Recession and Retirement Planning

The U.S. economic outlook darkens daily, with millions facing unemployment and businesses in a steep decline. Could this change retirement plans for millions of Americans?

Unfortunately, the spread of the coronavirus has resulted in extreme stock market volatility, reducing the value of many people’s retirement accounts. Nonetheless, seeing a drop in your account and the possibility that it may take some time for it to recover can be extremely concerning.

Social Security Concerns

Social Security’s trust funds could run out as much as four years earlier (in 2032 rather than 2036) due to the coronavirus pandemic, according to new research from the Wharton School at the University of Pennsylvania.

The pandemic will affect Social Security income in three key ways:

  1. You may not get to work the full 35 years.
    If you lose your job and are unable to find work again until the pandemic is under control, you could easily wind up spending a year or more unemployed. A long period of unemployment could leave you with fewer than 35 years of wages under your belt. If that happens, you’ll have a $0 factored into your personal benefit equation for each year short of 35 employed years. And even if your working life still hits or exceeds that length, a job loss may take away what would have been high-earning years from the peak of your career.
  2. You may have to accept a lower wage when you get back to work.
    People who have been out of work for quite some time simply need money, and therefore, tend to lower-wage standards which employers can take advantage of. This leaves less negotiating leverage when a job offer arrives. If you’re unemployed for the most 2020 or beyond, you may find yourself forced to accept a lower salary from your next employer than you were paid by the last one. And unfortunately, lowering your salary, will ultimately reduce your Social Security benefits.
  3. You may have to file for benefits early.
    You’re allowed to claim Social Security as early as 62 years old, and if you’re out of work for an extended period of time due to the pandemic, you may need to file for those benefits earlier than anticipated. This doesn’t come without consequences: Claiming before full retirement age (today between 66 and 67) means taking a permanent reduction in the size of your monthly benefit.

How to Stay on Track

With all the uncertainties it’s difficult to ride out any market downturn, but holding a well-diversified portfolio—a mix of stocks and bonds geared to your risk tolerance and financial goals—remains the smartest strategy.

As study by Katherine Roy at J.P. Morgan Asset Management, found 401(k) investors who kept contributing to their plans during the Great Recession had fully recovered by March 2010, just two years after the bear market bottom. That was a faster rebound than the market itself, which regained its pre-crash high in March 2012.

While staying the course might not be possible if you’ve become unemployed or your salary/hours have been reduced, those who can still save and invest – and especially if you were hoping to retire soon – it’s crucial to know where you stand and decide whether you need to adjust. Try the following guidelines to minimize financial disturbance as you enter retirement:

Reviewing your current retirement strategy: It’s not too late to review and diversify your current retirement plan. Under the guidance of your retirement income advisor, keep your asset mix on track by revisiting contributions, withdrawal rates and re-balancing periodically. Regularly re-balancing your portfolio to keep it in line with your goal time horizon can help offset any unwelcome surprises such as the coronavirus.
Build Your Emergency fund: Cash reserves have never been more essential to protecting your finances. Your emergency fund should aim to cover three to six months of expenses—perhaps as much as a year if your job isn’t secure. That money should be kept in a safe, easily accessible account, which will spare you from having to tap retirement funds or run up your credit card balance for unexpected bills.
Hire an specialist: If you want help with your financial strategy, consider hiring an experienced financial planner that specializes in retirement income strategies. A professional planner can also give you advice on stock market volatility, suitable investments to consider and ultimately bring you fresh new ideas for your retirement income.
Final Thoughts
The coronavirus crisis has torn the Band-Aid off the financial fragility of many Americans.

Because nobody knows how long this recession will last, it can be tough to plan for retirement right now. But by considering the above ways the recession could affect your savings and your future Social Security benefits, you can go into retirement as prepared as possible.

Do you have concerns on the effect COVID-19 has had on your current retirement plans? McAdams Group can help ensure you’re as prepared as possible for whatever the future has in store. Contact us here today to find out more.

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