Depending on your annual income, you could lose more than $200,000 in investment gain in a retirement account just by taking a year off work.
Many are the people who have been unemployed since 2020, who have even only survived from stimulus check to stimulus check or unemployment benefit. Another group of people with the combination of home and work responsibilities, who managed to keep their jobs, have wanted to reduce their work hours or even leave the workforce in order to reorganize their lives, leaving them without enough income for other purposes. Whatever the reason, one of the most sacrificed items in personal finance is retirement savings.
An example of this situation is the one experienced by millions of people, especially women. Nearly 4 in 10 women are considering reducing their work hours or quitting their job due to increased household needs, especially in terms of family care during the COVID-19 pandemic, according to data from a recent Fidelity survey.. At least 951 of the 1,902 adults surveyed were women. Of those, 42% said they are considering retiring from the workforce due to homeschooling needs.
The biggest problem with anyone leaving or losing their job, including working women, is that as incomes decline, they also stop contributing to their 401(k)s and IRAs. The most adverse effect is seen in 401(k) accounts that are employer-sponsored and lose any contribution from the boss, which puts them behind in retirement savings.
Fidelity calculated how much it would hurt retirement savings, especially for women, if they took just one year off work. The calculations assume you were saving 9% of your salary per year and earning a 3% employer match.
Here’s what taking a year off for your retirement savings would mean at three different income levels:
- If your salary were $50,000 a year and you decided to take a year off, your retirement savings would be reduced by $106,469.
- If your salary is $75,000 a year and you decide to take a year off, your retirement savings would be reduced by $159,702.
- If your salary is $100,000 a year and you decide to take a year off, your retirement savings would be reduced by $212,936.
It can be understood that unemployment is a phenomenon alien to the people who suffer from it, but if a worker decides to leave the labor force at will, it is possible that in addition to affecting their long-term finances, it may also block their professional growth. By the time he decides to return, it would be hard to find a job at the same level and with the same pay.
If you’re fortunate enough to return to the workforce with income equal to or similar to what you had before you left, it’s important that you immediately re-contribute to your employer-sponsored 401(k) retirement accounts and an IRA alternatively, to try to recover your savings in the future and the affectation is not so perceived by you in your retirement.
Remember that one of the main tips on saving is to set aside at least 10% of your monthly income for that item, but if picking up the pace is difficult, start with 1% or 2% and gradually increase it over time. The important thing is that you don’t stop contributing.