Should You Continue Saving for Retirement Even When Unemployed?

Yes, you should continue saving for retirement if you can, but it’s not the top priority when unemployed. Focus first on essentials and your emergency fund. If possible, contribute small amounts to an IRA to stay on track, but it’s okay to pause until you’re re-employed. Once you have a job again, increase contributions to make up for the gap.

How to decide whether to continue saving for retirement when unemployed?

It’s simple. Can you afford it?

• If you do not have the money to pay your essential bills

  such as housing, food, insurance, home and car repairs, debt payments, etc. saving for retirement should be the least of your worries. You need to use whatever money you have to cover these expenses.

• If you do not have an emergency fund

  at least six months of living expenses, you cannot afford to save for retirement. Emergencies can strike anytime, and if you have no money to cover it, you will be forced to sell investments, withdraw from your retirement account or borrow at a high-interest rate – and none of these options are good financial decisions when unemployed. So, focus on putting extra money toward your emergency fund instead of saving for retirement.

How to save for retirement when unemployed?

1. Get acquainted with IRAs

   An individual retirement account (IRA) is a great option for people who do not have access to an employer-sponsored retirement plan such as a 401(k) account. In a traditional IRA, the contributions are deducted from whatever taxable income you have, much similar to a 401(k). However, in a Roth IRA, earnings are taxed upfront, but your withdrawals in retirement are not taxed. So if you’re not employed full-time, but have some earned income, IRAs can help save for retirement.

2. Rollover your old 401(k)

   If you are unemployed, you will not be able to contribute to your employer-sponsored 401(k). However, the account is still yours, and the money in it is also yours. You have two options: let the money in your 401(k) lie as it is or roll it over to a traditional retirement account (IRA). Rolling over your 401(k) into an IRA could be a better option because you will have more flexibility and better investment options. And you can begin contributing to it once you start earning income.

3. Focus on optimizing your investment portfolio

   If you no longer have a job, you may not be able to add to your retirement accounts, but you can definitely make sure that your portfolio is optimized. Make sure you have the right mix of investments and stocks in various asset classes and industries. Examine your investment portfolio to ensure that you are not under or over-invested in any area.

4. Consider reinvesting dividend income, if your finances allow

   If you own dividend stocks, you may be tempted to redirect the dividend income towards paying your bills and get through the rough phase of unemployment. But if you can get by without doing it, consider redirecting your dividend income to buy more stocks and other investments. These small contributions to your retirement portfolio can add up to significant savings over time.

5. Focus on long-term growth, if you can

   If you have some investments in a taxable brokerage account, you may be tempted to move them to dividend stocks or other income-generating investments for the extra income that you could use for covering your expenses. However, making this change can provide you the temporary relief, especially if you are unemployed, but it can harm you in the long run. Rather than making such adjustments in your portfolio, find some other sources of generating income or reduce your spending.

Losing your job after being gainfully employed for years can be a nasty shock. But the steps mentioned above can help you manage money and come out on the other side, financially stable and much in control of your life.