What to do if the coronavirus pandemic forces you into early retirement

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Until recently, the goal of Early retirement was a high one. But with the chaos caused by the coronavirus pandemic, some older workers are being pushed into retirement – ready or not – minus the sandy beaches and financial freedom.

In previous recessions, it was common for older workers to drop out of the labor force entirely instead of trying to compete for new jobs. But now there is even more pressure to give up work.

“As this is a global health pandemic, it has added complexity that has not been seen in previous recessions,” he said Jeffrey Lewis, a financial advisor at 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 children with an underlying health condition, Lewis said. “If employers are unable to meet the needs of workers to work from home, workers may have to find work elsewhere or simply retire.”

The pandemic has hit older workers hard. The unemployment rate among Americans 55 and older reached a staggering 13.6% in April, down from just 2.6% in January US Bureau of Labor Statistics.

One in five Americans in their sixties has lost their job or been on leave due to COVID-19, according to July 2020, according to COVID-19 Retirement Confidence Index from financial technology company SimplyWise. Overall, 15% of Americans are now considering getting social security benefits sooner than expected. One in five respondents laid off during the coronavirus pandemic are now planning to take early retirement.

What if it looks like you have to retire earlier than planned, but aren’t sure you’re financially ready? “There’s no single answer to when you can afford to retire,” he said Jay Abolofia, certified financial planner and founder of Lyon Financial Planning LLC. “It depends on a variety of factors including your life expectancy and general health, planned retirement expenses, flows of guaranteed income such as social security and pensions, and other financial resources.”

Here are some things you should know about retiring from the pandemic.

Be ready to zoom out

At some point every worker fantasizes about what life will be like when they no longer have to answer a demanding boss or difficult customer. Perhaps you imagined your golden years as a time to take your dream vacation or move into a home on the coast.

While those goals are still possible, you will have to make some sacrifices either now or in the years to come to ensure you can afford to live comfortably in retirement. “If you’ve seen a decrease in your income, an increase in your spending, or market turmoil that has decreased your savings, you will likely need to adjust your retirement lifestyle,” Abolofia said. “If you’re not happy with that prospect, you can consider postponing retirement if possible, downsizing your home, spending less on your lifestyle, moving to a lower cost of living state, or moving up to Social Security until you are 70 move.”

Get your timing right

The biggest challenges aspiring retirees face today are loud Pam Kruger, Creator and co-host of “MoneyTrack” at PBS and founder and CEO of Wealthramp. For example, some older workers may need to postpone their planned retirement date by a year or two – possibly longer. Others who have been laid off, taken on vacation, or otherwise seen a significant drop in income may have no choice but to retire now.

“It is vital to plan retirement early because once [workers] When you hit the off button, you have to replace 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 retirement expenses. The hunt for higher yields, even on “safe” longer-term bonds, could risk losing capital over time as prices rise higher.

Before you hit the early retirement trigger, it’s a good idea to check if your long-term financial plan can really support it.

Consider using Social Security early on

“Another important timing decision is whether to postpone Social Security or start now,” said Kruger. The longer you wait Entitlement to social security benefitsthe more you can get; If you wait until full retirement age to claim benefits (between 65 and 67 years of age, depending on your year of birth), your benefits are around 30% higher than if you took them early from the age of 62. Wait until you turn 70, the benefit amount would be an additional 32% more than what you would get at full retirement age.

However, waiting is not always the best option. “The reality is that coronavirus poses a serious threat to people with pre-existing medical conditions who may choose to get social security sooner or later,” Kruger said. Workers in their sixties should not only evaluate their health and life expectancy if they choose to use social security, but also their cash needs, their “break-even” age, and how a spouse might fit into the picture.

Take stock of your existing resources

To know if your savings can get you through retirement, you need to evaluate what resources you have. Take an inventory of your existing retirement plans and employer-provided benefits such as 401 (k) s, IRAs, annuities, annuities, etc.

“When you have a good understanding of your retirement savings and other sources of income, apply the 4% repayment rule to your fixed assets,” said Lewis. For example, if you have $ 1,000,000 retirement savings, multiply that by 0.04 (4%). The result would be $ 40,000, a good starting point for determining how much you can withdraw from your investments each year to help cover your living expenses in retirement. You may also have additional sources of income such as social security or rental income to supplement your expenses.

Lewis pointed out that the 4% rule is just a starting point and is definitely not the answer for every individual. “Many retirees want to spend more money in the early years of their retirement while they are ‘go, go, go’,” he said. “If you want a more personal retirement plan, it may be beneficial to seek help from a financial advisor.”

Test your current plan

Unfortunately, there is no way to predict what will happen in the financial markets today, tomorrow, or even a year from now, Lewis said. “Just because you can’t predict what and when will happen, doesn’t mean that you can’t retire because of the uncertainty in the financial markets.” He suggested a “Monte Carlo simulationTo see if you are still on your way to retirement.

A Monte Carlo simulation is a statistical modeling tool that you can use to stress test your plan against different returns on investment, Lewis explained. For example, it may include a “bad timing” scenario where you get poor returns in the first two years after retirement. “By doing this exercise and stress-testing your retirement plan, you can provide much-needed comfort to those who feel 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 remember that again, this is just a tool to help you assess your current situation, but it is not a guarantee of what will happen in the future.

Rebalance your portfolio

The last thing you want to do is sell your assets in a panic. Now is a good time to rebalance your portfolio. The main reason, according to Kruger, is to manage your risk. “Especially when there is uncertainty about where the economy or stock markets are going, people who are about to retire or who are already retired are particularly sensitive to having too much of their savings in the stock market,” she said.

Refocusing can reduce your risk while avoiding duplication between your different accounts. For example, you may have multiple 401 (k) s and IRAs holding index funds or exchange-traded funds that are heavily based on technology stocks. “While tech stocks are the darling of the market right now, you may have way too much in a given company and not realize it,” said Kruger. In addition, you could pay additional fees to have the same funds in different accounts.

The second reason to refocus is to better tailor your investment timeframe to your cash flow needs. “This can change from year to year and it will certainly change once you retire over the starting line,” said Kruger.

This means that you have plenty of cash like CDs, savings accounts, and short-term, high-quality bonds. At the same time, you should set aside other savings to stay invested for your life and allow those longer-term investments (namely stocks) a return of more than 5% per year. “You need that balance to avoid running out of money, to pay immediate and medium term bills, and to stay invested in the stock market to stay ahead of inflation … which is consuming your savings every year “said Kruger.

Be careful with miracle drugs

Finally, Kruger explained that panicked investors may be more likely to seek the advice of brokers or sellers who might want to sell them on riskier assets or complicated annuity contracts who don’t, as there is now a desperate need to get higher returns on the surface to be risky. “Make no mistake with these investments, especially if they come up with pension funds or annuities: there are currently many products that promise higher returns, but investors run the risk of losing a lot of money.” She said.

Kruger added that annuities aren’t investments, they’re insurance contracts and the devil in the fine print. “Read the contracts carefully and ask any finance professional why a particular strategy is best given your financial situation and goals, and clarify the total return after fees and taxes,” she said.

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