It isn’t unusual in these times for individuals to be temporarily out of the work force. In some cases, the exit is a voluntary act such as a maternity or paternity leave or planned early retirement. Other times, the exit comes through layoffs or forced early retirements, or because there are care-giving issues for family members.
Time away from work not only means a loss of current income, but also, in most cases, the suspension of contributions to a retirement plan. If there is no cash flow due to a time off, chances are that money is not available to continue funding a nest egg.
Regardless of why someone leaves the work force, those who are able to get back to work should take advantage of the opportunity that is presented to re-evaluate financial circumstances. Is it possible to free up money for retirement savings once again? Here is a process to help determine the possibilities.
Step 1. Take care of regular expenses and debts.
Make sure cash flow can pay for lifestyle. First and foremost, that means paying for necessities such as food, clothing, shelter and transportation. Limit extraneous expenses until a steady work routine and paycheck management are established. Also ensure that payments can continue on any personal debts. Car loans, student loans and credit card debts must be paid on time. If it is possible, pay more than the minimum monthly payment required on high-interest credit card debts in order to reduce the principal balance each month.
Step 2. Manage spending.
When paychecks start rolling after a period without them, it is easy to feel “rich” again and quickly turn on the spending spigot. After all, depending on the circumstances of the time away from work, a family may have significant pent-up demand for items when purchasing has been delayed. The feeling is understandable, but it is important to spend money responsibly. This is not the time to begin careless spending habits, but instead to prudently manage income.
Step 3. Pay for future security.
Take advantage of an improved cash flow position to save for the future. The importance of saving for retirement cannot be overemphasized, regardless of economic position. Those who have the ability to work and generate income will eventually face a time when doing so is no longer possible. Those who have been out of the work force for a while should be particularly inspired to resume a serious retirement savings regimen. The financial challenges that come when there isn’t a regular paycheck aren’t unlike what Americans face in retirement. Their well-being is dependent, in large part, on the foresight they had to save money for their future financial security.
Those who have worked and were in the habit of putting some of their earnings away for retirement – either through an employer plan or an individual retirement account or both – should make retirement saving a top priority when re-entering the work force.
First, find out what employer-sponsored retirement savings options are available. If it is possible to contribute to a 401(k) or 403(b) plan, begin doing so as soon as possible. Remember, the closer someone is to retirement, the more they should save, since there will be limited time to let wealth accumulate in investments.
If offered, be sure to capitalize on the opportunity to take advantage of an employer match of all or part of the amount put into the plan. Many employers will match contributions by up to 3 percent of salary – giving you a built-in return on investment. This is, in a sense, “free” money that shouldn’t be passed up.
Contributing to an IRA is another good idea. Consider making contributions to a Roth IRA, if you qualify from an income perspective.
It is a rare opportunity to build up a source of potential tax-free income. An IRA is a must for anyone who does not have the ability to participate in a savings plan at work, but it is beneficial for anybody trying to meet retirement savings goals.
Paula Dougherty, CFP, ChFC, CLU, is a senior financial adviser with Dougherty & Associates, Ameriprise Financial Inc. in Springfield. She is licensed in Missouri, Arkansas, Kansas, California and Arizona, and may be reached at paula.j.dougherty@ampf.com.[[In-content Ad]]
