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How to Right Your Retirement Savings After Coronavirus Setbacks

There is a route to replenishment in 2021 and beyond for investors whose retirement savings have been affected by the pandemic.

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The COVID-19 pandemic and government shutdown threw our lives into disarray on many levels. Many Americans relied on their savings accounts to help them make ends meet as a result of widespread unemployment and the economic downturn. If you've had trouble planning for retirement, consider using these methods to replenish your retirement fund in 2021 and beyond.

Reassess your situation

Don't panic if you had to take a 401(k) loan or withdrawal, drain an IRA, or dip into your Roth, Cameron Burskey, managing director of retirement security at Cornerstone Financial Services in Southfield, Michigan, says there are ways to get back on track without jeopardizing your retirement goals.

The first step is to assess where you are now and where you need to be in order to achieve your objectives, Burskey advises. He suggests conducting a retirement income review with the help of a financial advisor or planner, as the findings will point you in the right direction.

Make a plan

To restore your retirement fund, create a monthly schedule, says Dan Hoffmann, managing director and financial planner at Morgan Stanley in Chicago. Every month, add a little more than your regular contribution, he advises. Every three months, set a calendar reminder to nudge your donation up a notch. Big changes are difficult, but small gradual changes will help you get back on track.

Advisors recommend that you pay yourself back as soon as possible if at all possible. The Coronavirus Aid, Relief, and Economic Security Act waived the additional 10% tax penalty associated with early distributions of up to $100,000 in qualifying retirement accounts during calendar year 2020 for those who were harmed by the pandemic. When you withdraw your distribution, you'll still owe income tax, so you will get those taxes credited back if you re-contribute it within three years.

Step up your savings

For others, the pandemic has provided an opportunity to save their lives. Maybe you haven't traveled as much or spent as much money on eating out as others. Perhaps you've saved money on gas because you work from home. Catch-up contributions for retirement plans in 2020 and 2021 allow people 50 and older to contribute an extra $6,500 above the annual contribution cap of $19,500 for 401(k)s and $1,000 above the annual contribution limit of $6,000 for IRAs, providing a boost to retirement savings.

For those who have "picked up supplementary income through freelance or one-off gigs," IRAs can be a good choice, according to him. If the IRA account you want is less expensive and you want more investment options, advisors say rolling over your 401(k) plan to an IRA might be a good idea.

Fees associated with IRAs and 401(k)s are important to remember since the lower the fees, the better. The more you pay, the more money you have to spend.

Have a backup plan

Advisors typically view withdrawals from retirement accounts as a last resort. One pandemic lesson learned: Having a contingency plan in place will help you avoid having to tap funds set aside for retirement in the future.

Other experts suggest that you start small, with a target of building up to $500 in an emergency fund, and then add to it over time. A home equity line of credit can also come in handy if you need money quickly.

Lower payments save money that can be put into a savings plan or used to create an emergency fund. Furthermore, many home equity lines of credit do not impose provisions for early repayment or prepayment.However, bear in mind that your home is now backing your loan, your loan payments could increase if interest rates rise, and you may overspend with access to a line of credit if you lack discipline.

Roth IRAs, like home equity lines of credit, can provide access to cash, according to advisors. Roth IRAs are financed by after-tax donations, and withdrawals are tax-free if kept for more than five years and made after the age of 59 1/2. If you need money quickly, this increased withdrawal flexibility can be beneficial.

If the pandemic reduced your income this year and placed you in a lower tax bracket, now could be a good time to convert your conventional IRA to a Roth IRA. To lock in withdrawal flexibility, you'll pay fewer taxes, which will help you later.

Revisit your portfolio

Advisors say now is a good time to review the asset distribution of your investment accounts. According to Rob Austin, head of research at Alight Solutions, a 401(k) record-keeper for large employers in Charlotte, North Carolina, the rapid market sell-off in March 2020 triggered record-high trading volumes, with the majority of investors trading out of stocks and into fixed-income assets, such as bonds or money market funds.

Despite the market's recovery, Austin said Alight hasn't seen the trend reverse or investors return to stocks from fixed income, which means some investors are likely to have lost money due to the market's recovery.

What is the story's moral? When saving for retirement, it's best to take a long-term approach and stop making snap decisions. Whether or not you made trades during this period, advisors recommend revisiting your portfolio if there is substantial market uncertainty because your portfolio allocation is likely to have changed.Advisors agree it's important to make sure your asset allocation is sufficient for your ambitions, risk tolerance, and time period, or the amount of time you have to spend before retiring, and to rebalance as needed.

Consider reducing investment risk if you're less than five years away from retirement, according to financial advisors. That way, potential unanticipated uncertainty won't throw your plans off, forcing you to rethink your plans or make trade-offs just as you're about to retire.

The initial market decline, however, wasn't all poor news. Many who remained invested reaped the benefits of a rapid and steep recovery. Even if you quit adding to your plan, took a distribution, or borrowed money, the good news is that your investment balance is definitely worth more today than it was a year ago.So, even though you feel like you have a lot of catching up to do, your money was always working for you.