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The COVID-19 crisis and concerns about its global economic impacts continue to send shockwaves through financial markets. That has sparked no small amount of concern about 401(k)s, IRAs and other retirement investments.
If you're close to retirement age, the pandemic may have you wondering if you should put retirement plans on pause. The answer, according to experts, depends in large part on the nature of your retirement planning thus far, and what you do between now and the day you collect your (literal or figurative) gold watch.
We consulted a number of certified financial planners to get their takes on this topic. As you might imagine, their advice was far from uniform, reflecting different investment approaches and client risk profiles.
Opinions tended to fall on one side of the issue or the other, with some recommending a "wait and see" approach, while others suggesting moving forward as planned. That reflects not only the advisors' investment philosophies, but also their clientele and, to some extent, economic conditions in the regions where they work.
The experts agreed, however, that the decision to delay retirement is a highly personal one, and that an individual's circumstances and preferences may ultimately outweigh any other concerns.
Here's an overview of their general advice on whether to consider delaying retirement in a turbulent market.
Arguments in Favor of Delaying Retirement
- It'll give the markets time to settle down. Giving the pandemic a chance to run its course and the economy a chance to heal can provide a clearer picture of both the potential income stream from your investments and the amount of income you'll need to retire comfortably. "I would suggest delaying retirement if you can for the near term, until you can see what the new normal is going to be," says Jon L. Ten Haagen of Ten Haagen Financial Services Inc. in Huntington, New York.
- You might need time to rethink your post-retirement plans. When you retire from your life's work, you should also retire to a fulfilling new life, says Tom Scanlon of Raymond James in Manchester, Connecticut. COVID-19 has forced many near-term retirement candidates to rethink their plans.
"Six months ago you could say, ‘I'm going to retire and work part time at Home Depot'" or elsewhere in a retail or service setting, Scanlon says. "Now, many of those jobs just aren't there."
If you're not sure the retirement life you envision is within reach, Scanlon recommends staying on the job until your plan is possible or until you work out an alternate plan—unless work is making you unhappy. "If you like what you do, stay the course—but you have to like it," Scanlon says.
- The longer you wait, the more you can save. If you keep working, you can continue to make significant contributions to your employer-sponsored retirement plan or your individual retirement account (IRA). Staying at your job longer means you might delay the start of Social Security benefits, which can significantly increase the amount of those monthly benefits.
Arguments Against Delaying Retirement
- Your investments should be OK if you've followed a lifetime investment plan. An investment approach built around your career earnings and targeted retirement date may allow you to stick to your original timeline.
Taking into account the client's tolerance for risk, retirement planners typically devise strategies for building and maintaining an investment portfolio over the course of the client's career. That often involves funneling savings into more aggressive investment vehicles early on, with the goal of growing the value of the portfolio. As the client's earning power increases (and the amount they invest grows along with it), a retirement planner will typically broaden the portfolio with a mind toward continued growth but also diversification to protect against downturns in specific industries or markets. As the client approaches retirement, funds are typically shifted to more conservative investments—those with less growth potential but greater resistance to market fluctuations, and which may yield steady returns in the form of interest or dividends that can help provide reliable income during retirement.
Daniel P. Lash, partner and financial advisor with VLP Financial Advisors in Vienna, Virginia, outlined the approach this way: "We begin increasing bond positions as the client has less than 10 years until retirement and have five to seven years in bonds by the time the client has three years or less until retirement." he says. "This way, when markets are down, we can sell just from their bond positions, which are likely up or not down as much relative to stocks.
"We then can continue to provide the client with the income they need during the down market and have enough in bonds to wait for stocks to recover," Lash says.
- Delaying retirement may not be an option. Pandemic-related work shutdowns have some employers offering early-retirement buyout packages as a way to downsize. Realistically, many workers have no choice but to accept these offers, says Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan.
Lump-sum buyout offers may never be more attractive than they are now, LaBrecque says. He compared lump-sum buyouts to a home mortgage: Just as the amount you can borrow on a typical mortgage loan increases as interest rates fall, the amount of funds available for lump-sum employee buyouts increase as well.
"Because of COVID and because of the Fed's actions, interest rates—especially on government securities, which is what they use to measure lump sums—have gone way, way down," LaBrecque says. "So, consequently, lump-sum [buyout offers] have gone through the roof. People with lump-sum options should seriously look at them."
- Retiring soon doesn't have to mean depleting your investments. The end of your full-time career doesn't have to mean you stop earning, saving or investing, says Sean M. Pearson of Ameriprise Financial in Conshohocken, Pennsylvania. "Retirement is neither a finish line nor a one-size-fits-all solution," he says.
"If you were not planning to retire or would prefer not to draw from retirement accounts when they are down, consider a phased retirement," Pearson says. "Specifically, if you plan to work part time, even if you don't start right away, you can substantially reduce how much you need to withdraw from your investments for income."
Pearson also stresses that beginning your retirement doesn't obligate you to collect Social Security benefits right away—in fact, he recommends delaying collection to anyone who can afford to do so. "Regardless of when you retire, if you can wait to collect Social Security, consider that option," Pearson added. "Your monthly payment increases for every month that you delay."
General Advice for Retirement Planning in Turbulent Times
Regardless of their views on the notion of delaying retirement amid current financial upheaval, experts we consulted offered some general guidance that's applicable to retirement-related decisions at any time of uncertainty.
Don't Act out of Panic
Whether you're deciding to change your retirement date or reallocate retirement investments, fear is your enemy. Actions and reactions made in a state of fear tend to be impulsive, irrational and, oftentimes, disastrous.
Robert Braglia of American Financial & Tax Strategies in New York City offered the cautionary tale of one 69-year-old client who's been on the verge of retirement for several years. As markets took a nosedive in March amid concerns over business shutdowns and record unemployment due to COVID-19, this individual panicked. Against advice and his long-term investment strategy, he insisted on selling out a chunk of his holdings on March 19, deep into the market plunge, and just four days before the market bottomed out.
"Working another year or two is how he'll have to make it up," Braglia says.
Have a Long-Term Plan (But Know When to Adapt)
"Make a plan and stick with it," Braglia says. "Nothing should be changing for people with a plan."
LaBrecque endorsed that approach, but added that it's important to be able to adapt to changing circumstances. Several of his clients are part of a workgroup that their employer just eliminated, so they've shifted focus from planning to retire in the next few years to deciding how best to invest their buyouts.
"Sometimes the company may say you're retiring whether you like it or not, and you've got to have enough nimbleness to be able to adapt to that," LaBrecque says. "Have a long-term plan, but be adaptable and be flexible."
Expand Your Emergency Fund
It's prudent for everyone to have access to an emergency fund to cover about three to six months of expenses, but in a volatile market (or one that's in a sustained downturn), many experts advise clients near retirement to increase that amount so they have 18 to 24 months of expenses on hand. Doing so allows you to pay your bills without having to sell investments at steep losses as you wait out the market's inevitable recovery.
Basically everyone should have an emergency fund—investments or cash which can be easily liquidated within a 30-day window, Ten Haagen says.
Think About What Will Make You Happy
Retirement shouldn't just be a numbers game, and it's important to focus on what you really want. If your job has you stressed out and miserable, retiring a year ahead of your longstanding target date could be a great decision, even if it costs your retirement fund a few thousand dollars. Conversely, if you love your job and wonder what you'd do all day without it, it could be wise to work past your retirement date until you come up with a plan on how to fill your time.
Dana Anspach, founder and CEO of Sensible Money in Scottsdale, Arizona, puts it this way: For every decision about retirement timing, "There are two components—the financial side and the values side.
"A series of financial stress tests can help you determine if your retirement plan is sustainable or if delaying retirement would help provide a bigger cushion," she says. "But your values play an even more prominent role."
As an example of the values calculation, Anspach compared the approaches of several clients who are medical professionals facing burnout in the midst of the pandemic. Several are exploring options for accelerating their retirement, but their approaches to doing so vary widely. Some will do almost anything to find a way to make earlier retirement work, including changing their lifestyle to reduce expenses, while others prefer the security of having more money first, and plan to work longer to make that happen.
The Bottom Line
Considering retirement in times of unprecedented uncertainty can be daunting, and every decision depends on many variables, including finances, your physical health and goals you have in mind for post-career living. Before making your choice, consider consulting a professional financial advisor. Be sure to take a breath, talk over the decisions with your loved ones and avoid acting in haste. You'll likely have to live with your choice for a good, long time, and you deserve to give the matter careful consideration.