The COVID-19 pandemic has upended a lot of people’s financial plans. Losses in business revenue, stock value, and employment create a variety of bumps in the road to retirement. The steps you should take to protect your future depend on the assets you have available, how close you are to your target retirement age, and the current condition of your investment portfolio. Take a look at these seven ways you can take action to stay on track with your retirement plan.
1. Revisit your budget.
Many Americans have experienced changes in both income and expenses as a result of the pandemic. While your income may be reduced, it’s likely that you’re also spending less on things like transportation and entertainment. On the other hand, being stuck at home may have caused you to take on some additional expenses such as gym equipment or home improvement supplies. With so many aspects of the economy in flux, it’s wise to take a fresh look at your budget. Reassess which expenses are necessary and which are discretionary, and identify any that you might comfortably eliminate.
2. Maintain a healthy emergency savings fund.
Even before the pandemic hit, most Americans didn’t have enough in savings to cover even a $500 emergency. Protect yourself by making sure you have enough emergency savings in place to cover at least three to six months of expenses. If you don’t, use your budget review to look for ways to shuffle more funds into savings.
3. Consider increasing your retirement plan contributions.
If your budget is in the black and your emergency fund is in good shape, then this may be a good time to increase your retirement plan contributions. Upping your 401(k) contribution percentage while stock values are down positions you for better returns in the future. Many employers match three to five percent of employee contributions, so make sure you know your employer’s policy so you can capture as much of this valuable benefit as possible. For 2020, 401(k) contribution limits are up to $19,500 for those under age 50 and an additional $6,500 for those 50 or better.
4. Rebalance your assets as needed.
Work with your financial advisor to determine whether your investments need rebalancing. When the market is volatile, investment values can change dramatically, upsetting the balance of equities to fixed income investments in your portfolio. Because this balance naturally shifts over time and because the appropriate ratio may change over the course of your life, it’s a good idea to meet with your advisor periodically to make any necessary adjustments.
5. Don’t panic.
Panic selling your investments during a market downturn is one of the fastest ways you can lose money. Even if your shares have lost value, you still own the same number of shares; selling them simply cements the current loss in value so you have no hope of recovering it. Buying again when the market rebounds means that you’ll be paying more to get back in. Keeping your shares in your retirement plan gives you the opportunity to regain the loss when the market bounces back.
6. If possible, avoid dipping into your savings.
The CARES Act has made it easier to tap your retirement fund by waiving early withdrawal penalties and loosening the restrictions around retirement-account loans to cover coronavirus-related expenses. This may tempt you to dip into your savings if you need extra cash, but it’s best to avoid doing so unless you absolutely need to. While the CARES Act waives the ten percent penalty that normally applies to early retirement plan distributions, it does not exempt the withdrawn funds from taxes. The amount will be added to your annual income and taxed as such. If you don’t ask to have a percentage of the amount set aside for taxes when you withdraw, you could end up owing a lot when you file your 2020 taxes. The CARES Act lets you distribute the tax burden over up to three tax years, however, and allows recontribution of some or all the withdrawn funds by the third year. Make sure you work with your tax professional to evaluate this option.
7. Consider taking Social Security early.
Waiting until you turn 70 to take Social Security results in the biggest monthly payments; however, there are some good reasons for opting to start collecting your checks as early as 62. If you’re married, it can make sense for the lower-earning spouse to start claiming benefits at 62 while the higher-earning spouse waits until full retirement age. Whichever of you survives the other will be able to continue collecting the higher amount for the rest of your life.
Another factor to consider when deciding when to take Social Security is your life expectancy. Depending on your birthdate, if you take Social Security benefits at 62, your benefit will be between 70% and 75% of your full retirement benefit. The percentage increases each year, reaching 100% at 66 or 67. Benefits continue to increase beyond this until age 70. If your parents and grandparents died around these ages, however, it might be in your best interest to take payments earlier. If you collect 75% of your full benefit beginning at age 62, you would receive years’ worth of benefits before you ever reach your full retirement age.
The state of the economy today demands that we take a fresh look at our financial plans. A trusted financial advisor can help you determine the best moves to make right now to best secure your future. For more information about tax and financial planning, subscribe to our blog!
Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.