Losing your job is always a stressful event. On top of searching for a new position and redesigning your budget, you might have to seek new training or even consider relocating. With all of the short-term questions to consider, it can be difficult to prioritize long-term concerns, including retirement planning. However, job loss presents both obstacles and opportunities for retirement savers. While you address your immediate needs, don’t leave retirement planning behind.
Step 1: Re-evaluate Your Retirement Goals
Whether you intended to stay at your job until retirement or not, your retirement plan probably didn't include any periods of unemployment. For at least a short time, you won’t be putting as much – or any – money toward your future. This may change your target date of retirement or the amount of money you can expect to withdraw. Obviously, the longer your unemployment lasts, the more drastically you’ll need to re-evaluate your goals.
If possible, it’s best to consult with a professional, rather than going through this process on your own. If you’re newly unemployed, you may be tempted to make choices out of fear or anxiety. An outside observer can help you look at your situation practically.
Step 2: Roll over Your 401(k)
If you have a retirement account with your old employer, you have a few options. Depending on your plan’s rules, you may be allowed to leave your 401(k) as is, or you could cash it out. You could also roll it over into a no-fee IRA. This is typically the best choice for several reasons:
- Fees. Over a lifetime, the average two-earner household can expect to see their 401(k) earnings reduced by about $155,000 worth of fees. Of course, IRAs have fees, too, but with greater freedom, investors can choose providers that don’t charge for plan administration, and can opt for funds with low expense ratios or low-cost index funds.
- Investment Choices. Most 401(k) plans offer their users a relatively small selection of pre-screened investment choices. This is great, if the investments your company offers are good ones, but odds are, they’re not the best choices available, or at least the best choices available for you. With an IRA and a little research, you can gain access to a much larger (and more appropriate) variety of investments.
- Ease of Management. If you change jobs several times throughout your career, keeping track of all your old 401(k)s can become a hassle. Who wants to remember to rebalance six different accounts every year? Rolling old 401(k)s into an IRA consolidates your retirement funds and makes them simpler to handle.
Unless you’re truly desperate, don’t take money out of your 401(k). The penalties for doing so are steep in the short term – you’ll owe income tax on the amount you withdraw, on top of a 10% fee – and in the long term. If you cash out, you’ll rob the money of its potential for future growth.
Step 3: Consider a Roth IRA
If you are in a position to continue contributing to a retirement account, consider opening a Roth IRA, or converting your Traditional IRA to a Roth. Because the money you contribute to a Roth account has already been taxed, they’re a great retirement vehicle for the young – who are often paying much lower tax rates than they will as older adults – and the unemployed or underemployed. If your income currently places your income is temporarily low (or lower), take advantage by contributing to your IRA.
If you already have a Traditional or Roth IRA, but aren't in a position to continue contributions, simply touch base with your provider and ask that automatic withdrawals from your checking or savings account be temporarily suspended.
The Bottom Line
After a job loss, set up a meeting with an investment adviser as soon as possible. An adviser can take an objective look at your circumstances and help you decide your next move. He or she can also help you reallocate the investments you already have to fit with your adjusted risk tolerance, retirement date or other preferences. Losing your job will change your retirement savings plan, but it doesn't have to derail it completely.