By Ryan McPherson, CFP®
Planning to retire comfortably during stable or even robust economic times can be challenging on its own. Doing so during a pandemic and healthcare crisis brings additional hurdles.
If retirement is on your horizon, make sure you don’t sentence yourself to work longer than needed by unknowingly committing these pandemic-related money mistakes.
1. Overusing (or unnecessarily using) CARES Act retirement plan withdrawals
Even though the CARES Act allows for penalty-free withdrawals of up to $100,000 from certain types of retirement accounts, this should be viewed as a last resort if you need money.
Once those dollars have left your IRA or 401(k) and are in your hands, they’re no longer invested and won’t be subject to potential market growth. Eventually, when you wish to retire, you’ll need that money and by withdrawing it now, those dollars won’t have benefited from compounding. If you’re a few years away from retirement, this can be particularly devastating, as it’ll be incredibly challenging to make up for a large withdrawal now. (Remember: you’ll also likely owe income taxes on dollars you withdraw from a pre-tax IRA or 401(k).)
If raiding your retirement account is an action of last resort, where should you turn first for cash? (Hint: it’s not your emergency fund.) Luckily, you actually have numerous options . . .
Start with your expenses before pulling money from anywhere.
● What subscriptions could you pause for a couple of months?
● When was the last time you rebid your homeowners/renters and/or auto insurance? If it’s been a couple of years, there might be some savings hiding there.
● Still have cable? Cut it. (Or at least aggressively renegotiate your package.)
● Buying too much online ‒ no judgment here, we’re all guilty ‒ establish a “buy day.” That’s right, a buy day. Pick a day each month to make non-grocery and non-essential purchases online. During the other days of the month, add items to your cart. On the buy day, review your cart(s) and remove any items you’ve realized that you don’t need or haven’t thought about for a while.
● Focus on frequency. If you find yourself going to the grocery store or buying groceries online 4, 5, or more times per week, aim to drop that number. You’ll find that your overall grocery spend will fall as well.
Once you’ve done as much as you can with your expenses here’s where to look next:
● Credit card points - If you’ve amassed credit card points, consider cashing them in to decrease or fully pay off your credit card bill.
● Negotiate bills - This is especially relevant during the COVID-19 pandemic. Various companies from lenders to utilities may be willing to waive late fees, delay interest penalties, and/or give you a brief reprieve from payments. Call them, you may be surprised by what you find.
If the above remedies aren’t sufficient to offset the impact of a pandemic-related layoff, furlough, or salary cut, it’s time to consider dipping into your emergency savings and/or temporarily reducing your retirement plan contributions down to the level at which you still receive your employer’s full match. At this point, using a home equity line of credit (HELOC) to bridge a gap may also be applicable.
Withdrawing from a retirement account (or taking a plan loan) comes after you’ve exhausted the strategies above, regardless of what withdrawal benefits the CARES Act provides. Don’t prematurely or unnecessarily use retirement savings and jeopardize your ability to retire comfortably.
2. [Financially] supporting adult children
I get it, your child was laid off or had their hours cut and you’re trying to help out. This is a tough situation as you obviously want to help them through a challenging time, but have to balance that desire with your own retirement preparation needs.
Monetarily supporting adult children is expensive while you're working and becomes very difficult to continue once you've retired unless you've amassed a tremendous amount of money. (Or the monetary support is small compared to your investments/savings.) If you can't stop supporting them completely, at least decrease the level of monetary support over a period of years. It's ok to inform your adult children that you can't continue to support them and expect to retire at any reasonable age. It can be helpful to establish a ramp down period during which your support decreases with a fixed end date. Additionally, if your child is looking for flexible remote and/or part-time work, they may want to consider Steady, which aggregates such opportunities.
Remember: any "savings" from no longer supporting adult children can go towards your retirement. Don’t compound your own COVID-related money troubles by overly (or unnecessarily) financially helping out your adult children.
3. Manage your emotions
2020 has been (and continues to be) at the intersection of a healthcare crisis, a period of economic uncertainty, a stretch of stock market volatility, and a contentious presidential election. To say the least, these events do not help to calm the nerves.
For pre-retirees (and retirees), one of the most disastrous moves can be “going to cash” or severely rebalancing your portfolio to be overly conservative as markets jump around. A lesser investment sin, but still ill-advised, is stopping retirement plan contributions until things “calm down.”
While several broad market indices (like the S&P 500) have rallied back from their March 2020 lows, it’s likely that we’ll experience market gyrations as 2020 closes out and as we move through 2021. Essentially, you’ll still have ample opportunities to make emotion-driven investment errors in 2021. Stay alert!
Here’s why this matters. You’ll probably be retired for 3 decades or more. Over such a long time frame you’ll need your retirement assets to grow faster than inflation to maintain your standard of living. Cash and bonds, while less volatile, generally won’t do this. You need exposure to riskier growth-oriented assets like stocks.
How much should you have of each? This is where a financial advisor can be helpful to conduct risk tolerance and preference testing to ensure that your exposure to different types of investments matches your needs and ability to stomach market movements.
As you navigate through the coming years, aim to avoid these money mistakes to help position yourself to retire comfortably on your terms and timeline.
About the author: Ryan McPherson, CFP®, EA
Ryan McPherson, CFP®, EA is the Director of Financial Advising/Coaching and Personal Finance Education at SmartPath, a leading employee financial wellness company. Before SmartPath, Ryan spent over a decade in wealth and investment management roles.
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