Should you change your retirement plans because of the coronavirus?
If you are planning to retire soon, recent events may cause you to rethink your choice. The coronavirus crisis has caused significant declines in the stock market which may have affected your retirement account balance. Millions of Americans also found themselves unemployed or with reduced incomes.
For some Americans, delaying retirement just won’t be an option, either because you have already set your plans in motion or because your job has been affected by the crisis and you cannot find another one. But if you have the choice to wait a little longer, should you do so given the current economic uncertainty?
To help you decide, ask yourself these four key questions.
1. Do you have cash outside the market?
The stock market has been very volatile lately, to say the least. The recent fluctuations are an important reminder to future retirees that you shouldn’t have invested the money you will need to spend in the next five years.
If you retire, you’ll need to start relying on your savings to support yourself. If all of your money is invested, you are breaking this basic principle and may find yourself forced to sell investments at a loss because you need the money.
Unless you have several years of living expenses in a safe place so that you can easily tap into that reserve of money while waiting for market downturns, you run the risk that your retirement account the balance plunges too low if you are forced to sell losing investments in a bear market.
If you can, it makes sense to wait and start pumping up your high yield savings account so you have funds readily available to live on, leaving your investment accounts alone for a while.
2. How will your health insurance coverage change?
Millions of early retirees have employer health coverage, and retiring could mean giving up your current policy.
Of course, you have the right to keep your coverage under COBRA for 18 months. But if your employer subsidizes the premiums and stops when you retire, maintaining your insurance could become prohibitive.
If you are 65, you will likely qualify for Medicare, but it may not be as comprehensive as the coverage you had from your employer. And you’ll probably want to purchase an additional policy to limit out-of-pocket expenses. It is an expense that you must plan for.
If you are not yet eligible for Medicare, retirement entitles you to a special enrollment period in the Obamacare insurance market. And, depending on your income, you may be eligible for grants to help you purchase insurance. But again, policies offered to individuals are often much less generous in terms of coverage than employer plans.
During an unprecedented public health crisis, you need to fully understand what quitting your job will mean for your insurance costs and coverage. If you are not satisfied with the options available to you after employment, it may be a good idea to stay a little longer at your job.
3. How much money will your investment accounts produce?
Social Security benefits are designed to replace only about 40% of pre-retirement income, which is well below what experts say you’ll need to maintain your standard of living.
As mentioned above, you will likely have to rely on retirement accounts to provide the rest of your money (especially since you want to put your cash savings aside when possible in case you need them).
To make sure you don’t drain your retirement accounts, you’ll need to decide on a safe withdrawal rate. Traditionally, many retirees withdrew 4% of their account balance in the first year and made annual increases based on inflation (a strategy called the 4% rule). But changing economic conditions are now prompting many experts to recommend moving closer to about 3% in the early years of retirement.
If your investment accounts have been affected, 3% of the balance (or even 4%) may not provide the money you need. Think about what you would feel comfortable withdrawing and compare it to the planned spending. If there is an obvious shortfall, plan to work a little longer to build up your account balance.
4. Would you potentially want to return to work?
If you are planning to retire but are not sure whether you are ready to leave the workforce for good, now is probably not the right time to quit your job.
If you have a stable job, you are very lucky; millions have become unemployed. It’s unclear how long it could take for the economy to recover from the COVID-19 pandemic, and jobs could be scarce if you decide retirement is not for you and want to re-enter the market. work.
Make sure you are truly prepared to retire in times of economic uncertainty
If it is too late for you to change your retirement plans, we hope the coronavirus crisis will not change your financial situation too much. You can always aim to cut spending and limit withdrawals from investment accounts to give your portfolio time to recover if you’ve recently taken a hard hit.
But if you can change your plans, carefully consider the answers to these four questions so you can decide what’s right for you. You may decide that it makes sense to move on, but there’s also a good chance you’ll find that working a little longer is the best solution for your long-term financial security. It’s best to find out before you leave work.