Retirement Nest Eggs in the Age of COVID-19

Protect your retirement nest egg

Retirement Nest Eggs in the Age of COVID-19

Here’s what you should do to protect your retirement nest egg now if COVID-19 has pushed you into early retirement. 

As the stock market dipped in March and April, older Americans watched their retirement accounts swoon. Millions of people across the U.S. retired earlier than planned as of April, according to a 2020 study from the Becker Freidman Institute for Economics at the University of Chicago. Even though investments have largely recovered, many job sectors have not. With the virus still working its way through the country, those near retirement find themselves shaken.

Is it time for adjustments to your retirement account?

Don’t make decisions based on emotion but instead be sure you’re doing a lot of research or working with a financial professional who can help you navigate through this crazy economic time. The importance of a diversified allocation across retirement accounts can’t be overstated. Less risky options might include annuities, bonds and high-dividend stocks, among others. Your allocations will vary based on risk tolerance, proximity to retirement and other factors.

What To Do Now

If you need money right away, consider your options carefully. Withdrawing from a retirement fund may not be your best option for the long haul. Sit down with a financial professional and evaluate the pros and cons of a home equity loan, credit card debt or reverse mortgage. Interest rates, tax consequences and your time horizon may influence your decision. Check which federal government programs are available that may offer aide. If you can avoid tapping your retirement savings that may be prudent. If you have other assets that you can use before turning to your retirement account, that would be a whole lot better.

Another possibility is to borrow from your 401(k) or IRA. These can be sources of short-term loans, but you’ll want to consult with a financial advisor before making a move as the rules governing these withdrawals can be complicated, and there are penalties for violating the rules. Many people are unaware that in any 365-day period, you can withdraw funds from one IRA account only and replenish it within 60 days without incurring any taxes or penalties. It is therefore an interest-free, short term loan. But again, we recommend consulting a financial advisor so you don’t run afoul of IRS rules.

Look at Your Budget

Now’s the time to review your budget and make adjustments. Many of us are working from home. If that’s true for you, what you spend on gas and clothing for the office has almost certainly decreased. How about the money you used to spend going out to eat, or to the movies? Make sure that budget allocations are in line with your new normal.

When was the last time you negotiated your phone bill or checked around for a better rate on insurance? If it was more than a year ago, or if the coronavirus has changed your situation, it’s time to revisit your bills. You may be surprised to learn the number of expenses that you might be able to reduce:

  • Cable or satellite television
  • Landline phones
  • Internet
  • Alarm systems
  • Storage units
  • Satellite radio
  • Gym memberships
  • Credit card rates

 

Home and/or car insurance is something that most of us renew automatically every year. We tend to use the same company without thinking about it. After all, the insurer makes a big deal about all the discounts we’re getting. But even if you called around and got a great deal a few years ago, companies tend to increase rates over time (they know we’re lazy and will usually stay with the same firm). Some companies offer excellent rates for 30-somethings but are at the bottom of the pack when you get older.

Save for Your Emergency Fund

You may have drawn down your emergency fund over the last few months. If you can, start to work on building cash back up. Even if it’s a small amount per month, tuck away money for the next rainy day. Emergencies will happen when you least expect them, including when you just ran through your last dollar of rainy-day funds. Try to have something saved up that you don’t touch to cover life’s little (and big) surprises.

Continue To Work

For those who have the choice, continuing to work may be a good option. Near-retirees may want to reconsider moving forward with retirement during such a volatile market. Withdrawals will significantly impact your portfolio’s overall value when you start withdrawing during a declining market.

This risk is called a sequence of return risk which can adversely affect your nest egg when you retire. A down market right when you start withdrawing retirement funds for income can severely affect how much you’ll have in later years, much more so than a down market in the later years of retirement. If negative returns occur early in your retirement, the amount of income you can withdraw over your lifetime is affected significantly to the downside.

We all have had to make adjustments due to the pandemic. Some of us have been hit a lot harder than others. It’s a time of adjustment and reassessment, including around our retirement portfolios. Staying financially stable is always a balancing act, and it may be particularly difficult now. But there are steps you can take to tighten spending and make sure your nest egg is allocated to stay the course.

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