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America was already facing a retirement-planning crisis long before the coronavirus shut down the world economy. Layoffs may lead many people nearing retirement age to throw in the towel and just retire early. Being forced to retire early during the coronavirus recession will likely have a devastating effect on their incomes during retirement. It could also lead to a spike in the rate of poverty among retirees.
Retiring early can post quite a few financial challenges. Your retirement nest egg will need to last longer, as you will be retired for more years. For those who haven’t checked, even with the Affordable Care Act, health insurance is unaffordable for many. Claiming Social Security before full retirement age reduces your monthly benefit for the rest of your life. The 50% of Americans with a retirement account have seen their balances drop thanks in part to the slow response to the COVID-19 pandemic by the Trump administration.
The situation may seem bleak, but there is light at the end of the tunnel. We will get through this. The economy is slowly beginning to reopen, and the stock markets are beginning to rebound. All the same, fear of the coronavirus may lead many people near retirement age to make choices today that will put them at higher risk of falling into poverty as they age. Baby Boomers will be the first generation to retire, mostly without the help of pensions. Social Security is not meant to replace your entire pre-retirement income.
A new report from the New School’s Retirement Equity Lab shows the coronavirus will likely lead to a wave of downward mobility in retirement. According to the report, an estimated three million more people will fall into poverty during retirement after the coronavirus recession than would have otherwise been expected. The poorest Americans won’t be the only group negatively impacted. The good news, if you can call it that, is only 15% of high earners are expected to lose their jobs. The bad news, is has been estimated that the average amount saved for retirement by age 65 is estimated to drop by 31% after the coronavirus recession ends. That drop will occur due to a combination of stock market performance, early withdrawals from retirement accounts, and reduced savings during the recession.
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How Much Do You Need to Retire Comfortably?
A very rough rule of thumb is to have around 200 times your monthly income (minus your estimated Social Security benefit) saved for retirement. So, if your household makes $250,000, per year, and is expecting $5,000, per month, in Social Security (married couple two SS checks), you will have a target of around $3.17 million saved for retirement. Again, that’s just a rough estimate; your actual needs will depend on your cost of living, retirement goals, etc.
Many are tempted to underestimate how much they will need to save to maintain their standard of living in retirement. There are a million blogs telling you how cheaply you can live in retirement. You may have also heard you can live on 50-70% of your pre-retirement income. The number of people who are not saving adequately for retirement, and the number of people with credit card debt, shows how hard it is to live on 100% of your salary. Your spending will only be reduced in retirement if it must be.
Regardless, do you really want to be 80 years old and counting your pennies?
You are Eligible for Social Security. Should You Claim It Early?
Age 62 is the earliest age you can claim Social Security. That will result in a greatly reduced retirement income monthly benefit. But for those thrown out of work during the coronavirus recession, tapping Social Security, early, may be quite tempting.
In a perfect world, everyone would have substantial retirement savings, be in good health, and willing and able to wait until age 70 to start collecting the maximum Social Security benefit. For those suffering from COVID-19, out of work, or forced to retire early, claiming Social Security earlier may make sense. Talk with a fiduciary financial planner to make sure you understand the pros and cons of the choices you are making. Also, make sure to exhaust any unemployment or stimulus benefits you may be entitled to first.
Healthcare Costs Can Break the Bank
Retiring before the age of 65 could also leave you spending a substantial amount of money on health insurance. Medicare benefits begin at 65. Depending on your income, age, and where you live, health insurance can easily be $1,000-$15,000, per month, for people in their sixties. That is per person, by the way, and a definite budget buster for many.
According to Fidelity Investments, it is estimated that the average couple will need $285,000 in today’s dollars for medical expenses in retirement, excluding long-term care. That is more than the average American couple has saved to fund their entire retirement, so you can see how many are heading toward a wave of poverty in retirement. The choice for some may fall between choosing to eat or buying life-saving medicine.
Use the cononavirus recession as a wake-up call to get your financial house in order. Work with an incredible financial planner to see if you are on track for a comfortable retirement. If not, that person can help you make the right choices to ensure you have a retirement income plan you can’t outlive. Please do what you can to avoid being one of the millions of Americans who are expected to fall into poverty during retirement.