The traditional “three-legged stool” of retirement used to be Social Security, a company pension plan, and personal savings. But that model no longer applies for many. Most companies have switched from employer-funded pensions — which guaranteed a fixed benefit for life — to employee-funded 401(k) accounts that do not. And, a growing number of families are faced with high consumer debt and minimal personal savings.
The coronavirus pandemic has further complicated the retirement plans of many Americans as they face layoffs and investment losses. Let’s consider how you can address each leg of the traditional retirement stool in light of the COVID-19 crisis.
Based on current projections, the Social Security trust fund is expected to last until 2034. However, there are several systemic changes that could extend the payment of full benefits. These include: an increase in the retirement age, a decrease in benefits, an increase in the Social Security tax rate or an influx of new workers to pay into the system. The last major “fix” for Social Security was in 1983, and most analysts predict that Congress will address the program’s issues again before benefits are compromised.
On a personal level, however, one approach to planning for any potential shortfall is to access your Social Security account online at www.ssa.gov to find your projected monthly benefit at your full retirement age. Then, back out a percentage of those benefits in 2035 and beyond to budget more conservatively.
401(k)s and IRAs
Whether you participate in an employer-sponsored 401(k) or contribute to a traditional IRA, these retirement vehicles offer many advantages. Contributions can lower your tax bill and provide tax deferred growth. Some employers match employee 401(k) contributions, which is like getting free money. Many 401(k) plans allow you to take out loans against them. And, those over 50 can even make catch-up contributions if they’re falling behind on their retirement goals.
The CARES Act has loosened restrictions on COVID-19 qualified hardship withdrawals. However, it’s important to carefully consider the potential negative impact of raiding your 401(k). You may set back your retirement timetable considerably, especially if you miss out on a sharp stock market recovery. And, if you lose your job and can’t pay back your 401(k) loan, you’ll owe taxes on the distribution and may face steep early withdrawal penalties.
Personal Savings and Debt
The uncertainties around Social Security and the stock market make savings and debt an even more important part of the retirement equation. Here are some things you can do to position yourself to help keep your retirement on track.
- Work the numbers. Set a clear savings goal for retirement. Think about the lifestyle you want, what you want to do and how long you expect to live after retiring. Get it all down on paper and calculate how much money you’ll actually need.
- Create an emergency fund. A 2018 study notes that the median American household has less than $5,000 in a savings account, which can make dealing with a financial emergency precarious. Try to accumulate enough money to cover at least six months of expenses and keep it in a low-risk savings vehicle to avoid raiding your retirement account. Learn more about setting up an emergency fund here.
- Reduce debt. Going into retirement with significant debt (especially high-interest debt) is a handicap you don’t need right now. Sign up for AutoPayPlus to pay down your debts even faster and avoid missed payments that can trigger costly fees and credit damage.
- Downsize early. The big house that wasn’t nearly big enough when the kids were little might be more than you need now. An earlier move to a smaller home, coupled with some presumed profit from the sale of a larger home, could mean being mortgage free and retirement ready sooner.
- Cut costs. Think hard about extraneous expenditures. Do you really need a new car every four years? Can you eat in a little more often? Or save by taking a staycation this summer? Stash away the money you save and earmark it for retirement.
With so much financial uncertainty, it can be helpful to speak with a qualified financial advisor to review your retirement goals, investments and budget. They may be able to find options and solutions you haven’t thought about to help keep your retirement on track. Also, the AutoPayPlus biweekly payment program can help you pay off personal loans, student loans, credit cards, auto loans and home mortgages faster and at a lower cost over the life of the loan. The less you pay in loan interest, the more you’ll have available to save for the retirement you’re dreaming about.
10 COVID-19 Retirement Planning Tips
- Make up your match. If your employer cuts their 401(k) match as a cost-savings strategy, try to contribute more to make up the difference.
- Try to avoid tapping your 401(k). The CARES Act has loosened restrictions for hardship withdrawals due to COVID-19, but try to resist raiding your retirement account if possible.
- Consider lifestyle adjustments to stay on schedule. Downsizing or moving to a less expensive area might allow you to maintain your retirement timetable.
- Reduce high-interest debt. Prioritize paying down more costly, higher interest debt. AutoPayPlus can help you pay down those debts faster.
- Revisit your budget. Comb through your budget and look for ways to save. Temporarily cutting back on nonessential spending can help you boost your retirement account.
- Review your portfolio allocation. Being invested in a volatile market close to retirement can be risky. Sit down with a retirement advisor to make sure you’re appropriately invested given your risk tolerance and time until retirement.
- Get professional advice. You may have access to a professional financial advisor through your employer. Set up an appointment and review your current retirement strategy and goals.
- Consider postponing retirement. It may not be your first choice, but working and saving just a year or two longer may give you enough extra money to pay for the retirement lifestyle you really want. Or, consider taking on some extra work in the gig economy.
- Build an emergency fund. Having an emergency fund at the ready may prevent you from tapping your retirement savings during a crisis. Read more about how to create one here.
- Monitor investments more closely. The volatility markets have experienced since the pandemic began makes it more important to keep a watchful eye on your portfolio performance. That way, you can make any needed adjustments quickly to better position yourself for retirement.