Until recently, the goal of early retirement was a lofty one. But with the chaos caused by the coronavirus pandemic, some older workers are being pushed into retirement ― whether they’re ready or not ― minus the sandy beaches and financial freedom.
During past recessions, it was common for older employees to drop out of the workforce completely rather than try to compete for new jobs. But now, there’s even more pressure to abandon working life.
“Since this is a global health pandemic, it has added a layer of complexity not seen in past recessions,” said Jeffrey Lewis, a financial advisor with Savant Wealth Management. Some older workers may be less inclined to return to the office for fear of contracting the virus themselves, or bringing it home to their spouse or kids who may have an underlying health condition, Lewis said. “If employers are not able to meet employee needs to work from home, then employees may be forced to look for work elsewhere or simply retire.”
The pandemic has hit older workers hard. The unemployment rate among Americans age 55 and up reached a staggering 13.6% in April, up from just 2.6% in January, according to the U.S. Bureau of Labor Statistics.
One in 5 Americans in their 60s have lost their jobs or been furloughed due to COVID-19, according to the July 2020 Retirement Confidence Index by financial technology company SimplyWise. Overall, 15% of Americans are now considering claiming Social Security benefits earlier than they had anticipated. One in 5 respondents who were laid off during the coronavirus pandemic are now planning to retire early.
So, what if it looks like you need to retire sooner than planned, but you’re not sure you’re financially ready? “There is no one-size-fits-all answer to the question of when you can afford to retire,” said Jay Abolofia, a certified financial planner and founder of Lyon Financial Planning LLC. “This depends on a variety of factors, including your life expectancy and general health, planned spending in retirement, streams of guaranteed income like Social Security and pensions, and other financial resources.”
If you’re considering retiring because of the pandemic, here’s what you need to know.
Be prepared to downsize
At some point, every worker fantasizes about what life will be like when they no longer have to answer to a demanding boss or difficult customers. Maybe you’ve imagined your golden years as a time to take that dream vacation you always wanted, or move to a home that sits along the coast.
Though those goals are still possible, you will need to make some sacrifices ― either now or in the years to come ― to ensure you can still afford to live comfortably in retirement. “If you’ve experienced a reduction in your earnings, an increase in your spending, or market turmoil has reduced your savings, it’s likely you’ll need to adjust your lifestyle in retirement,” Abolofia said. “If you’re not comfortable with this prospect, you might consider delaying retirement if possible, downsizing your home, spending less on your lifestyle, moving to a lower cost of living state, or delaying Social Security to age 70.”
Get your timing right
The biggest challenges facing soon-to-be retirees today are timing decisions, according to Pam Kruger, creator and co-host of “MoneyTrack” on PBS and founder and CEO of Wealthramp. For example, some older workers may need to delay their planned retirement date by one or two years ― maybe longer. Others who have been laid off, furloughed or otherwise saw their income drop significantly may have no other choice than to retire now.
“It’s critically important to time retirement right because once [workers] hit the ‘off’ switch, they must replace that active income ― a steady paycheck ― with passive income streams,” Kruger said. She noted that money in low-risk investments may not generate enough interest income to support spending levels in retirement. However, chasing higher yields, even from “safe” longer-term bonds, could risk loss of principal over time when rates head higher.
Before you pull the trigger on early retirement, it’s a good idea to evaluate whether your long-term financial plan can truly support it.
Consider taking Social Security early
“Another significant timing decision is to delay Social Security or start now,” Kruger said. The longer you wait to claim Social Security benefits, the more you stand to receive; waiting until full retirement age to claim benefits (which is between 65 and 67 years old, depending on what year you were born) means your benefits will be about 30% higher than if you take them early starting at age 62. By waiting until you’re 70 years old, the benefit amount would be another 32% higher than the amount you’d get at full retirement age.
But waiting isn’t always the best option. “The reality is coronavirus is a serious threat to those with preexisting conditions who may elect to start getting Social Security sooner than later,” Kruger said. Workers in their 60s should not only evaluate their health and life expectancy when deciding to take Social Security, but also cash needs, their “break even” age and how a spouse might fit into the picture.
Take stock of your existing resources
To know whether your savings can get you through retirement, you’ll need to evaluate what resources you have at your disposal. Take stock of your existing retirement savings and employer-provided benefits such as any 401(k)s, IRAs, pensions, annuities, etc.
“Once you have a good understanding of your retirement savings and other income sources, apply the 4% withdrawal rule to your investment assets,” Lewis said. For example, if you have $1,000,000 in retirement assets, multiply that by 0.04 (4%). The result would be $40,000, a good starting point to determine how much you can withdraw from your investments each year to meet your living expenses in retirement. You may also have additional income sources such as Social Security or rental income to supplement your spending.
Lewis pointed out that the 4% rule is just a starting point and is definitely not the answer for every individual. “Many retirees end up wanting to spend more in the early years of retirement during their ‘go, go, go’ years,” he said. “If you find yourself wanting a more personalized retirement plan, it may be advantageous to reach out to a financial advisor.”
Stress-test your current plan
Unfortunately, there is no way to predict what’s going to take place in financial markets today, tomorrow or even a year from now, Lewis said. “However, just because you cannot predict what and when will happen does not mean you are unable to plan for retiring during financial market uncertainty.” He suggested using a “Monte Carlo simulation” to help determine whether you’re still on track for retirement.
A Monte Carlo simulation is a statistical modeling tool that is designed to stress-test your plan using varying levels of investment return, Lewis explained. For example, it can incorporate a “bad timing” scenario, where you experience poor returns during the first two years of retirement. “Going through this exercise and stress-testing your retirement plan can help provide much needed comfort to those feeling nervous about retiring during a global pandemic.”
Many financial companies offer free online simulators that you can use to evaluate your plan, like this one from Vanguard. And keep in mind that, again, this is simply one tool that can help you evaluate your current situation, but it’s not a guarantee of what will happen in the future.
Rebalance your portfolio
Though the last thing you want to do is panic-sell your investments, now is a good time to rebalance your portfolio. The main reason is to manage your risk, according to Kruger. “Especially when there’s uncertainty about where the economy or the stock market’s heading, those people about to retire or already in retirement are especially sensitive to having too much of their savings in the stock market,” she said.
Rebalancing can reduce your exposure to risk while also eliminating any overlap across your different accounts. For example, you may have several 401(k)s and IRAs that hold index funds or exchange-traded funds that are heavily based in tech stocks. “While tech stocks are the darlings of the market right now, you may have far too much in one particular company and not realize it,” Kruger said. Additionally, you could be paying extra fees to own the very same funds in different accounts.
The second reason to rebalance is to better match up your investing time frame with your cash flow needs, “which may change from year to year and will most certainly change once you step over the starting line into retirement,” Kruger said.
This means ensuring that you have plenty of liquid funds, such as CDs, savings accounts and short-term, high-quality bonds. At the same time, you’ll want to set aside other savings to keep invested over your lifetime and allow those longer-term investments (namely, stocks) to produce returns of more than 5% a year. “You need this balance in order to avoid running out of cash to pay immediate and medium-term bills, and stay invested in the stock market to stay ahead of inflation … which eats away at your savings every year,” Kruger said.
Be wary of magic bullets
Finally, Kruger explained that because there is an urgency around earning higher returns right now, panicked investors may be more likely to take the advice of brokers or salespeople who want to sell them on higher-risk investments or complicated annuity insurance contracts that don’t appear to be risky on the surface. “Make no mistake about these investments, especially if they are coming at you with bond funds or annuities: Right now, there are many products that look like they can promise higher returns, but investors are at risk of losing a lot of money,” she said.
Kruger added that annuities aren’t investments, they are insurance contracts and the devil is in the fine print. “Be sure to thoroughly read the contracts and ask any financial professional to explain why a particular strategy is most appropriate given your financial situation and goals, and to clarify the total returns after fees and taxes,” she said.
