Even if you have done everything by the book for decades, chances are good that the COVID-19 pandemic has affected your retirement plans.
Some people are making less money or have lost their jobs altogether. Others have seen employers decrease or completely eliminate company matches to 401(k)s and other employer-sponsored retirement accounts. And the stock market, while it may seem to be recovering one day, it changes directions the next. Market uncertainty and the volatility that goes with it appear to be here to stay for a while.
For those who have just retired or are about to retire, any damage done from the effects of the pandemic may be even harder to overcome. This is an important time to talk to your financial professional about your plans and your current situation, and here are a few things you can start thinking about now.
It may be a tough thing to consider but delaying retirement and working for even two or three more years if you are able can have a positive impact on the amount of money available to you in retirement. Not only will you have more time to rebound from any losses caused by the pandemic, but if you wait until age 70, you’ll receive much larger monthly Social Security checks than you would if you began taking early retirement at age 62. Of course, delaying retirement also means you can wait longer to start tapping into your savings.
Even if your employer has suspended or decreased the “matching” component of your retirement benefit plan, you may want to keep contributing — and possibly even increase your contribution. Another option available for you or your spouse is contributing to an IRA if your employer does not provide a retirement plan.
Think hard about penalty-free withdrawals
Through the end of the year, the IRS is allowing retirement plan participants affected by COVID-19 to take penalty-free withdrawals of up to $100,000 from qualified retirement plans. The CARES Act also makes some retirement-plan loans potentially easier to get and pay back. But unless you have a severe emergency, it may be unwise to take out a loan or withdrawal.
The change is only meant for people directly affected by the virus — either those who have lost their job as a result of the pandemic, have been diagnosed with the virus, or have cared for a family member who got COVID-19 — and the IRS may eventually demand proof. More importantly, withdrawing such a significant amount now could leave you with less when it comes time to retire.
For those who have recently retired or are just about to, consider adjusting your expectations about how much you will be able to withdraw from your retirement accounts. Traditionally, financial professionals have advised clients to follow the “4% rule” which broadly suggests withdrawing no more than 4% of your retirement account each year (that is $40,000 from an account with a $1 million balance).
But given pandemic-related challenges to financial markets, some say it now may be smarter to withdraw closer to 2-3% the first few years. That means doing more with less in the short-term, but it may be a wise decision for the long haul.
Take lessons from the pandemic
If there is any good financial news about the COVID-19 pandemic, it is that most people are staying home and not spending money on travel, eating out, and other leisure activities like they did previously. Those mulling a smaller retirement withdrawal can reflect on the money they saved during the crisis — and consider if they really need that trip to Paris or those fancy dinners out.We hope you have found this information helpful, but it is only an overview. At Bangerter Financial, we can help you evaluate your current situation and discuss options to get you back on track so you can make the most of your retirement. Give us a call at 915-965-1879. We would be honored to assist you.