By Sam Dixon
The far-reaching financial effects of the COVID-19 pandemic include its impact on retirement confidence across generations.
A study by the Transamerica Center for Retirement Studies found that 20% of millennials say their confidence in their ability to retire comfortably has declined because of the pandemic. The decline increases with age – 25% of Generation X who were surveyed expressed decreasing confidence and 32% of baby boomers.
Those three groups comprise the three main generations now in the workplace.
Against the grim backdrop of the pandemic, many among each generation already had their work cut out for them in terms of saving enough for retirement. While millennials have the longest time to work, they have more student loan debt than the older generations. Gen X is largely behind in its retirement savings and many have credit card debt while still raising families. The boomers have had the most years to save, but many were hit hard by the Great Recession and now the pandemic. They, of course, have less time to recover than the younger generations.
Millions of Americans are changing their budgets and refocusing their retirement plans.
Meanwhile, with the pandemic clouding the big picture indefinitely, these possibilities regarding retirement hang in the hazy horizon:
Retirement May Be Shorter and You May Have to Work Longer Than Planned
Staying in the workforce longer gives you more time to save, a smart thing to do considering that the economic impact of the virus has slowed or slashed savings. Your retirement account will have more time to grow. It’s wise in the current context to consider extending your work years – health willing – as long as possible.
Working from Home May Mean More Cash Available
Remote working has its advantages in regard to saving for retirement. Without expenses for commuting and lunching with colleagues, that’s cash available to put aside for retirement, such as through an IRA. The maximum IRA contribution in 2020 is $6,000, or $7,000 if you’re age 50 or older.
Family Members Who Need Help
Consider the situations of family members who may need your financial support. This could postpone your retirement or otherwise adjust it significantly. While helping family members is a personal decision, don’t adjust your plan without first considering their situation.
More Incentive to Save: Social Security May Shrink
The rumblings in recent years have been that Social Security will disappear, but the background consensus is that the program will still pay out 75% of benefits through most of the century. That’s a significant hit for retirees, and it’s never been wise anyway to rely on Social Security to cover most of your retirement expenses. Those hard facts heighten the importance of saving enough for retirement.
With no end in sight to the pandemic, what can people do to save, reorganize and stabilize their retirement plan – and restore their confidence in being able to retire? These planning tips can help:
Protect Your Retirement Savings
Millions lost their jobs because of the coronavirus-forced shutdown, and many who didn’t suspend their retirement contributions. Others took early withdrawals from retirement accounts, setting their retirement savings further behind schedule and forcing them to save more when things improve. Then there was the blow of some companies suspending their matches to employee 401(k) accounts.
With many people behind on retirement savings, all these pandemic-related factors put them in a tough catch-up position. But It doesn’t have to put you further behind. The bottom line is to preserve your retirement savings as much as you can. If you’re still working and have a 401(k) or similar plan, keep contributing if you can afford to do so, even if your employer has suspended its match. Remember the costs of a 401(k) loan – it typically has to be paid back within five years, or sooner if you lose your job – or a withdrawal; it triggers income taxes while reducing your savings. If you’re feeling squeezed financially, tap your emergency fund first, cut expenses where you can, and negotiate with creditors to reduce or spread out your payments.
Reassess Your Portfolio
Is the investment part of your plan suitable? Now is a good time to evaluate.
One consideration for people nearing the end of their working years is turning part of their portfolio into income investments. Review your asset allocation and assess your risk tolerance. The pandemic and its financial effects have triggered a roller coaster ride in the stock market, and if the market’s volatility has made you nervous, consider adjusting to a more conservative portfolio. The closer you are to retirement, it’s more important to move some of your 401(k) or IRA into safer investments, such as bonds.
Others who are a few years away from retirement may want to seek more growth in their money. Remember, one of the big financial risks for retirees is inflation, so in preparation for that, it’s important to find a portfolio risk level that provides growth and can help balance those likely increases in the costs of goods and services.
Consult your financial advisor about alterations, and whatever you do, don’t make knee-jerk decisions that could make things worse. History shows markets do recover, so don’t panic and be too quick to sell off. On the other hand, if you have the cash, it might be the right time to pick up some bargains in depressed stocks.
Minimize Your Debt
I can’t emphasize this one enough. The longer you wait to eliminate debt, the less likely you are to reach your retirement savings goal. So much income goes toward paying interest on debts that it can become difficult to save.
In an uncertain economic environment, it’s especially risky to enter into retirement with lots of debt. Avoid high-interest credit card debt or big-ticket items such as car loans. Get these debts down while working and don’t take on new debts. If you’re in your 20s, 30s, or 40s, it’s worth it to slow your retirement savings in place of getting rid of debt. Consolidating high-interest debt into low-interest payments is possible with a home equity line of credit. When the debt is eliminated, you’re in position to contribute much more to your company retirement account.
About the author: Samuel J. Dixon, RFC
Sam Dixon is a managing partner at Oxford Advisory Group. A graduate of the College of Business at Florida State University, he specializes in retirement planning, estate planning, and investments for retirees, executives, and small business owners. He lectures on risk aversion in retirement and developing a predictable retirement plan.