With COVID-19 disrupting everything from daily life to stock prices, it can be tough to set financial goals and make plans for retirement. “For the last few months, we’ve seen very volatile movements in capital markets, which has caused fear and uncertainty in investors,” says Lauren Anastasio, a certified financial planner at SoFi in Claymont, Delaware.
In spite of the unknowns, it’s possible to set a course for your financial future. Take care to avoid these retirement planning mistakes:
- Not revisiting your budget.
- Stalling automatic investments.
- Withdrawing unnecessarily from a 401(k).
- Reverting to cash.
- Not having an emergency fund.
- Rushing into retirement.
- Not maintaining a retirement plan.
Not Revisiting Your Budget
If you used to drive 30 minutes or an hour to work, but are now clocking in from home, you may have noticed a difference in your monthly gas expenses. Other areas of your life and spending might have changed as well. “Capture your monthly bills, and don’t forget to include quarterly or annual expenses,” says Kyle Powers, director of 401(k) advisory services at The Fiduciary Group in Savannah, Georgia.
You might find some expenses have dropped in recent months, and you can set aside more toward retirement. And if you’re going through a down period due to a job loss or sickness, a budget can help you maneuver through this time. Once earnings go up or your situation changes, you’ll be able to easily spot opportunities to save for retirement.
Stalling Automatic Investments
If you regularly had money withheld from your paycheck and deposited into retirement accounts prior to COVID-19, it’s best to continue saving if you are in a financial position that allows you to do so. “Continuing to contribute to your 401(k) or IRA, particularly during the down times, is essential to building retirement savings that will support your long-term goals,” Powers says. Maintaining your savings habit will also help you avoid spending the funds on non-essential short-term items.
Withdrawing Unnecessarily From a 401(k)
Individuals who take withdrawals from a retirement account before turning 59 1/2 typically face a 10% early withdrawal penalty. However, the CARES Act waives the penalty for coronavirus-related withdrawals, allowing investors to take up to $100,000 from their retirement accounts. While this rule change provides financial assistance for those who need it, an early withdrawal may not be right for everyone. “I am seeing many individuals taking distributions even if they do not meet the criteria to qualify for the waived penalty, and even when they don’t actually need the money,” Anastasio says.
Before taking money out of a retirement account, it may be wise to talk to a financial advisor about your options. “While the penalty is temporarily waived, distributions will still be subject to taxation, and taking money out unnecessarily will require someone to save even more in the future to replenish the funds,” Anastasio says.
Reverting to Cash
When markets sway, it may be tempting to sell stocks and hunker down with the proceeds in cash until the economy stabilizes. “It may feel good to take action to try to prevent further loss, but there is no way to know if that’s a great decision or a terrible one,” says Scott Schleicher, a financial planning specialist group manager and senior financial advisor at Personal Capital in Denver.
Before getting out of the market and using cash as a safe haven, look at your overall allocation of funds. “Some cash is good,” Schleicher says. “But sitting in all cash as an attempt to avoid market volatility can be very damaging.” As inflation continues, piles of cash will have less purchasing power. Furthermore, investors who plan to invest again when it is safe may have a hard time pinpointing when to take action. “As they wait for that perfect moment to reinvest, they could be missing out on massive gains, which, over the long run, can feel just as devastating as suffering losses,” Schleicher says.
Not Having an Emergency Fund
If you don’t have some cash set aside for unexpected expenses, it can be difficult to keep up with repairs or pay for medical bills during COVID-19. “While a credit card may be a convenient place to turn in order to cover an unanticipated expense, that bill will eventually come due and you don’t want to be forced to take a 401(k) loan to cover it,” Powers says. Having enough funds to cover three to six months of living expenses can provide a shield for future events.
Rushing into Retirement
If you planned to step away from the workforce this year, your retirement account balances may not look the same today as they did at the beginning of the year. “Near retirees may want to reconsider moving forward with retirement during such a volatile market,” says Jeffrey Burg, president of AlphaTrust Advisors, a financial advisory firm in Phoenix. “It doesn’t matter what order your portfolio returns come in when you’re saving, but it significantly impacts your portfolio’s overall value when you start withdrawing.” You may decide to work for a few more years to give the market and your portfolio time to stabilize.
Not Maintaining a Retirement Plan
If you didn’t have a retirement plan in place before the pandemic, now might be a solid time to create one. And if you have a financial plan in place, revisiting it regularly can still be beneficial. “Retirement is an incredibly special and personal time,” Burg says. An advisor can help you create and review goals and stay on track to reach those goals during retirement.
