lucky, it might even just mean taking your hobby and turning it into a side hustle.
Got Laid Off
Unfortunately, almost no one has absolute job security. Depending on your field, a job loss could mean an extended period of unemployment, taking a new position with lower pay or even having to move up your retirement. Not to mention, if you don’t have an emergency fund, you could end up needing to tap your retirement accounts to cover expenses.
Solution: Change Your Asset Allocation
Shifting assets from stocks to bond as you age is a normal part of retirement saving, trading higher returns for greater stability the closer you get to your retirement date. However, one way to potentially boost your 401(k) is by taking a calculated risk and keeping more of your money in stocks for longer than you normally would.
Granted, there is definitely some risk here — if there’s a big drop in the markets at the wrong time, it could mean having to delay your retirement a few years as you wait out the recovery. However, if you are ready to take that chance, the additional returns it creates could help you close the gap created by losing your job.
Even the best home insurance plans don’t cover everything, and something like a flood can leave you footing the massive bill for making your house livable again. And while you can likely argue a hardship exemption to avoid taking a tax hit for drawing down your 401(k), you’re still likely to find yourself facing a massive setback to your retirement plans.
Solution: Use Catch-Up Contributions
Though mother nature might have dealt you a bad hand on this one, you might be able to take advantage of the higher contribution limits for your retirement accounts to help make up for having to spend your hard-earned nest egg on rebuilding your home. Once you hit the age of 50, the IRS allows you to make additional “catch-up” contributions to your IRA, Roth IRA or 401(k). That means you can exceed the normal $6,000 annual limit on contributions to your IRA or Roth IRA by up to $1,000, or the $19,000 annual cap on 401(k) contributions by up to $6,000.
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About the Author
Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.