I’ll be the first to admit it. I’m exhausted by COVID-19 — just as I’m sure that you are. But, that doesn’t mean you should completely ignore it. If you do, you may not only be putting your physical health in jeopardy but also your financial future.
The pandemic has caused job loss or a reduction in hours. In fact, according to the Congressional Research Service, “The unemployment rate peaked at an unprecedented level, not seen since data collection started in 1948, in April 2020 (14.7%) before declining to a still-elevated level in October (6.9%).”
Additionally, the fluctuating stock market has devastated retirement plans. Examples would be fewer contributions to 401(k) plans from both employers and workers, retirement accounts losing value, and people having to dip into their savings, IRAs, and 401(k) plans.
And, to make matters worse, more Baby Boomers have retired since COVID-19 began than ever before. Pew Research reports that in the third quarter of 2020, roughly 28.6 million Boomers “reported that they were out of the labor force due to retirement.”
While these are certainly trying times, it doesn’t have to be all doom and gloom. If there is a silver lining it’s that the crisis has emphasized the importance of financial preparedness and retirement. And, while that may not currently seem like a priority, it should be so that you can handle potential emergencies while still being able to enjoy your Golden Years.
I know that may seem far-fetched right now. But, it’s impossible if you utilize the following seven strategies.
1. Recession-Proof Your Retirement Savings
COVID-19 has done a number on the global economy. But, just how devastating have the effects of the crisis been?
“It has certainly plunged the world economy into a very deep, but mercifully, a short recession, explained Nariman Behravesh, Chief Economist at the consulting firm IHS Markit. “Everybody’s been hurt. I don’t think anybody’s really been spared by this – it’s a combination of fear, uncertainty, and the reaction to the lockdowns.”
“Looking at historical precedents, it’s about three times as bad as the global financial crisis of 2008 in terms of GDP decline on an annual basis,” added Behravesh. “It’s not quite as bad as the Great Depression in the 1930s, where the output drop was sustained over a three to four-year period, and the unemployment rate went up to 25% in the US. This time so far it only went up to 13% in the US, but it’s the worst downturn we’ve had globally since the 30s.”
Even if the worst is behind us, the crisis has highlighted the importance of keeping your financial plans on track. That may seem impossible. But, there are ways to achieve this regardless of how the economy is performing.
Stay in the Market.
I know that’s it’s tempting to get out when the market drops. However, you’ll want to keep on investing to beat inflation. And, more importantly, grow your wealth.
“A solid financial plan will account for the ups and downs of the market,” writes Megan Nye for Northwestern Mutual. “When you’re younger, that may mean simply riding out a downturn and waiting for your portfolio to recover.” And, “since you won’t need to withdraw from your investments any time soon,” this is okay.
“If you’re older and need to regularly withdraw money from your savings, you’ll want a mix of investments and assets that aren’t tied to the market,” adds Nye.
To put your mind at ease though, research by Franklin Templeton shows that those who kept investing following market drops over the past 20 years also benefited from big recovery days. On average, they were able to fetch a 6% annual return.
What about those who bailed. If they missed the best 10 days, they only averaged a 2.4% return. But, if they missed the best 30 days they actually posted an average annual loss.
Make Sure that You’re Rebalancing
As you should know, “you’ll want a mix of riskier assets for growth and safer assets for stability,” adds Nye. As you approach retirement, however, this should become less risky. What’s more, you should also rebalance regularly.
“That’s because a long run of stock market returns can actually leave you taking more risk than you should,” clarifies Nye. For example, you have set your asset allocation at 80/20 (80 percent stocks and 20 percent safe assets like bonds). “After years of growth in the stock market, your asset allocation could turn into 90/10 if your stocks grow faster than your bonds.”
“When you rebalance, you sell some stocks and buy bonds to get back to 80/20,” writes Nye. “Then when the next downturn hits, the gains from the stocks you sold will be in safe bonds.”
Guarantee at Least Part of Your Income
Guaranteed sources of income, think annuities, pensions, and Social Security, aren’t affected by market volatility. Even better, they will provide you with a consistent monthly income in retirement. As such, you should try to find at least one type of guaranteed income if you haven’t yet.
Another excellent source that you should have on hand? Cash.
But, that doesn’t mean hiding thousands of dollars in your home. Instead, you could place your cash reserve in either a permanent life insurance policy, high-yield savings accounts, or money market deposit accounts so that you won’t have to withdraw from your retirement savings.
How much should you have in cash? Preferably, 5% of your portfolio.
Diversify Your Portfolio.
“Diversification is an investment strategy where you own a variety of assets that will perform differently over time,” states Due Founder and CEO. “The idea is that it provides security and mitigates risk. If an investment fails or underperforms, you won’t lose everything.”
In short, diversification keeps your portfolio healthy. In order to achieve that, you want to have a mix of stocks, bonds, cash, and investments like real estate. Moreover, it should also include various “groupings or sectors where your investments are made within each asset class.”
Work With an Expert
Make an appointment with a financial expert who understands your goals so that they can aid you in developing a plan. More importantly, they can help you prepare for handling the ups and downs of the market.
2. Improve Your Financial Health
As an effect of the crisis, 43% of Americans have reported that it will 6 months or more to financially recover. Additionally, 52% were forced to dip into their long-term savings within the next year. And, 37.4% of people between the ages of 45 to 64 have either lost their job or a part of their income in the last eight months.
There is a bright side to all of this, however. The COVID-19 pandemic has encouraged retirees to improve their financial wellness. In fact, the quarterly Principal Retirement Security Survey (3rd Quarter 2020) found that:
- 77% report reducing monthly expenses.
- 58% report simplifying their life in retirement by consolidating financial portfolios, relationships with wealth management firms, or/and relationships with financial professionals.
- 33% report looking at finances more frequently.
- 18% are meeting with financial professionals.
- 17% are paying down debt.
- 14% are planning to save more money.
- 13% are creating or adding to an emergency savings account.
To be honest, the above should be practiced by everyone — regardless of their age. But, how is this possible during turbulent times? Well, if you are able, you might want to find a side gig or earn a passive income, like delivering takeout or creating an online course.
What’s more, you should correct common money fixes. That may sound overwhelming. But, most of these are so simple they probably only would take-up 30-minutes or less. Some ideas would be to reviewing your monthly budget, planning a monthly menu, consolidating your debt, lowering your bills, and canceling unnecessary memberships and subscriptions.
3. Delay Retirement — if Possible
36.4% of Americans within 20 years of retirement expect the pandemic to delay their retirement. For many folks, that may sound disheartening. But, is that really all that terrible?
For starters, you should be grateful that you still have a source of income. Secondly, by putting off your retirement, you’re able to pad your retirement savings. If you have been laid off, unfortunately, inquire about a severance package or try to secure part-time/contract work until your back on your feet.
4. To Claim or Not to Claim Social Security Benefits?
Let’s say that the pandemic has resulted in you getting laid off or furloughed and you’re age 62 or older. You may be eligible to claim your Social Security benefits. That may be appealing right now, however, most people delay their Social Security benefits because they increase the longer you live.
On the flip side, there are advantages of claiming these benefits early.
“If you lose your job unexpectedly in your early 60s and your savings aren’t as robust as you’d hoped they would be, Social Security benefits can help bridge the gap between what you have saved and what you need to pay the bills,” writes Katie Brockman for the Motley Fool. “Keep in mind that your monthly payments will be smaller the earlier you begin claiming, but if you retire early and it’s tough to make ends meet, claiming early might be a smart move.”
5. Don’t Neglect Medical Insurance
Prior to the crisis, 32% of Americans had medical debt. What’s troubling about that is that 28% of these individuals had an outstanding balance of $10,000 or more on their bills despite being healthy and having insurance. Obviously, that can throw a monkey wrench into your retirement savings.
“Even if people have insurance, their deductibles are going up and people are spending more on health care,” Dan Macklin, Salary Finance’s U.S. CEO and co-founder of SoFi, told CNBC Make It. “Across the country, across different income levels, we see the reason people are short on money and often need to borrow money is often related to medical debt.”
Hopefully, COIVD-19 has stressed the importance of having medical insurance. If you are retired and over the age of 65, you’re eligible for Medicare. If not, you can look into insurance exchanges or COBRA continuation coverage.
Furthermore, you should have a health savings account (HSA) to pay for certain medical premiums. Another way to fill the gap would be by purchasing long-term care insurance. And, explore ways that you can pay off your medical bills like with a payment plan or negotiating costs.
6. Stay Calm and Continue to Contribute
I’m with you. We’re all stressed right now. However, this isn’t the time to panic and do something in haste.
Even though you may be struggling financially, keep contributing to your 401 (k). Some experts even recommend that you increase your contributions if possible. After all, when the market is down, you tend to get more bang for your buck.
Also, don’t cash out your stocks or raid your retirement savings. Instead, assess your savings and investments and revise your plan more strategically — preferably with a financial expert. And, to help you sleep at night, just remember that the U.S. economy is resilient and it should rebound.
7. Be Willing to Compromise
COVID-19 has certainly changed how we need to prepare for retirement. For instance, you may expect:
- A higher tax burden due to the COVID-19 stimulus package.
- Your savings may not be worth as much because of inflation.
- Social Security may be depleted before 2035.
- Some people may not have a retirement fund as contributions and 401 (k) are coming to an end.
As a consequence, this may force you to rethink your retirement. Case in point, you may have to work longer. The good news is that you could ask to work remotely or leverage a hobby into a new revenue stream.
You may also want to relocate to an area that is affordable to live once you retire, such as Ocala, FL or even abroad. Another compromise would be following in the footsteps of the Golden Girls and have roommates. In fact, 45% of millennials are open to living with a roommate just to save on expenses.
In short, the pandemic might have changed how you imagined how your retirement will be. But, if you’re flexible, you may still be able to live a comfortable and fulfilling life.
Conclusion
We are all in a financial bind because of Covid-19. Take heart. Stay brave. Be grateful every day. Prepare for your retirement — and save, save, save.
