COVID-19 has changed the day-to-day lives of millions of people and the vast majority of Americans are affected by social distancing measures to stop the spread of the disease. At the same time, equity markets have been volatile, and many people are out of work, at least temporarily.
One of the most pressing questions that many are asking is “What will this do to my retirement?” Others are asking “Do I need to do anything now?”
A recent Society of Actuaries report, Impact of COVID-19 on Retirement Risks, provides an overview of many of the issues related to retirement risks. This article is based on that report and provides some tips for American working families and retirees.
What we need to do now
Retirement is a long-term proposition and hopefully COVID-19 is a temporary event, but one that may have longer term consequences. The most important immediate action is to follow the advice of health professionals. But depending on your financial situation, the next step that may need to be done is to assess your financial situation and minimize spending. Start by determining whether adjustments are needed in spending and what expenses should be targeted.
If spending is an issue, for retirees who have investment accounts, it would be best to try to avoid selling equities at depressed prices to support current spending needs.
For those nearing expected retirement, this will be a time to assess whether plans can go forward and consider what adjustments may be needed.
For those not nearing retirement, there are a variety of challenges and scenarios. And even though the CARES act waives early withdrawal penalties, ideally, people should try not to withdraw retirement savings and, if possible, continue saving and building assets for retirement.
There are many factors to think about related to retirement, but most do not require immediate action. As a general rule, it is much better to be deliberate and thoughtful and not make significant changes in direction all of sudden.
Some people have financial advisors, but many do not. A big question is where to turn, so only look to trusted advisors or reputable organizations for advice. Be careful, because there are many scammers posing as people to help us, while they are really out there looking to take advantage at this difficult time.
Employers are a valuable source of help
For many Americans, employer-sponsored 401(k) and similar plans are their primary retirement savings, and in some cases, their primary savings for all purposes. The COVID-19 virus and related economic developments create challenges for employees which employers and their benefits plans can often help with.
- Employers may actually be the best source of help for some people. The first step is to find out what resources are available through employee benefit plans and other employer-sponsored programs.
- Many employees will want to revisit their financial strategies to see if they are doing the right thing for their personal situation. Some employers offer tools and resources like financial coaching to help employees do that. Some of the things to be reviewed are:
- Maintaining an adequate emergency fund
- Keeping debt under control
- Evaluating sources of funds for immediate needs
- Revisiting long-term investment strategies
- Using Health Savings Accounts (HSAs) appropriately
- Employee Assistance Programs (EAPs) can be a good source of help.
- Individuals with substantial challenges with debt will want to develop a strategy to manage debt. Financial wellness programs may be a source of help.
Most employees will not want to change long-term strategies. Thinking about and evaluating the options carefully before making big changes is always prudent.
Be very careful before using a 401(k) as a source of loans or to fund short term needs
Utilization of hardship withdrawals and plan loans are likely to increase, and amounts withdrawn or borrowed may be higher if the relief provided by the CARES Act is offered through your employer sponsored plans. There is some tax relief on penalties for hardship withdrawals, but be careful. Using retirement funds early may cause financial problems later on.
Some households are financially fragile and have major problems with debt. If they need to borrow and can borrow from a 401(k), it may be better than borrowing through a credit card or other higher interest cost loan.
Maintain an adequate emergency fund
Many Americans are not able to pay for an unexpected expense of $400 and live paycheck-to-paycheck. The Society of Actuaries research report Financial Fragility Across the Generations looks at the situation of such financially fragile Americans. COVID-19 reinforces the need for an emergency fund and encourages a rethinking of how much money should be in such a fund.
Don’t claim Social Security early if you have other options
Social Security is the major source of regular income for many families and the only source of income for a substantial number. Claiming benefits at a later age results in a larger monthly income, and for those who live to higher ages, it makes a substantial difference in the total value of the benefits they will receive. Unfortunately, many people claim early without understanding what it costs them in the long run. COVID-19 serves to reinforce the importance of Social Security.
Loss of income through job loss or reduction of hours may push some people into claiming Social Security earlier. Don’t claim early without clearly evaluating the options and long-term consequences.
Claiming later may mean working longer, which may be a good solution for many people. It may also mean using other resources to help you get through to the later claiming age. Evaluate whether 401(k) balances or housing equity can help you bridge to a later claiming age. The Society of Actuaries report, Spend Safely in Retirement, discusses the value of late claiming and offers ideas for the strategies that surround the claiming strategy.
Conclusion
COVID-19 has made temporary changes, at a minimum, in the lives of almost all Americans and many will feel permanent change. The economic turmoil accompanying the measures to manage the health crisis also have the potential for impacting retirement plans. Everyone should be thinking about the long-term issues related to these changes. This is a good time to be sure that there is a good long-term plan in place and see what if anything is needed to update it.