Saving for retirement is crucial, no doubt. And while you've been steadily funding your nest egg, life happens and you may have needed to dip into it early. This could be chalked up to a host of reasons—perhaps an unexpected job loss, large medical expenses or to help cover college costs or buy a house.
According to the Transamerica Center for Retirement Studies, about 4 in 10 workers (37%) in the U.S. had to take funds preemptively from their retirement savings—whether it be an early withdrawal, hardship withdrawal or loan from their retirement savings account.1
The good news? There are steps you can take today to get back on track. In this guide, we offer tips on how you can get started rebuilding your retirement fund.
1. Assess Your Current Financial Situation
First, figure out the exact amount withdrawn from your retirement savings. You might've taken an early contribution from your 401(k), IRA or SEP IRA. Or it might've been from your investments or long-term savings account that you had planned to set aside for your nest egg. To nail down this info, look at your quarterly or annual statements.
Now, examine the impact of early withdrawals on your retirement goals. For example, if you originally planned to retire at 67, determine how this changes if you continue saving the same monthly amount. Also, calculate how much extra you'd need to save each month to reach your goal of retiring at 67.
For most retirement accounts—think 401(k)s, IRAs, SEP IRAs and 403(b) accounts—if you pull money out before you hit age 59½, you'll be on the hook for paying any income tax on those contributions, plus a 10% early withdrawal penalty (unless an exception applies).2 That's essentially money that's dissipating into thin air.
2. Set Clear Retirement Goals
Once you have a solid picture of where you stand financially, home in on your retirement goals. Here's how to go about it.
Define your revised retirement expectations
If you expect to have less saved up, now is the time to tweak your anticipated lifestyle and budget for retirement. Questions to mull over include the kind of lifestyle you want to enjoy in your golden years, whether you plan to age in place or may require long-term care and how much you'll need to save to sustain this preferred lifestyle in a given year. You can always review this information later and make adjustments as needed.
Determine your target retirement age
Once you've ironed out details—both broad strokes and finer lines—figure out your target retirement age. As mentioned in the previous section, if you anticipate needing more time to shore up funds for your nest egg, you might want to push the target retirement age back by a few years.
Figure out your new savings target
How much money do you actually need to meet these goals for retirement? It largely depends on your needs and preferences. One method is to multiply your anticipated annual spending level by 25. So, if you currently spend $50,000 a year, your target savings for retirement would be about $1,250,000 to maintain that same lifestyle.
READ MORE: The Ultimate Guide to Calculating Your Retirement Savings
3. Create a Realistic Budget
Now that you've ironed out when you'd like to retire and how much you'll need to save, look at your budget to see what you can realistically afford. You could start by cutting back on some areas of spending and funneling that toward your retirement contributions to give them a boost.
Once you've reviewed your budget, you can also allocate a portion of your income—such as 5%, 10% or 15% (the choice is yours!)—toward retirement savings. One way to do this is to set up an automatic savings transfer that will do the work for you. Again, this should be a percentage that you can reasonably afford and are comfortable allocating. The key is to get started. You can always make tweaks along the way!
4. Maximize Employer Benefits
Another great and relatively easy way to save funds for retirement is to contribute to employer-sponsored retirement plans like your workplace 401(k), 457 plan or SIMPLE IRA. These can make it simple for you to save for retirement.
Setting aside a portion of your paycheck into your plan can help you make steady progress toward building your nest egg. And if your employer offers matching contributions, contributing enough to get the match can boost the amount you're stashing away.
Beyond an employer-sponsored retirement plan, explore other workplace benefits that can help you rebuild your retirement plans. For instance, a workplace-sponsored health savings account or flexible spending account can provide tax savings and help you save on eligible healthcare costs. In turn, you can put those savings back into your retirement plan. Or, your employer might offer free financial guidance. Why not take advantage of that free benefit?
5. Automate Your Contributions
By setting up automatic transfers to make regular contributions, you can ensure you're consistently saving and staying on track with your goals. Another benefit of automated investments? Dollar-cost averaging—which means purchasing a set amount of a stock or other asset at regular intervals, such as once a month. Its price will likely fluctuate, but over time your cost per share will average out.
6. Review Your Asset Allocation
After taking money out of your retirement savings early, it's helpful to check in to see exactly how your money is invested. This review—called asset allocation—lets you find out if your investments are balanced. By making adjustments, like spreading your money across different types of investments, you might improve your chances of catching up on the money you withdrew. It's important to think about how much risk you're comfortable with and how soon you'll need the money to make the best plan for your retirement savings.
7. Consider Delaying Social Security Benefits
Ah, Social Security. This great government benefit that most American workers will get is designed to replace a percentage of your pre-retirement income in your 60s. And while you might be tempted to tap into your Social Security benefits as soon as possible, it might behoove you to push back that date while you're still catching up on your savings.
Evaluate the impact of early versus delayed Social Security benefits. If you wait until your full retirement age, which is either 66 or 67, you'll get 100% of your benefits.3 If you start receiving benefits before you hit your full retirement age, you won't get the full amount.3 But if your full retirement age is 66 and you push back on receiving your benefits until you're 70, you'll get 132% of your monthly benefit amount.4 Not bad, right?
8. Look at Tax-efficient Strategies
Looking into tax-efficient strategies may help reduce the taxes you might owe and make the most of what's left in your savings. You can try methods like using tax-friendly accounts or finding deductions to reduce the extra taxes from the withdrawal. By doing this, you might get back some of the money you lost when you took out funds early, helping you catch up on your retirement savings. It's a good idea to talk to a tax expert to help you figure out the best ways to handle taxes after an early withdrawal.
9. Seek Professional Guidance
Working with a financial advisor or financial planner can help you understand your retirement goals, devise a customized game plan and receive guidance and support. You can also review your financial plan to ensure you're on track, and make any adjustments as needed.
The Bottom Line: Slow and Steady Wins the Race
If you've had to preemptively tap into your retirement savings, there's no need to panic. You can get back on track by figuring out your new retirement savings goals and target date, making trade-offs to free up funds to put toward your retirement and exploring your retirement savings options.
You can also explore Synchrony's educational resources to help you learn how to take steps to start rebuilding your retirement for a more secure future.
Jackie Lam is an award-winning, L.A.-based money writer whose work has appeared in Salon.com, Refinery29, Time, Forbes, CNET, Business Insider and BuzzFeed, among others.
READ MORE: What's the Median Retirement Savings By Age?
Sources/references
1. Collinson, Catherine and Cho, Heidi. Post-Pandemic Realities: The Retirement Outlook of the Multigenerational Workforce. Transamerica Center for Retirement Studies. July 2023.
2. Retirement Topics - Exceptions to Tax on Early Distributions. IRS. August 29, 2023.
3. Starting Your Retirement Benefits Early. IRS.
4. If you were born between 1943 and 1954 your full retirement age is 66. IRS.
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