Wednesday, October 28, 2020

Bouncing Back After COVID-19


I recently attended a webinar by The American College of Financial Services about post-pandemic retirement planning. A report associated with the program included a discussion of  four categories of financial impacts. 

Two categories were for retired individuals (called Staying Afloat and Preparing) and two for not-yet-retired individuals (called Regrouping and Capitalizing) who were negatively impacted by the pandemic and not yet impacted, respectively, with respect to their retirement plans.

Below are four take-aways from The American College report that stuck out to me as we enter our ninth month of living with COVID-19:

¨       Different Generational Impacts- A TD Ameritrade survey cited in the report found that Generation X most frequently expected a severe impacts of COVID-19 on their retirement planning compared to Millennials and Baby Boomers. Many feared a diminished capacity to save or the prospect of being forced into an early retirement. The report also noted evidence of job losses disproportionately affecting older workers who decided, or were encouraged, to take early retirement versus a layoff or seeking a new job. Some had concerns about COVID-19 and underlying health issues.


¨       A Perfect [Negative Financial] Storm- Shorter careers due to earlier retirements have a number of negative effects including permanently lower Social Security and pension benefits, less opportunity to accumulate money in tax-deferred retirement savings plans, and a longer time period to rely on retirement income and assets. To make matters worse, many investors chose to withdraw funds from their retirement accounts to meet living expenses. The CARES Act permitted withdrawals up to $100,000 from tax-deferred accounts not subject to the normal 10% penalty and 20% mandatory withholding. If funds are restored within three years, they will not be subject to taxation.


¨       Impacts on Social Security and Medicare- Before the pandemic, Social Security trustees warned that, in the absence of program reforms, benefits would need to be cut by 24% in 2035. This date will likely be pushed forward with reduced payroll tax collection resulting from high unemployment levels. This issue is of most concern to individuals who rely on Social Security for the bulk of their retirement income. Similar funding concerns exist for the Medicare program.


¨       There are Some Silver Linings- Many Americans remain employed and some are able to save money by not commuting or needing childcare. In addition, many working age and retired persons are reducing discretionary expenses such as travel and eating out. As a result of spending changes prompted by the pandemic, these households may be in a stronger position now than they were in January. Nevertheless, many still have issues of concern such as low interest rates available on savings accounts and accumulating enough money to generate their desired level of future income.


The report ends on a sobering note: “many must accept that their long-cherished retirement plans will have to change.”

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