The COVID-19 pandemic has many people rethinking their retirement plans.
The stock market has been unpredictable. It fell in March, regained some of the loss, but has been choppy since then. A resurgence of the pandemic in many states and around the world may cause the markets to decline sharply again.
As a result, many pre-retirees are worried they can’t afford to retire. After all, if your retirement portfolio stood at $500,000, a 20 percent drop like the markets registered this spring could have reduced it to $400,000. For someone planning to follow the 4 percent rule, a fairly standard rate of withdrawal that allows your portfolio to last 30 years in retirement, they could have withdrawn $20,000 annually from a $500,000 portfolio. But 4 percent of $400,000 is just $16,000, $4,000 less per year.
Plus, of course, it’s less every year, which can add up significantly. In addition, withdrawing 4 percent in a dropping market may not be prudent, if your capital is being eroded.
Fortunately, there are many options for dealing with falling markets and unstable conditions in pre-retirement.
For some, the prudent option is postponing their retirement until later. Postponing your retirement gives your retirement nest egg more time to recover and also allows you to ride out the uncertain conditions of the pandemic. Many companies, for example, are struggling and some may declare bankruptcy. If you worked for one of these firms, it may be prudent to wait until you know more clearly what’s going to happen.
However, this might not be your only option. Discuss your retirement plans with a financial advisor to see if one of the following real life scenarios will work for you.
Worried about your retirement plans? Contact the financial advisors at Rock House Financial to see how we can help.
Retire With a Tighter Budget/New Plans
If you’re determined to keep your initial retirement date, one option may be simply tightening your budget and stretching your income.
For example, were you planning to travel extensively in early retirement? Those plans may be far less possible with COVID-19 anyway, and if you eliminate or modify those plans, retirement on schedule may be very doable.
A retirement financial advisor can help you project your expenses going forward and note any potential opportunities for belt-tightening.
Retire and Work Part-Time
Another option would be a semi-retirement. An increasing number of retirees are working part-time in retirement. Working part time, at least initially, can help you make up any shortfall from your retirement portfolio. Working also provides more financial flexibility in case of future stock market drops or other effects on your portfolio. These are both real life scenarios that could happen.
Working in retirement can help you cut down on costs such as healthcare (if you’re able to maintain employer-offered healthcare plans) and can increase the amount of money you’re able to contribute to your retirement funds. There are rules about working in retirement though, so make sure you discuss this decision with a retirement financial advisor.
In addition to financial perks, many retirees also find part-time work interesting and continue to do it because they want to, not out of financial need. In fact, a part-time job may not be for your current employer. Some retirees choose to consult, help train or start a new business of their own, something they’ve always wanted to do but never had the time for, such as crafting, writing or mechanics.
Pay Off Your Debt or House Faster, Before Your Retirement Date
Part of retirement financial planning is about your income, of course, but the other part is about your expenses. You may be able to continue with your current retirement plans and retire when you initially wanted to if you can cut your expenses.
If you have credit card or other debt, can you pay it off faster, before your retirement date? Similarly, if you are still making mortgage payments, can you pay off your house before your retirement date? (Read our recent blog post: Is refinancing in today’s climate a good idea?) What about downsizing? These options may free up the money you currently pay for debt and mortgage service and make your retirement doable.
Business owners may have other needs. A retirement financial advisor can be a huge help in your plans.
One method of reducing living expenses is relocation. Real estate prices vary widely through the United States and the world, as do expenses such as property taxes. If you are currently paying a mortgage on a $600,000 home in a high property-tax state, you can lower your expenses considerably by relocating to a $250,000 home in a lower property-tax state. You can also tap the equity in your existing home to add to your nest egg.
Relocation to a less-expensive area is only one part of the relocation equation. The other is relocating to a smaller place, which can be less expensive even if you stay in the same locale. Many pre-retirees are empty nesters, and their children are grown. In this case, you may have no need for the same size home you raised children in, or you may no longer have the time or desire for the upkeep and maintenance a large home can require.
Many places simply have lower costs of living as well. Utility, insurance, taxes and even grocery prices can vary from place to place. It can pay to do research on the costs of living in multiple areas to find one that suits you.
If you’re thinking about retiring in or relocating to Utah, contact the financial advisors at Rock House Financial.
Take Social Security Earlier
If the effects of COVID-19 on financial markets has negatively impacted your retirement plans, you may want to consider taking your Social Security retirement benefits earlier. People initially become eligible at the age of 62.
This isn’t a decision to be taken lightly, though, as this decision can have a major effect on the amount you’ll receive.
If you take your Social Security benefits before your full retirement age, your benefits will be lower than if you waited. And they will be permanently lower. (Your full retirement age is determined by your birth year. The full retirement age for people born between 1943 and 1954, for example, is 66.)
If your full retirement age is 66 and you choose to take Social Security benefits at age 62, your benefits will be 25 percent lower than they would be if you waited. Your spouse’s benefits on your Social Security account, if your spouse is eligible, will be 30 percent lower.
On the other hand, Social Security benefits increase by roughly 8 percent each year between your full retirement age and age 70, and those increases are also permanent. If you take Social Security earlier, you will forfeit the possible increase.
While potential reductions and lack of increases can be significant, that doesn’t mean it’s always a bad idea to take Social Security before your full retirement age rolls around. It can make the difference between retiring when you want to and not, so it can be a good idea! In addition, if you have health issues or know that you may not have a long life expectancy after retirement due to family history or other reasons, it can also be prudent to take Social Security early.
Discuss all of these options with a retirement financial advisor to arrive at the right plan for you now and for your retirement.