Retirement savings are facing a triple threat due to the COVID-19 crisis. Market volatility, depletion of savings, and unprecedented job losses have the potential to wreak havoc on even the best-laid retirement plans. However, with a few prudent steps, pre-retirees can balance their current financial needs with their long-term financial security and peace of mind.
Volatility and Market Loss:
Recent extreme volatility in the capital markets has taken a significant toll on the value of retirement portfolios. The average 401(k) balance fell 19% in the first quarter of the year and the average IRA balance fell 14% (1). How much and how fast the markets may recover is difficult to predict, and a big concern for those who are nearing their planned retirement date. Luckily, the market showed some strength in Q2 and has recouped some of its earlier losses. However, we might have been given a short-term gift as nobody knows the true long-term economic effects.
Large losses can derail years of planning and preparation and many investors will need new strategies to help maintain their retirement progress. This might be a time to de-risk some of your portfolio if you are close to retirement. Another protective strategy is to add a few buffered investments to your portfolio to benefit from potential upside while allowing some protection for the downside.
Early Retirement Withdrawals:
The current crisis is prompting many to drain retirement savings. Over a quarter (27%) of Americans either plan to withdraw money from their retirement savings accounts or already have done so, in order to help weather the COVID-19 crisis.(2) New government rules make early withdrawal easier and less costly. Under the CARES Act, many Americans can now take a withdrawal of up to $100,000 from their retirement savings without the typical early withdrawal penalty of 10%. Accessing retirement savings may help address short-term financial needs but can also have a dangerous longer-term impact. As conditions normalize, many pre-retirees will need to look for ways to not only “payback” their retirement account, but also to add more savings to achieve their retirement goals.
Job losses have soared during the pandemic and the resulting economic shutdown. Many of the unemployed will be able to resume work after only a short period, but others may find their career path disrupted for many years to come. Unfortunately, those affected may be forced to spend down savings and will experience substantially reduced retirement funds and benefits.
Without question, many Americans are in a difficult financial situation during the current crisis. But that does not mean future retirement security needs to be irreparably damaged.
To help keep your retirement on track, here are a few steps to consider now:
Instead of depleting retirement savings, tap into alternate funding, or consider refinancing your debt. For some, a home equity loan may be an attractive option. For others, a regular 401(k) loan may be a better option than a withdrawal. You may also be able to seek a forbearance on payments from your credit card company, mortgage lender, or other creditors.
If you are tapping into retirement savings, use the money wisely, such as paying daily expenses or paying down debt. Avoid expensive and unnecessary purchases when withdrawing retirement savings.
Delay retirement and work longer. Pushing back your retirement date and continuing to work a few extra years may give you the cushion you need to comfortably recover from the current crisis.
Reevaluate your financial strategy. Due to the widespread impact of the current crisis, many pre-retirees will need to reassess their investment strategy, retirement preparation, and financial planning needs. Acting now will help you get back to where you want to be sooner and with greater confidence.
I love the quote below because I think it sums up my relationship as a financial advisor and my clients.
"Always plan ahead. It wasn't raining when Noah built the ark." - Richard Cushing
I hope this helps lend some insight into potential action steps you need to take. Thank you so much for taking the time to read it. Please stay safe!
Arthur Strauss, CFP®
Investment advice offered through Strauss Financial Group, Inc., a Registered Investment Advisor.
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