While no one can foresee the future, COVID-19 highlights roles for emergency savings and lifetime income.
The coronavirus pandemic has been a huge financial strain on Americans, as they suffer through furloughs, layoffs and pay cuts. Some people have stopped or reduced the amount they are putting in retirement accounts, and others have tapped into a 401(k) or IRA to help cover bills.
The personal finance app Personal Capital surveyed retirees and full-time workers in May. More than a third who were planning to retire in 10 years said the financial fallout from Covid-19 means they’ll delay.
Nearly 1 in 4 current retirees said the impact has made them likelier to return to work. Before the pandemic, 63% of American workers told Personal Capital they felt financially prepared for retirement. In its current survey, that number has dropped to 52%.
The pandemic has impacted retirement planning on many more levels such as:
- Stress levels are high: It’s difficult to focus on financial preparations for retirement when you are facing more immediate financial concerns and worried about the future.
- Less saving for retirement: Those who have been furloughed or laid off are not able to take advantage of the automatic deductions for contributions to their workplace retirement accounts.
- Emotional decision-making: Individuals are making emotional decisions about retirement savings and investments rather than sticking to a long-term plan.
- Forced early retirement: Older workers who have lost their job and been unable to find new employment during the pandemic may be forced into retirement years earlier than planned.
While 2020 was a tough year, you can make moves to “pandemic-proof” your retirement plan in 2021 and beyond. Here’s how…
The pandemic has exposed many weaknesses in our ability to respond quickly and effectively. While state governments continue to work on their current response, many in the private sector are looking toward the future by learning from the past.
COVID-19 is highlighting the critical strengths of our systems, too. Strengths we can take forward (according to Forbes) include:
- Social Security: Retirees can count on their monthly checks coming in uninterrupted by the current financial crisis. That’s one of many good reasons for pre-retirees to maximize the amount of their Social Security benefits.
- Pensions and annuities: Similarly, retirees who purchased guaranteed payout annuities or are fortunate to have earned benefits from a traditional defined benefit pension plan can count on their monthly checks coming in.
- 401(k) plans: These plans have enabled millions of workers to accumulate savings to supplement Social Security and any pension or annuity benefits that they receive.
- Medicare: Post-age-65 retirees don’t need to worry about going without health insurance, unlike many laid-off workers who are stressing about losing their health care coverage. Medicare is literally savings lives right now. (Retirees can close Medicare gaps by purchasing either a Medicare Advantage or Medicare Supplement Plan.)
However, it is the weaknesses that are most useful when looking ahead to the threat of further pandemics. The aspects of our retirement systems that need shoring up, enhancing, or fixing include:
- Social Security: The system’s long-term financing challenges are well-known. The system needs to be financially sustainable for many decades, so Americans can be confident about receiving the benefits they’ve been promised.
- Pension plans: Underfunding of state and local pension plans could be exacerbated by the recent stock market decline if asset values don’t bounce back soon. This could eventually lead to more difficult choices of either funding pension plans or providing necessary public services.
- 401(k) plans: While these plans can do a good job of accumulating savings for retirement, they’re currently only offered to about half of the workforce. The recently passed SECURE Act is a step in the right direction to fix these shortcomings, but most likely we’ll need even more progress.
- Reliance on working longer: Many older workers’ “retirement plan” is to continue working as long as they can, often due to insufficient savings.
- Health insurance pre-Medicare: Individuals who lose their job or don’t have access to a health insurance plan face a daunting challenge: finding affordable health insurance to bridge the gap until they’re eligible for Medicare.
- Long-term care: Medicare and medical insurance don’t pay for help for frail elders who need assistance with completing the activities of daily living.
While these legislative change suggestions could take time, there is one main strategy you can adopt now that will help financially future-proof your retirement plans…
Nervous Americans are getting serious about setting aside cash for the unexpected. And rightly so.
The idea of the emergency fund is to make sure you have easily accessible cash in the event of, say, a global pandemic; Emergency funds are designed for situations like COVID-19 because they can give you some peace of mind when faced with a reduced income and other instances that could affect you financially. Knowing that you have everything covered for a few months can hopefully help ease your mind in a time of distress and uncertainty.
Most experts recommend saving enough to cover roughly 3-6 months of expenses in the event of an unexpected situation like a job loss, car breakdown, etc. But even if you only have a few days or a week’s worth of expenses covered by an emergency fund, that’s a great start.
Furthermore, now that many people are staying at home and are practicing social distancing due to COVID-19, you can use this opportunity to reallocate the money you would normally use on things like going out to eat, extracurriculars, and other similar activities toward your emergency fund.
At this point, it makes sense to evaluate how we’ve been affected and devise plans to help reduce the risks from similar situations moving forward.
Even the best-laid plans may not work when stress-tested in a real-life situation. It’s time we all take a deep breath, look at our current position, and determine where we want to be in the future.
If you are feeling overwhelmed when it comes to your retirement plan, contact the retirement income advisors at CKS Summit Group. With over 20 years of experience, CKS can help determine your risk tolerance against your risk need and what plan makes the most sense for you and your family if – and when – the next global pandemic hits.
Set up your virtual complimentary strategy session with us here today.