When going through a difficult financial time, it may be wise to reduce current expenses. It might be necessary to pause contributions to retirement accounts. However, before reducing retirement savings, you’ll want to have a plan for when and how you’ll pick up savings habits again.
Here are some periods when you may need to temporarily stop saving for retirement:
- During a health crisis.
- To get rid of credit card debt.
- Times of unemployment.
- When starting a business.
- When saving for a home.
- To build an emergency fund.
- When paying off student loans.
- While kids are in college.
During a Health Crisis
If you find yourself suddenly facing medical costs that aren’t covered by your insurance, you’ll likely need to reach outside of your regular budget to pay bills. “Pausing savings in your 401(k) plan early on in a health crisis can be beneficial,” says Jay Ferrans, president of JM Financial & Accounting Services in Southfield, Michigan. Consider putting the funds you usually deposit in a 401(k) in a savings account until you need the money. This way, “you will have liquid dollars to spend on the care as needed later on,” Ferrans says.
If you end up not needing that money, you can invest those funds later toward retirement. You might put the money in a traditional IRA or Roth account. If you do use the funds for health costs, you can get back into contributing regularly to a 401(k) after the crisis passes and you’re able to fit retirement savings into your monthly budget.
To Get Rid of Credit Card Debt
If you’re carrying high credit card balances that aren’t getting paid off every month, it could be in your best interest to stop saving for retirement while you pay down the debt. “The interest cost (from the credit cards) will most likely eat into whatever gains you might experience in your retirement plan and more than likely exceed it,” says Brett Keener, a financial advisor at Pacific Advisors in San Diego. Say you have a credit card debt that has an interest rate of 15% or 20%. If your retirement accounts are earning 5% or 10%, the returns your invested money earns will be lower than what you are paying for the debt. “You would be better off pausing or decreasing your contributions until you can get to the point of paying your credit card balances off every month,” Keener says. Once you’ve cleared the debt, you can get back into long-term savings habits.
Times of Unemployment
If one member of a married couple loses a job, it might be time for the other spouse to put a hold on retirement savings. You can use the extra dollars to pay for expenses that your spouse’s income usually covers. “Remember to get started saving as quickly as you can when your spouse finds new work,” Ferrans says.
When Starting a Business
To get a new business venture off the ground, you may need funds for purchasing inventory, supplies, equipment or office space. “You may want to pause saving for retirement if you are starting a new business,” Keener says. Once the company begins to generate profits, you can pick up saving for retirement again.
However, before redirecting retirement contributions to a new business, you’ll want to consider the potential drawbacks. “The money in a retirement plan is really meant to be locked up for decades,” Keener says. If you take it out and the business doesn’t turn a profit, you could end up far behind in your retirement savings goals.
When Saving for a Home
If you’re planning to purchase a home within the next few years, you’ll likely want to build up funds to cover initial costs. “You may want to reduce your retirement contributions to either put down a larger down payment or to make sure you have a cash reserve after you close on your home,” says Ari Baum, CEO of Endurance Wealth Partners in New York City.
To Build an Emergency Fund
If you don’t have any extra cash in a savings account that can cover unexpected expenses, you may decide to pause retirement savings. You can use the funds you usually set aside for retirement to build an emergency fund. “The need for a reserve fund has been made clear by the current pandemic and its effect on many people’s short-term finances,” Keener says. You might decide to save every month until you have an amount stored that could be used to cover three to six months of living expenses. Once you have enough built up, you can redirect that monthly savings into a retirement account.
When Paying Off Student Loans
If you recently graduated from college and are anxious to reduce student debt, you might opt to direct money pegged for retirement toward loan repayments. By focusing on getting rid of student loans, you could pay off the balances in a short period of time. Then you’ll be able to steer the funds you had been paying each month toward student loan balances to long-term savings.
While Kids Are in College
When your children enter college, you might look for ways to help pay for their education. While you may want to continue saving a certain amount toward retirement, such as contributions that your employer matches, you could decide to use additional funds for school payments instead of retirement savings. “Pausing unmatched contributions to retirement plans could be done while children are in college in order to pay more of the college bills out of income rather than taking on debt,” Keener says. After their college years are over, you can go back to saving more for retirement.