Question: I was laid off in my 40s and took a lower-paying job. I'm unable to contribute to my retirement savings until my income rises, and I've only saved $200,000 so far. Help!
Answer: The Bureau of Labor Statistics reported an unemployment rate of 4.2% on August 1. But while that rate may be relatively low, it doesn’t tell the whole story of today’s job market.
Many large companies are cutting headcount in anticipation of tariff-related blowback. Many qualified people are out of work, with far too few good prospects.
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If you got laid off in your 40s — a time in your life when you may still have an expensive mortgage and child-related costs to cover — you may have jumped into a lower-paying job to bring in some money and ride out this tough labor market. But that might leave you unable to contribute to a retirement account.
It would be one thing if you were sitting on $1 million at this stage of life. A $1 million nest egg left to grow at a rate of 7% per year, which is below the stock market’s average, could be worth close to $3.9 million in two decades. In a situation like that, not being able to contribute toward retirement savings for a few years doesn’t seem so terrible.
The picture looks different if you’re only sitting on $200,000 in retirement savings, which is roughly in line with the average $188,643 401(k) balance among 45-year-olds in Vanguard's latest How America Saves report. If you were to leave $200,000 to grow at a yearly 7% return, you’d be looking at roughly $774,000 in 20 years – a decent sum of money, but probably not enough to allow for a comfortable retirement.
Still, the situation isn’t hopeless. Here’s what to do.
Don't touch your existing savings
If a layoff has pushed you into a lower-paying job, it can be tempting to tap your retirement savings to make up the difference. But Mary Clements Evans, CFP and Financial Advisor and Owner at Evans Wealth Strategies, says that’s something you should aim to avoid doing at all costs.
“Do everything you can to not touch that $200,000. Although you can’t add to it, it will continue to grow,” she insists.
If your new salary isn’t enough to cover your expenses, you may need to temporarily reduce your spending or consider a side hustle to make up the difference.
Invest for growth
It's challenging to predict when today's tight labor market will begin to open up. But you may want to brace for it to take a while.
As Evans points out, during the 2008-2009 recession, many people were unable to find a new job for years. Today's economy is, of course, very different. Only now, some industries have the threat of AI looming over them, so it's not a given that a better-paying job will be yours within months. Rather, it could take time.
For this reason, Evans insists that if you're unable to contribute more toward retirement for the time being, it's important to invest for growth. If you’re in your 40s and are therefore many years away from retirement age, you have time to ride out market fluctuations.
"Growth is different from risk," she explains. "Growth can be large, well-run companies with good track records. Be sure you are well diversified."
Specifically, Evans recommends owning shares of a few dozen companies across a range of market sectors.
Now, Evans does recognize that investing for growth can be scary, so she emphasizes the importance of being both emotionally and financially prepared for normal stock market volatility.
"You emotionally prepare by understanding how the markets work," she says. "You financially prepare by never investing money that you need within a few years into growth."
To this end, if you're in a lower-paying job that doesn't leave you with much wiggle room for extra bills, assess your emergency savings. If you don't have at least six months' worth of living expenses in cash, you may want to prioritize boosting your emergency fund in the coming months over retirement plan contributions, even if you're itching to get back into the habit of funding your nest egg.
Capitalize on matching dollars
When you’ve taken a pay cut, you may need almost every last dollar to cover your near-term expenses. But if your new job comes with an employer-matched 401(k), it’s a good idea to try to squeeze out that match – even if it means having to cut some corners and make some sacrifices.
When an employer offers a 401(k) match, that’s basically free money for your nest egg. So it’s important to try to avoid leaving it on the table if at all possible.
Keep networking and don't give up
Being forced to accept a lower-paying job in your 40s can be demoralizing — not just because it limits your ability to save for goals like retirement, but because it’s hard to take a step backward salary-wise when you’re already at the midpoint of your career and have years of experience under your belt.
To this end, Evans has simple advice: “Keep networking and keep looking.”
Stay in touch with your professional contacts and continue to inquire about job openings. And use LinkedIn and other job sites to continue your search, even while you’re collecting a paycheck.
In the meantime, use your current job as an opportunity to sharpen your skills and, if possible, build some new ones. With any luck, you’ll eventually return to a salary you’re happy with, at which point you’ll be able to resume retirement plan contributions and get back on track.
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