The COVID-19 pandemic has had obvious impacts on everyone’s lives. Financially speaking, the impacts may be felt for a while. For pre-retirees, the uncertainty we now deal with can bring about many emotions. A retirement that seemed so close can now seem like yet another unknown.

The good news is if you were on track before, then you may still be within striking distance of the retirement you have worked so hard for. If you were unsure where you stood before, then now is the time to start to remedy your situation.

First Things First

Before worrying about your longer-term retirement plan, you may be more concerned about your current situation. It can be hard to think about retirement when you are dealing with other concerns, such as a job loss or decrease in income and a drop in your investments. And, of course, the pandemic has its own set of health concerns.

If you have been diagnosed with COVID-19 or had other financial issues due to COVID-19, then your retirement plans probably took a back seat to your health, as well as the health and safety of your spouse or dependent. The good news, financially speaking, is special provisions apply to you, enabling access to coronavirus-related distributions from certain retirement accounts early and without penalty through December 31, 2020 (this date may be extended pending future legislation).

Retirement plan distributions: You can withdraw up to $100,000 penalty-free. You do have to pay income tax, but you can spread it over three tax years. You also have the option to “repay” the money back into your account.
Increased access to retirement plan loans: You can now take a loan of up to $100,000 from some retirement plans. Most importantly, you can delay loan repayment for up to one year. This can apply to a 401(k) plan, Thrift Savings Plan, and others that normally allow for smaller loans. Contact your plan sponsors to find out how.

You May Be OK

Assuming you or your advisor positioned your assets in an appropriate manner, you should still be sticking with your investment portfolio. There have been and will continue to be volatility in the markets, but this should have been assumed as a possibility.

If, however, your investments suffered more losses than you were comfortable with or a job loss means you will experience adverse financial conditions affecting your current cash flow, then now is the time to reassess. There is nothing wrong with adjusting your risk, especially since markets have rebounded.

If you are unsure as to how much you were impacted by declining markets, then the first step is to figure out your “safe withdrawal rate.” This is the amount of money you can comfortably pull from your investments while still keeping a high probability of not running out before the end of your life.

This number is usually around 4% per year and should be addressed in most retirement planning scenarios. A financial planner can help determine if your portfolio matches up with your withdrawal rate, which, in turn, needs to match up with your assumed retirement spending.

Concerns

We have four major financial worries for pre-retirees as a result of COVID-19. The previously addressed market performance is not at the top of our list. The concerns we have are:

Job loss (and subsequent decline in savings rate)
Poor timing of investment decisions
Depletion of emergency funds
Low interest rates

Job Loss

Our number one worry for pre-retirees is job loss. One of the best things you can do when markets are down is continuing to save each pay period. Dollar cost averaging has long been shown to work well after market downturns because of the continued purchasing of lower-cost priced shares. Losing your job, however, probably means you stop saving and lose any matching your employer was doing on your behalf.

As mentioned to start this article, your first concern should be making it through this period and understanding your options should you need access to funds. Managing the decision of where to pull from can help you get back on track quicker when you are employed again as well as save you in taxes. Costly mistakes can and should be avoided.

Poor Timing

If you suffered large losses and made the mistake of divesting during the market plunge, you are now faced with a tough decision of how and when to get back into the market. Do you get back in at once? Do you slowly put money back to work over a period of weeks or months? The answer differs for everyone.

One of the things we saw far too often from people we met with around the 2012 time frame was long-term money sitting in cash because they could never figure out when to re-invest. Meanwhile, the recovery was well underway.

Depletion of Emergency Funds

Having an emergency fund is a foundation of any financial plan. Having an emergency fund in retirement is just as important. You can spend several years or longer building your emergency fund to the level you are comfortable with only to see something like a job loss or reduced income deplete it.

If you have to tap into your emergency fund, try to have a plan to build it back up in the years before retiring.

Low Interest Rates

Most investors are not worried about this yet, and it is certainly a worry that probably should be further down the list for now. The reality, however, is future retirees may find it difficult to generate income from a simple bond-style portfolio for many years to come.

Rates are extremely low, and while that is great for taking loans, it is not great for income generation. This may also mean pensions and Social Security will have little or no inflation adjustments for the time being.

Managing your expenses in a reasonable way can help, but it is also essential to develop an investment strategy with a financial advisor that can match your previously mentioned withdrawal strategy to your portfolio.

All Is Not Lost

Maybe you were hoping to retire early at 60 or at the “normal” age of 65. If the recent market performance or economic fallout of the pandemic has made you rethink your plans, you are probably now wondering how many extra years you will need to work.

It is very possible it’s not as many years as you think. Just one or two more years of working can have a significant impact on your retirement success. This is because the extra year or two means you are saving in your retirement and you are also delaying accessing your funds. The compounding return of these two factors can make a big difference.

When we review future cash flow analysis with clients, they are usually surprised how much of an impact a single year on the back end of their earning years can have. Usually, this is a pre-retiree’s highest income years and highest savings rate years.

Final Note

One final thing that pre-retirees are also stressing over is their adult children, who may also be suffering financially. While adult children have time on their side to get back on track for retirement, they can still have current issues with things like student loans and mortgage payments. Student loans have been given forbearance options, and so have mortgages.

Before dipping into your retirement plans or emergency funds to help, make sure they find out their other options first.

Visit our COVID-19 resource page for more information.

Discuss your situation with a fee-only financial advisor.

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