In response to the COVID-19 pandemic, the federal government passed the Coronavirus Aid, Relief and Economic Security (CARES) Act in March. One of the provisions of the CARES Act was to make it easier for people who qualified to withdraw funds from retirement accounts, like 401(k) plans and IRAs.
If you dipped into your retirement funds to offset the financial effects of the coronavirus pandemic, it’s time to start taking action to replace those funds as soon as possible.
Get Serious About Reducing Your Debt
If you had to dip into your retirement funds to pay your debts, consider it a lesson learned. Start working now to pay off accumulated debt, such as credit card balances, student loans and medical bills.
You may also want to consider refinancing your mortgage and shortening its term. Mortgage rates have tumbled to historic lows in 2020, while real estate values have remained relatively stable.
For example, if you have a 30-year note, refinancing to a 15-year note will likely raise your payment a bit. However, you stand to save a ton in interest by paying off your home earlier.
If your mortgage is mostly paid off or fully paid off, you could sell your home and use part of the proceeds to pay cash for a smaller home and the other part to pay off other debt.
By doing so, you would effectively eliminate one of your largest debts and possibly the bulk or entirety of your remaining debt.
To make things even easier, consider moving to one of the less expensive states where retirement costs are less than $45,000 per year. That way, you’ll get more out of your retirement dollars.
Consider Series I Savings Bonds
If the stock market’s got you down and you want an investment that won’t result in a loss, consider Series I Savings Bonds backed by the U.S. Treasury.
It’s true that you won’t get the returns that the stock market can provide with a Series I Savings Bond. However, the return will likely be better than anything you can get from your bank.
Plus, these bonds are fully protected against inflation and will never lose purchasing power.
Plan To Work Past Your Original Retirement Date
Even the best-laid plans can go awry. If you already had your retirement date set, you may need to reconsider. Sticking with your daily grind for a few extra years could help you build up your retirement nest egg.
Plus, if you work at a company that gives you a pension, working longer can increase your bottom line. Some employers, like the federal government, calculate your pension annuity by averaging together your three highest-earning consecutive years.
Consider Making Catch-Up Contributions
If you’re 50 or older — or you will turn 50 during the year — you’re eligible to contribute extra money to your 401(k) plan, which could help you recoup some of your losses. For 2020, the catch-up contribution limit is $6,500.
If possible, you should also increase the amount you contribute from your paycheck each period — especially if your employer offers a match. The IRS allows workers to contribute up to $19,500 per year in 2020.
Wait as Long as Possible To Take Social Security
Even though you can start drawing Social Security benefits when you turn 62, waiting until you reach full retirement age — or even later — can give you a higher amount. Your full retirement age is determined by your birth year.
For example, if you were born in 1960 or later and retire at 62, your monthly benefit amount will be 30% less than it would be if you waited until your full retirement age of 67. So, if your full retirement benefit was $2,000, you’d only get $1,400.
You can delay taking benefits past your full retirement age to boost your benefit amounts even more. At age 70, however, you’re required to start drawing Social Security.
Invest In Long-Term Care Insurance
If you haven’t done so yet, start looking for long-term care insurance. Although you don’t want to pay premiums for years and years before you’ll actually need it, you should secure it by age 60 to 65 — or five years earlier for couples — according to financial advisors. Waiting until age 70 can cause the premiums to more than double. You could also be denied if you have serious health issues.
Having to shoulder the cost of long-term care could decimate your retirement funds. The average monthly cost of an assisted living facility is $4,051, according to Genworth’s 2019 Cost of Care Survey. And a private room in a nursing facility will run you more than double, at $8,517 per month.
Pay Off Your Car and Keep Driving It
The average length of a new-car loan is around 72 months, according to Experian. So even if you’re able to put down a sizable down payment, you’re still saddling yourself with hundreds of dollars of debt each month — for years — that you could funnel toward retirement.
If you’re close to paying off your car loan, consider driving the vehicle for a few years once you’re free and clear of the debt.
Put Effort Into Cutting Expenses
Look at your most expensive costs each month, such as electricity, cable and insurance. You can likely reap significant savings if you shop around to see if you’re getting the best deal for your money. Here are some additional money-saving ideas.
Just by setting your thermostat 8 to 10 degrees higher for eight hours per day, you can save 10% annually on heating and cooling costs, according to the Department of Energy.
You can also save $40-$50 per month or more by ditching your cable or satellite TV and opting for a streaming service.
Then, take the money you’ve saved and put it toward your retirement funds.
Leverage Your Home’s Equity
You have options for leveraging your home’s equity. If you’re at least 62 and your home is paid off or almost paid off, you can apply for a reverse mortgage. A reverse mortgage allows you to take advance payments on your home’s equity.
While selling and downsizing might be the better choice, the advantage to a reverse mortgage is that you won’t have to move and you already know what your monthly utility, home insurance and maintenance costs will be.
The Federal Trade Commission recommends consulting with an independent government-approved housing counseling agency to find out if a reverse mortgage is right for you.
Another option is a cash-out refinance, which means you refinance your home and take some of its equity in cash. You’ll have to repay this debt as part of your newly refinanced loan, but it can provide you money now to help you improve your financial situation.
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