Considering Reducing Retirement Contributions to Offset Wage Reductions? Think Carefully Before Acting.

In the time of COVID-19, some employers have implemented mandatory wage reductions for employees. Unfortunately, in these times, many must accept the reality of a decrease in pay rather than take their chances in a tenuous job market. If you have experienced a reduction in pay, it’s likely that you’re feeling some understandable anxiety about your personal financial situation. To make ends meet, perhaps you should consider reducing 401(k) or other retirement contributions to offset the loss of income. Below we explore important considerations to make when faced with such a decision.

Don’t Lose Sight of the Long-Term

With all of the immediate health and financial concerns related to the pandemic, it is understandable that much of our focus may be on how we can get by day-to-day. However, it is important that we maintain a proper balance of immediate concerns with long-term financial goals. COVID-19 has not diminished the importance of careful retirement planning, and all the reasons you started to save for retirement in the first place are likely still valid today. Therefore, it is important to continue contributing to retirement plans to the extent possible. At the very least, try to maintain a contribution level that allows you to take full advantage of any employer matches. These matches likely represent the best return you’ll ever get on your savings and missing out on them can significantly reduce the growth of your nest-egg over time. (If your employer has reduced or eliminated matching due to the pandemic, this benefit is eliminated. See more below).

Revisit Your Budget

With less cash coming in, it’s more important than ever to take a close look at expenses. Will your reduced salary still leave you with enough to cover essentials such as food, housing, and healthcare? Are there areas such as unused subscription services where you might be able to save? Will you experience a shortage of cash in the future? When will you experience a shortage of cash flow in the future? The answers to these questions will determine the steps you take regarding retirement contributions.

If you can reduce non-essential spending and maintain contributions at their current levels, this will likely make the most sense. However, if meeting your family’s essential needs will cause you to turn to credit cards or other borrowing, reducing contributions might be the better option. In the long run, the interest expense on credit card debt will likely end up costing you more than you will have earned on your savings. This is especially true if your employer has eliminated matching. We’ve all learned how quickly things can change in these uncertain times, so be sure to revisit your budget frequently and update your analysis as circumstances shift.

Conclusion

Being faced with a wage reduction can cause significant financial anxiety. Reducing retirement contributions may seem like a convenient option to increase current cash-flow, but this decision should be short term and only made after a careful analysis. As mentioned above, to the extent possible, it is important to keep contributing to your retirement. In addition, look for ways to reduce unnecessary or discretionary spending. However, reducing contributions is likely a better option than turning to credit cards or other borrowing to cover essentials. Just remember to revisit your retirement planning if your situation improves in the future.

 

 

DISCLAIMER: The WM Daily Update COVID-19, COVID-19 Business Resources and COVID-19 Client News Alerts and other related communications are intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.