By Dylan Huang
The COVID-19 pandemic has spurred people across the country to rethink many aspects of their lives, including participation in the labor force. For some, an exit from the workforce was the result of factors outside of their control while others reevaluated what they wanted from their careers. In the midst of these changing workforce dynamics were a group – a record number in fact – who decided that the pandemic was a good time to retire. According to the Federal Reserve, the number of people who left the labor force through retirement was higher during this pandemic recession-recovery than in previous recession-recoveries.
Here are a few key lessons from pandemic retirees for those who haven’t yet taken the off-ramp to retirement.
Create a Spending Strategy
Many of those who retired during the pandemic already had enough money socked away to carry them through retirement. These assets, coupled with rapidly rising home prices and continued equity market strength, may have enabled pandemic retirees to add to their nest eggs, putting them in potentially enviable position at the start of their retirement years. According to our recent study, due to ‘paused’ costs during the pandemic (i.e., eating out, travel, entertainment), Baby Boomers were able add to their nest eggs. 45% of baby boomers put additional money aside.
A healthy nest egg is a crucial component of a comfortable retirement and throughout our working years, we’ve all become hard-wired to save. But this deeply ingrained habit can be at odds with enjoying our retirement to the fullest. It turns out that spending those hard-earned funds is harder than accumulating them. In fact, research from Greenwald & Associates shows that only 31 percent of retirees across all wealth levels systematically withdraw from their portfolios. The other 69 percent are not tapping into portfolio principal and are instead withdrawing less than the portfolio earns. Our own research found that many retirees seem to be trying to ‘self-insure’ their retirement funds by underspending and limiting their desired retirement lifestyle. Some even save money in retirement. I explored this phenomenon in depth in an earlier column.
Working with a trusted financial professional to create a spending strategy for retirement can ensure your nest egg lasts and you can enjoy the lifestyle you envisioned.
Don’t Overestimate Healthcare Expenses
It’s no secret that aging can be expensive and retirees often fear that unexpected healthcare costs will decimate their nest eggs. Although this fear has become that much closer to reality amid the ongoing pandemic, for the most part, healthcare expenses in retirement are predictable and often less expensive than retirees anticipate.
In a prior column, I shared research from our team which found that average healthcare expenses for all retirees, excluding LTC costs, are roughly $4,500 annually, or 15 percent of total retirement spending. This amount is not materially different than what retirees will spend, on average, for food and transportation, and significantly less than what they will pay for housing (42 percent of budget).
Unexpected healthcare events can and do happen, and the key is to plan for known or diversifiable risks and insure the unknown or undiversifiable risks. According to the U.S. Department of Health and Human Services, someone turning age 65 today has almost a 70% chance of needing some type of LTC service and support in their remaining years and 20% will need care for longer than five years. Basic healthcare expenses, such as insurance premiums, out of pocket costs for care or prescription drugs (known risks) can be budgeted and planned for while unknown risks can be mitigated with solutions like long-term care insurance and income annuities. Retirees who insure away these risks are generally happier and more confident in their retirement.
Mind your Equity Exposure
As investors get closer to retirement, they often gravitate toward investment strategies and portfolio allocations that lean away from equities and toward ‘safer’ investments like bonds. This is understandable given retirees’ decreasing appetite for risk and loss – especially in the later retirement years.
However, in today’s interest rate environment, the “cost” of generating retirement income from a portfolio of stocks and bonds is now higher. According to a recent article, from 1870 to 2015, it cost $26,267 in savings to produce $1,000 of annual income with a 50/50 portfolio. As of January 2021, investors need about $79,118 to reap that same $1,000.
Although equity markets can be unpredictable, maintaining some equity exposure in retirement is a crucial strategy to ensuring that a retirement portfolio can continue to grow and the spending plan you’ll create can stay on track. There are several options to accomplish this, including exploring annuity solutions that ensure basic expenses are covered and those that offer equity exposure as well as principal protection. A trusted financial professional can help determine whether these solutions make sense for you.
Although these lessons were highlighted by the pandemic, they will ring true as we continue to navigate through this period and when we emerge into the next chapter. If you have exited the workforce, or are getting closer to doing so, you can find your savings/spending sweet spot and enjoy the retirement you’ve been working towards.
About the author: Dylan Huang
Dylan Huang is Senior Vice President and Head of Retirement and Wealth Management Solutions at New York Life. In this role, he is focused on the development and distribution of New York Life’s retirement income and investment solutions as well as enhancing New York Life agents’ ability to deliver financial outcomes rooted in protection for clients, including Retail Annuities and Long-Term Care Solutions. He is responsible for the company's digital capabilities, including strategy and tools designed to enhance the digital experience for consumers and financial professionals.
Dylan began his career at New York Life as an actuary in 2001 and advanced to leadership roles of increasing scope in the company's Life Insurance, Annuity, and Corporate Finance divisions. He is recognized as a thought leader in the retirement industry for his product development, patents, award-winning research, and service as a board member for the Insured Retirement Institute and the New York Life Center for Retirement Income at The American College. He is frequently sought by members of the media for insights on retirement topics. Dylan holds a Master’s degree from the University of Connecticut and a Bachelor’s degree from the University of British Columbia.