Saving for retirement is one of the most important things you'll do with your money over your lifetime. That's why it's not surprising that 22% of all workers listed it as their top financial priority before the COVID-19 pandemic, according to research from the Transamerica Center for Retirement Studies.
But COVID-19 has changed things in many ways, including reducing the number of workers prioritizing saving for their later years. In fact, the number of people putting retirement savings first has fallen to 17% while there's been an increase in the number of workers citing saving for emergencies as their most important goal.
Normally, a drop in the number of people working toward a secure retirement would be a bad thing. But there are times it absolutely makes sense to prioritize emergency preparedness. Here's what to consider when deciding if that's the best choice for you right now.
Emergency savings or retirement savings?
For most Americans with a finite amount of extra cash, a choice inevitably has to be made about what to do with those precious dollars.
And in most cases (but especially now), the first priority should be building an emergency fund. This should be in a high-yield savings account where it's accessible, and should be enough to cover three to six months of living expenses. Liquidity is essential to prevent you from having to borrow when unexpected expenses happen (which they inevitably will), and it will ensure an income cut won't lead to the serious financial harm when you can't pay your bills.
Building an emergency fund also helps protect the value of your investments. You won't be forced to sell them at a loss in a bear market. This is especially important to protect retirement savings, as normally a 10% penalty applies if you have to make an early withdrawal (although this penalty is temporarily suspended for some during the COVID-19 crisis).
But while an emergency fund is of the utmost importance, that doesn't mean saving for retirement should always be postponed indefinitely, particularly if you have access to a 401(k) with an employer match. Delaying retirement savings is costly, and passing up the free money that comes from an employer's matching funds can be a big mistake.
So a balancing act is often best. For many people, this might involve quickly building a small emergency fund of at least $1,000 and then splitting extra cash between retirement savings and bulking up that fund until you've got your three to six months saved.
Alternatively, you could contribute enough money to get your full employer match first if you aren't overly worried about an imminent job loss or other financial disaster, then devote all your extra cash to an emergency fund before switching back to retirement savings. And while there's something to be said for this approach due to the financial security it provides, it's effective only if you have a detailed plan to get your emergency account up to snuff rapidly so you aren't delaying too long on saving for your future.
Make sure your financial goals are the right ones
Being nimble with financial management is important, and while you don't want to make rash changes such as giving up investing out of fear of a market downturn, you do need to make sure you're prepared for whatever life sends your way.
A crisis like the coronavirus is a reminder of the importance of emergency savings, so if you don't have your rainy day fund, it may be smart to make that your top financial goal for a while. Just remember to get back on track with your retirement savings as fast as possible to make the smartest choices for the short term and the long term.