Retiring During COVID-19: 5 Tips from a Financial Advisor in Utah
The Coronavirus pandemic has changed a lot of things for a lot of people, but for anyone who was planning to retire in 2020, it’s been a game-changer.
While some people have decided to move forward with their retirement plans as scheduled, others have completely changed course, and many are somewhere in between, confused about what they should do now. Many people who were planning to retire in the next three to five years are moving their retirement up and retiring now, as they are laid-off or are unsure about returning to work due to health concerns with the pandemic.
As a financial advisor in Utah, I’ve heard a lot of questions about retirement lately.
- Should I still retire?
- Can I retire?
- What about inflation?
- What do I do now?
Making the transition from working to retirement can be stressful under normal circumstances. Add a global pandemic, and emotions can get especially high. If you find yourself having some of these same fears, take a deep breath, and then consider the following tips.
First and foremost, don’t panic! Remember, we have been here before.
History shows us that there have been several market downturns in the last 100 years. The declines always recovered, and epidemics have been controlled and/or eradicated. The past cannot predict the future, but pandemics are temporary, and the U.S. has some of the brightest minds working to stop the spread of COVID-19.
While this may make sense, it can still be hard to stay calm if you’re one of the many people who were set to retire this year or next.
For many pre-retirees, they have already accumulated retirement assets in their employers’ retirement plans, IRAs and personal accounts. Their vulnerability is exacerbated by the percentage of their assets that are invested in the stock market. The market value of these assets has likely declined substantially.
If you’re one of these pre-retirees, discuss your situation with a financial advisor you trust. This advice can offer perspective and help you manage your financial expectations during these uncertain times.
Handling your finances, investments and retirement planning on your own can lead to emotional decision making, which can be especially dangerous when it comes to your financial future. You don’t want to make decisions based on fears now that can have long-lasting effects later. Feelings of comfort or discomfort can cause investors to buy high or sell low, which is the exact opposite of what you want to do. On the contrary, low prices can actually be a good thing.
You don’t have to make the tough decisions about your retirement on your own. Contact the financial advisors at Rock House financial to see how we can help.
Review Your Portfolio – And Your Risk Tolerance
Let’s say you’re planning to retire at the end of 2020. Hopefully, you already have retirement plans in place that are based on the asset amounts you’ll have accumulated during your working years in 401(k)s and personal accounts.
This is the risk zone. It is the three- to five-year period immediately before and after your retirement date. This is a period when saving amounts are at their highest and your tolerance for risk may be at its lowest.
If you’re planning to retire in the near future, be very aware of your exposure to risk and consider minimizing it during this vulnerable timeframe.
Millions of DIY retirement planners have their 401(k) assets invested in Target Date Funds that are managed by one of the mutual fund families. Because they are mutual funds, everyone in a particular fund is invested exactly the same. While this may sound safe, this is actually one of the fund’s biggest weaknesses because everyone is not the same. There can be substantial differences between professionals who plan to retire in the same year.
For example, some are very dependent on the assets in the fund; therefore, their risk tolerances are lower. Others may have substantial assets outside the funds, so their tolerance for risk is higher.
There is a good chance that Target Date Funds are creating excess risk exposure as consumers near their retirement dates.
This is where a financial advisor can be crucial. A financial advisor should be a source of discipline. When investors tend to respond emotionally to what they read in the media, a financial advisor should rely on research and continuous monitoring to produce the long-term results a client is hoping for.
Understand the Difference Between Realized and Unrealized Losses
Knowing the difference between realized and unrealized losses can help lead investors to make a rational, thought-out decision as opposed to simply reacting to a situation.
Let’s say you have a portfolio that is valued at $1 million and it declines in value to $750,000. You have an unrealized loss of $250,000. However, what if your cost basis for the portfolio was $500,000. You still have an unrealized gain of $250,000.
Unrealized gains and losses do not become realized until you sell.
Chances are, investment portfolios are down from their peaks. But staying the course makes sense as long as you are comfortable with your current holdings and the advice you receive from a financial advisor.
Selling converts unrealized losses into realized losses. This creates another challenge – when to get back into the securities markets. Since the markets tend to move in short spurts, many DIY investors miss part or all of the recovery by staying out too long.
Moving money in and out of the securities markets is called market timing, and it very rarely works.
Revisit Your Retirement Budget
Whenever you’re nearing retirement, it’s important to review your budget. In today’s environment, factor in any assistance you receive from the Coronavirus Aid, Relief and Economic Securities (CARES) Act.
- Negotiate with lenders
- If it makes sense, refinance
- Pay off school debt
- Continue to save if possible
Discuss Your Options
If you were planning to retire in 2020, you have options. You can:
- Retire anyway, hoping the markets will recover quickly
- Push your retirement date until any losses are recovered
- Continue with your retirement plans and work part-time
- Retire and live on a smaller budget
- Combine a few of the above to customize a solution that works for you
Retirement is not a one-size-fits-all decision, and therefore, one option may be better for some people when another is right for someone else. Discuss the pros and cons based on your specific situation with a financial advisor you trust. Retirement is a big life change, consider your options carefully before pulling the trigger.
If you’re looking for a financial advisor in Utah, contact Rock House Financial to schedule a meeting that fits your needs.