Unemployed And Unretired: Navigating Investment Strategies For A Secure Future

Investing for retirement while unemployed can be challenging, but it's not impossible. Here's an introduction to get you started:

How to Invest in Retirement While Unemployed

Even without a regular paycheck, it's important to continue saving for retirement to ensure your financial stability in the future. While unemployment can be a stressful time, there are several strategies you can employ to keep building your nest egg. From investing in yourself to exploring different types of investment accounts, you can take control of your financial future, even during periods of unemployment. This introduction will guide you through some of the key considerations and options available to you.

File for unemployment benefits

If you're unemployed, one of the first things you should do is file for unemployment benefits. This can provide you with some financial support while you're not working and help you cover essential expenses. The process for filing for unemployment benefits may vary depending on your location, so be sure to check with your local government or employment agency to understand the specific requirements and procedures.

In the United States, for example, you can apply for unemployment benefits through your state's unemployment insurance program. Each state has different rules and requirements for eligibility, but generally, you must have lost your job through no fault of your own (such as due to a layoff) and meet certain work and wage requirements. You will typically need to provide information such as your Social Security number, recent employment history, and reason for unemployment when applying.

It's important to act quickly and apply for benefits as soon as you become unemployed, as there may be a waiting period before you start receiving payments. The entire process can take several weeks, and in some cases, you may need to attend an interview or hearing to determine your eligibility. During this time, it's crucial to continue seeking employment actively and to keep a record of your job search efforts, as this may be required to maintain your benefit payments.

Remember that unemployment benefits are a temporary source of income, so use this time to focus on your long-term financial health. This includes continuing to contribute to your retirement savings, even if it's in smaller amounts, and considering other investment options to build your financial security.

Tap into your emergency fund

While it is important to have an emergency fund, it is also important to remember that this money should be used for emergencies only.

An emergency fund is a pool of money set aside to cover unexpected expenses that may arise at any time. These expenses could include things like job loss, medical emergencies, unexpected home repairs, or car repairs. The idea behind an emergency fund is to have a buffer that can cover these unforeseen expenses without disrupting your financial plan or leaving you in debt.

The amount you should save for your emergency fund depends on your personal situation, such as your income, expenses, and lifestyle. As a general rule, it is recommended to save three to six months' worth of living expenses in your emergency savings during your working years. This can increase to 12 to 24 months' worth of expenses when you retire, as your income will likely decrease, and you may have limited options for generating additional income.

If you are unemployed, it is important to prioritize your emergency fund over retirement savings. This is because you may need to tap into your emergency fund to cover living expenses while you are unemployed. Once you are employed again, you can focus on catching up on your retirement contributions.

• Determine if the expense is truly an emergency: Ask yourself if the expense is unexpected and unavoidable. For example, fixing a leak in your roof would be considered an emergency, while buying a graduation gift would not.
• Assess your financial situation: Calculate your essential expenses, such as housing, food, and utilities, and ensure that you have enough saved to cover these costs for at least three to six months.
• Consider other options: Before tapping into your emergency fund, explore other sources of income, such as part-time jobs or side hustles. You may also want to look into government assistance programs or other benefits that can help cover your expenses.
• Create a plan to replenish your emergency fund: Once you have used a portion of your emergency fund, make it a priority to rebuild it. This may involve cutting back on non-essential expenses or finding ways to increase your income.
• Seek professional advice: If you are unsure about how much to withdraw or how to manage your emergency fund, consider speaking to a financial advisor or accountant.

Remember, your emergency fund is meant to provide financial security and peace of mind during difficult times. Use it wisely and ensure that you replenish it as soon as possible to prepare for future emergencies.

Avoid withdrawing from 401(k) and IRA

While withdrawing from your 401(k) or IRA may be tempting when unemployed, it is important to consider the consequences and explore alternative options. Here are some reasons why you should avoid withdrawing from these retirement accounts while unemployed, along with suggestions for alternative approaches to managing your finances during this challenging period.

Penalties and Taxes

Withdrawing from your 401(k) or IRA before reaching the age of 59½ typically incurs a 10% early withdrawal penalty on top of regular income tax. This can significantly reduce your retirement savings and negatively impact your financial security in the long term.

Loss of Tax Benefits

Retirement accounts such as traditional 401(k)s and IRAs offer valuable tax advantages. Traditional 401(k)s allow you to take a tax deduction now, while Roth retirement accounts provide tax-free withdrawals in retirement. By withdrawing early, you forfeit these benefits, resulting in a loss of potential tax savings.

Impact on Future Retirement Plans

Withdrawing funds from your 401(k) or IRA can disrupt your retirement plans and make it difficult to catch up on savings. It is important to consider the long-term impact on your financial goals and retirement timeline.

Alternative Options

• Build an Emergency Fund: It is recommended to have three to six months' worth of essential expenses set aside in savings accounts. This can help you cover your immediate financial needs while unemployed without dipping into your retirement savings.
• Utilize Credit Card Offers: Take advantage of introductory credit card offers with zero percent interest for a limited time. However, use this option with caution and ensure you can manage the balance before the higher interest rate applies.
• Seek Support from Friends and Family: Relying on your community for financial support can be a helpful way to make ends meet without accruing debt or touching your retirement savings.
• Explore Other Sources of Income: Consider part-time jobs, freelancing, or consulting work to bring in additional income during this period.
• Spousal Retirement Options: If your spouse is employed, you may be able to take advantage of their employer-sponsored retirement plans, such as 401(k) plans, to ensure you are still contributing to your retirement as a couple.
• Self-Employed Retirement Accounts: If you are self-employed or have self-employment income, explore options such as solo 401(k)s, Simplified Employee Pension (SEP) IRAs, or Savings Incentive Match Plans for Employees (SIMPLE) IRAs.
• Health Savings Accounts (HSA): If you have a high-deductible health plan, consider opening an HSA. Contributions are tax-deductible, and withdrawals used for qualified medical expenses are tax-free.
• Brokerage Accounts: Invest through a brokerage account. While the earnings may not be tax-deferred, you can still grow your retirement savings. Withdrawals of contributions from a taxable account are not taxed again, providing added tax-planning flexibility.

Remember, withdrawing from your 401(k) or IRA should be a last resort. Consider the alternatives mentioned above and consult with a financial advisor to make informed decisions that align with your specific circumstances.

Reduce investment risk

Investing for retirement is important, but your strategy may need to change throughout your life. Generally, younger investors can tolerate more risk, but they often have less income to invest. Those nearing retirement may have more money to invest but less time to recover from losses.

• Money market funds: These are a type of low-risk, stable investment with high credit quality, short maturities, and high liquidity, making them easy to sell for cash. Examples include the Fidelity Money Market Fund and the Vanguard Federal Money Market Fund.
• High-dividend blue-chip stocks: These stocks offer stability and regular income. Examples include United Parcel Service Inc. (UPS) and CubeSmart (CUBE), which offer forward dividend yields of 4.4% and 4.8% respectively.
• Bank certificates of deposit (CDs): CDs have higher interest rates than other deposit accounts, allowing you to lock in a fixed rate for a specific period. Examples include EverBank's nine-month CD with a 5.05% annual yield and Marcus by Goldman Sachs' 12-month CD that pays 5% on a $500 minimum balance.
• Annuities: Annuities can provide a guaranteed income stream, but they are subject to the risk of inflation. An immediate fixed annuity can provide a guaranteed income stream for life, but you might not live long enough to collect enough payments to justify the investment.
• Bonds: Assembled into a properly diversified portfolio, the safest bonds, such as those issued by the federal government, government agencies, and financially sound corporations, can be a dependable source of retirement income.
• High-yield savings accounts: In the current environment of high interest rates, financial advisors recommend high-yield savings accounts as a tier for 2024 investment portfolios. Variable rates on these accounts are currently above 4% at many banks. Examples include CIT Bank's Platinum Savings account and Sallie Mae's high-yield savings account.
• 60/40 mix of stocks and bonds: This strategy involves building a portfolio with 60% income-producing stocks and 40% bonds, cash equivalents, and other fixed-income investments. The stock portion typically consists of a mix of value, growth, and dividend-paying stocks.

Invest in yourself

Investing in yourself is one of the best investments you can make when unemployed. This can mean upgrading your skills to make yourself more employable, which may cost money, or simply involve putting in the work. For example, you could take a free certification course on Google Suite products if you already know how to use Office products.

You could also decide to go back to school for another degree or switch careers entirely. Investing in yourself in this way could help you earn more later.

If you're unemployed, your first priority should be figuring out how to pay the bills without destroying your finances. It's important to have an emergency fund of three to six months' worth of expenses set aside in savings accounts. If you don't have a full emergency fund, saving for retirement probably shouldn't be a priority until you're employed again.

Frequently asked questions