Retiring into the Pandemic
The downturn of financial markets during COVID-19 may scare people who are about to retire. But the solution to a successful retirement is the same as it’s always been.
Retirement planning never mentioned this: A pandemic grips the world, markets drop, the economy heads for a downturn and thousands face unemployment. Rather than planning retirement cruises in the next few years, many couples are now spending an uncomfortable amount of time wondering if it’s safe to get groceries and whether their retirement dreams may be gone forever.
The solution to a successful retirement is the same as it has always been: plan, plan and plan some more.
While some people may be concerned they can no longer retire the way they intended, financial plans in their most basic terms come down to money coming in and money going out: inputs and outputs. When you add or subtract money coming in or out, it impacts the whole plan. So, while the environment has certainly changed, people who were planning on retiring in the next few years may have to take a deep breath, return to their financial plan and look at basic questions: How much can they afford to live on, how much will be coming in, how much do they want to spend and how much do they want to leave to their heirs?
Answering those questions and adjusting a retirement strategy accordingly takes the uncertainty out of the planning process. And if someone doesn’t have a financial plan, now may be the time to get one.
Here’s nine things people should keep in mind right now if they were planning to retire in a few years.
- Think carefully about your decisions
People making knee-jerk decisions about their investments or financial plans without examining the ramifications of those decisions can potentially make things a whole lot worse. For instance, if people sell an established company’s stock that has lost its value, they may be solidifying the loss and giving up hope the stock will ever rebound. While no one has a crystal ball, history suggests that markets do recover eventually from even the deepest setbacks. Anxious retirees think putting retirement funds into cash may temporarily take away the fear an investment will drop further. But when the markets do take off, a cash account will lose out. Moreover, inflation will over time eat away at any cash-only investments.
Many investors cash out at times like these and try and time the market and jump back in. You could potentially lose both ways, selling at a loss and buying at a market top. Also, there are no dividends coming in, making things worse.
- But you can re-examine your investments and diversify
People who are nearing the end of their working life should increasingly turn a portion of their portfolio into income or “defensive” investments. Stable income investments can go a long way to offset expenses in retirement. How large a portion of your portfolio should be in income securities depends on many other aspects such as how much growth you need in your portfolio and what your risk tolerance is. Again, those elements should be part of your overall plan.
While you shouldn’t panic, now can be a good time to re-evaluate if the investment aspect of your financial plan is still suitable. There may be a few investments that will have a difficult time recovering from the new economic environment and now may be the time to make a change.
- Can you work longer?
As mentioned, having a plan means you can alter some of the major inputs to see how it affects the overall outcome. Another major input is how long you continue to contribute to retirement savings and how long you avoid dipping into those savings. The decision to work a few more years could make a big difference in your financial plan. However, retiring is about a lot more than not working. You may also have aspirational goals you want to achieve or you may have health issues you need to address. Consider if working a few years longer than you anticipated – perhaps even part-time – is an option and how much it’ll impact your life. If you love your job, it might have a positive impact on your retirement plan.
- Can you adjust your lifestyle?
One of the other inputs you can adjust is how much money you spend. In this case, you can adjust how much you are spending now and how much you intend to spend during your retirement years. Depending on your situation, saving money may be as extreme as downsizing your home earlier than planned or may be as simple as cutting down on restaurant dining. Typically, people in their first years of retirement spend as much as they did when they were working, because they are active and travel more than they did previously. Expenses may go down as people become less active but they can also rise sharply if enhanced healthcare is needed.
- Can you contribute more into your super?
It may be counter-intuitive to think about contributing more to superannuation if your immediate future seems cloudy. But if you are shy of age 65, contributing more may have a positive impact over the next 20 years and will save you tax now.
- Can you minimise your debt?
Heading into retirement with large debts has always been considered bad policy, but in an uncertain atmosphere, it can be especially important to help ensure that nothing is dragging down your retirement plan. Debts you may want to avoid could include high-interest credit card debt or large items like mortgages or vehicle loans. People should work toward getting these debts down to a minimum while you are still working and try not to incur new ones. If you are stuck paying a large mortgage, perhaps a smaller property might be better suited to your means.
- Consider your other sources of income
People often have to be reminded of other sources of income in times when their retirement savings has experienced a setback. If you have been laid off, your super contributions may be lower this year. Depending on your age, income and assets, you may be eligible for Government benefits, like the Age Pension.
- Consider your family situation
If you feel that you are retiring at the worst possible time, remember that there may be others in the family who may also be in poor shape. You may or may not have planned to offer financial help to loved ones, but consider that their situation may have changed in the past few months too and they may be looking to you for help. While helping out family members is a personal decision, don’t adjust your financial plan without first considering whether you plan to help their situation.
- Do the little (but smart) things
While you may feel overwhelmed by a large retirement plan that could last 20 years or more, remember that there are many small elements that contribute to its overall health. These include being careful with your money but also getting organised around ensuring your tax return is up to date, and that you’re aware of where your super assets and bank accounts are. Getting financial advice gives you the peace of mind that you will enjoy your retirement without worrying about money.