By Sandra Adams, CFP
The coronavirus pandemic has taken us by storm. For the world and for so many of us individually, the virus has been devastating both financially and psychologically. It has likely changed forever the way we will live our lives. It has slowed us down and made us think about things differently. The impact for those nearing or in retirement has been and continues to be, significant. Here we will discuss impacts COVID- 19 is having on those close to or in retirement, and what adjustments can and should be made as a result of the pandemic.
First, let’s take a look at what the impact might be having on those nearing retirement:
Earlier than Expected Retirement
With the economy at a near standstill over the last few weeks and months, millions of Americans are being forced into early retirement, whether they were prepared to do so or not. For those who were behind on their retirement planning, what can be done?
While many may not be able to go back to their previous employment or even another full-time position, part-time work may be possible. Working part-time and working longer to avoid drawing from your investment portfolio, even if adding to retirement savings isn’t possible, can help make up for a shortfall and increase your ability to stretch your assets and income.
Utilizing home equity to support your long-term retirement is another possible action to take in times of financial stress. A Home Equity Conversion Mortgage (HECM) or a Home Equity Line of Credit (HELOC), is best to have in place BEFORE there is financial hardship but is still an option later on. It can provide extra income and/or liquidity (depending on how you wish to use it) if you need it. We generally don’t plan to use home equity as part of a client’s assets for retirement, but it can be a back-up plan.
Consider adding guaranteed sources of income, like insurance-based products providing income, for retirement stability. (Guarantees are based on the claims-paying ability of the issuer.) If you won’t have a pension supplied by an employer as part of your future retirement toolbox, these products are worth considering. The more of your retirement income that you can make “guaranteed,” the more stable, predictable and solid your retirement will be. These products do not come without costs and are not right for everyone, and should be thoroughly evaluated for your individual situation to determine if they are the right fit for you.
Investment Loss Due to the Economic Downturn
The pandemic has caused significant market volatility and economic slowdowns. As a result, many pre-retirees are finding their investment assets are down anywhere from 10% - 25% from the beginning of the year. And if job slowdowns, lost hours, or job losses are part of the equation, retirement savings or planned additions to these investment accounts are no longer happening, multiplying the impact to retirement plans. Retiring on time or with as much income in retirement as desired is being hampered for many. You may have to work longer (not always an option) or lower your income expectations in retirement.
Shelter in Place/Quarantine – A Test Run for Retirement
The recent requirements of sheltering in place may bring the realization that you don’t have a real plan for what your retirement looks like. With all of this time at home, many are getting a forced trial run for retirement. While you probably would not choose to sit at home, without going out to socialize and do things outside of the home (visit with family, volunteer, travel, etc.) this is a wake-up call to have a plan for when you no longer have a work schedule.
In our conversations with clients, we explain that retirement planning is as much about the money as it is about planning for your time. You want to make sure that you plan your time well — that you enjoy it, make good use of it, and find value in what you do. For those who don’t plan, they risk finding themselves sitting in front of the TV alone and unhealthy, just wanting to go back to work.
And for those already in retirement…
Investment Losses in the Early Years of Retirement
Even with a well-diversified 40% bond/60% stock portfolio, many clients were down just north of 15% in mid-April. Even if the market continues to recover, this highlights the danger of “sequence of returns” for those early in retirement, especially for those needing to draw significantly from their portfolios for income.
Statistics show that when you have a “bad draw” and retire when the economy is slow or markets are down significantly and you are drawing on your portfolio for income, your chances of failing in retirement (running out of money before you run out of time) increase significantly. Watch this video on how to keep your retirement plan from failing.
To avoid drawing from your portfolio in these early years (or when markets are down): reduce expenses, use the HECM or HELOC (especially if rates are low) instead of drawing on invested assets, use cash savings instead of withdrawing from your investment portfolio, or do some part-time work (at least enough to cover the discretionary expenses).
Significant Health Event and/or Loss of Spouse
The over-60 crowd, especially those with underlying health conditions, are those deemed most vulnerable to the coronavirus. We have seen tens of thousands of hospitalizations and deaths due to the disease across the U.S., resulting in high medical bills to many and losses of family members and spouses in others.
High medical bills can impact retirement plans, especially when they’re unexpected and unplanned. The loss of a spouse can be life changing. For the spouse left behind, the loss can be emotionally and psychologically devastating; it can also change the path of retirement significantly by reducing retirement income by as much as half, while expenses are not reduced an equivalent amount. As morbid as it sounds, we suggest that you always run scenarios to look at the “what ifs” of the loss of a spouse and how it would impact your future retirement, in order to plan ahead.
Emotional/Psychological Impact of the Pandemic
Those who are older in retirement, who may be empty-nesters or widowed, may find themselves lonely and isolated in the shelter-in-place and quarantine environment. Find ways to reach out to friends and loved ones amidst the isolation to fight loneliness and depression — phone calls, texting, FaceTime, Zoom, etc., are ways to stay in touch with the outside world and in touch with friends and loved ones so you don’t feel all alone in the world. Take the initiative to reach out to others.
The COVID-19 pandemic will not last forever. But it likely won’t be the last of events like these to impact pre-retirees and current retirees. The key, as always, is good planning — plan early, plan often, and plan well.
Stay safe and stay well — we’re all in this together.
About the author: Sandra D. Adams, CFP, can be reached at 248-948-7900, Center for Financial Planning, Inc. 24800 Denso Drive, Ste. 300, Southfield, MI 48033. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Any opinions are those of Sandra D. Adams, and not necessarily those of Raymond James.
Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.