The novel coronavirus pandemic has had an economic toll that has affected tens of millions of people. Everyone has felt the impact in some form or fashion.
Many people have lost their jobs. Millions of others have been furloughed. Those saving for retirement and those already retired have also had some surprises.
Equity market indexes saw record-breaking swings. Beforehand, those 1,000-point-or-more swings had taken months or even years to occur.
In the first quarter of 2020, some happened as quickly as in 24 hours. Given all this, it's natural for us to think about how much of a toll that the early days of the pandemic had on everyone's retirement security.
In an article by the Urban Institute, Richard W. Johnson talks about seven ways that the Covid-19 pandemic could undermine the retirement plans of many.
The Most Important Takeaway
Johnson's insights highlight the importance of having a financial plan. They also show how a well-thought-out plan could help you navigate uncertainty and be a psychological safety net in times like now.
One effect of the pandemic was the massive toll on total retirement savings held by retirees and workers in America. The good news is that many have had their money recover (but what also lies ahead is uncertain).
What Happened Last Time (And Why It Matters)
In 2008, the Great Recession and financial crisis led to a huge drop in the Russell 3000, a U.S. market index. Then, the Russell index, which Johnson says is designed to reflect the performance of the U.S. stock market, fell 39%.
During that time, Americans saw a 24% decline in their retirement accounts, from 401(k) plans and other employer plans to IRA accounts.
In total, Americans lost $2 trillion in total retirement savings in 2008, according to Johnson. What about the market impact in 2020?
In the first quarter of 2020, from January 1 to March 31st, the losses were (perhaps surprisingly) even steeper. The Russell 3000 index fell 25% through April 3, wiping out an estimated $3.8 trillion in total retirement savings for Americans.
Source: The Urban Institute Blog, Urban.org, Richard W. Johnson, "Seven Ways the Covid-19 Pandemic Could Undermine Retirement Security." Accessed 7.2.2020.
Where Are We Now?
Markets have since seen a rebound. While the Russell 3000 index hasn't recovered to its previous high earlier this year, it has regained a good portion of the value it lost to its decline.
If you were on the cusp of retirement, it's good to take a step back and assess the new landscape. Those near retirement or in early retirement fall into what pundits call the "retirement red zone," or 10 years before and 10 years into retirement.
During this time, sequence risk, or the probability of suffering investment losses at the wrong time (and thus having a noticeable impact on your financial security going forward) is heightened.
Here are a few questions you can use to help evaluate your goals and see how you can preserve your retirement security going forward:
1. Where Are You in Your Savings Goals for Your Desired Income?
If your retirement savings seem to be back on track now, then you have probably regained a good portion of the losses you sustained during the first quarter of 2020. If you appear to be way behind of where you would like to be, then it may be time to increase your retirement plan or IRA contributions.
2. How Have Recent Events Affected Your Retirement Savings?
At this point, your retirement plan should be well on the way to recovery. If you are still wiped out from the coronavirus, then your portfolio might need some attention.
Meet with a qualified financial professional and assess your portfolio to see what changes need to be made. If you are taking too much risk, then you might need to look at having some of your money in more conservative vehicles such as bonds, CDs, or fixed-type annuities.
3. What Does Your Financial Picture Look Like?
Your retirement plan balances may be lower than you would like. But a realistic assessment of your finances should give you a clear picture of what has worked for you, what hasn't, and where you are now.
What if you are still unsure of where you stand after going over your assets? Then it may be a good time to have a comprehensive financial plan done by a professional.
4. Do You Need to Put Away More in Retirement Savings?
Before you depart the workforce, you want to be sure that you have enough money for your long-term income in retirement.
If you are way behind in your retirement savings, then start making the maximum possible contribution to your IRA or employer-sponsored retirement plan. If you have a large sum of money sitting in cash, a non-qualified indexed annuity may also be a good supplement.
Its benefits include tax-deferred growth and the guaranteed income stream for later years that it can provide. Your financial professional can help you evaluate this and other options.
5. Do You Need to Protect Any of Your Money?
Depending on your goals, concerns, and situation, it might make sense to have some of your money in low-risk or fixed-interest instruments. These holdings can help protect some of your money against market risk. Not only that, it can help smooth out the volatility in other parts of your portfolio.
You have a variety of options that you can choose from among fixed-interest holdings. If you are looking for choices that might earn superior interest, you might look at fixed annuities or fixed index annuities.
Fixed and indexed annuities both guarantee the return of your principal. Indexed annuities pay interest based on the performance of an underlying financial benchmark such as the Standard & Poor's 500 Index.
Fixed annuities pay you interest based on a preset amount. You do have a fixed-interest bucket as an option for earning interest in an indexed annuity, but most contract owners choose interest-crediting strategies tied to the underlying benchmark over that.
In the long run, indexed annuities tend to earn more interest than their fixed cousins over time.
6. Does the Rest of Your Retirement Money Need Any Adjustments?
A financial advisor can be especially helpful here. It may be tempting to move all of your assets into guaranteed instruments like annuities or Treasury securities.
However, you need to have a guard against inflation somewhere in your portfolio. Most planners and financial professionals would recommend that even a conservative-minded retiree keep at least some money in equities or equity-based funds.
7. How Will You Be Prepared for the Possibility of Future Events Like This?
Another bear market is likely to happen at some future point. If you are in the retirement red zone, being prepared for that probability is important. Just knowing that the markets will eventually correct themselves and then rebound is a giant step forward.
You can speak with a financial professional about strategies, apart from those above, to grow your money while guarding against loss risk. One possibility might be a judicious use of put options, which can increase in value when stock prices fall. Your financial professional can walk you through those considerations.
Making Your Own Plan Retirement-Ready
Having a qualified financial professional to work with can make planning for retirement a lot easier. Consult a financial planner today if you have any lingering questions about your retirement.
Don't hesitate to enlist the help of a financial professional if you don't have one now. Whether you are starting from the ground-up or you simply want another opinion on your existing plan, a financial professional can help you reach more progress in your goals and more peace of mind.
What if you are currently searching for someone? No sweat, help is just a click away at JenniferLangFinancialServices.com.
Connect with a no-market risk advisor directly. You can request a phone consultation to discuss your goals, concerns, and overall financial situation.