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Chapter 5: Replenishing Retirement Savings

When people are experiencing a financial crisis, they often turn to their retirement fund for assistance, taking out a loan or withdrawing money. Reducing or stopping contributions is not uncommon either. Even people who have no problems paying their bills frequently are contributing little or nothing.

If retirement is several years or decades away, it is easy to push it to the side and focus on more immediate concerns, but saving for retirement is not something that can be done last minute. Okay, you can do it last minute, but you won’t be able to save much. Think about all of things you want to do in retirement: travel, play golf every day, at the very least, eat and have a roof over your head. You can’t rely on Social Security to cover all or even most of your costs.

Borrowing or withdrawing against a retirement fund can cost you a significant amount of money in lost potential investment earnings. You can’t unborrow or unwithdraw the money, but you can focus on replenishing your retirement fund. If you stopped your contributions, restart them, even if you are paying back a loan. If you reduced them, bring them back up. If you were not contributing to begin with, now is the perfect time to start. Most employers offer a retirement plan, the most common one being the 401(k), and/or you can contribute to an IRA (individual retirement account) or Roth IRA on your own. You may want to consult with a financial advisor if you are not sure how much you should be saving or what investment options you should choose.

The example below shows the benefit of continuing contributions to a retirement fund while paying back a loan you took out against it.

Salary $40,000 a year
Contribution amount 6% ($2,400 yearly)
Employer match 3% ($1,200 yearly)
Average annual return 8%
Fund balance at time of loan $20,000
Loan amount $10,000
Loan interest rate 5%
Loan term 5 years
Years until retirement 30

If you stop contributions while you are paying back the loan, you will have $458,673 at retirement. However, if you continued your regular contributions, you will have $578,275. That’s $119,602 more than if you stopped contributions (and only $5,448 less than if you never took out the loan)!

Remember, an unfavorable financial situation is not set in stone. You can seize control of your finances and pay all of your bills on time, pay off your debt, have a good credit report and score, and save.

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