The Coronavirus Pandemic and the Concerns for those Nearing Retirement
There has been an array of problems brought on by the current Coronavirus pandemic. On the economic side, the U.S. has seen an uptick in unemployment claims and increased stock market volatility. One group greatly affected is individuals nearing retirement. This age group is not only affected from a medical standpoint, but also from a retirement perspective. The group discussed are in their early-50s to mid-60s. According to a Market Watch article, “Americans 55 years and older had an unemployment rate of 13.6% in April, up from 2.6% in January.” Though it is believed that the unemployment number has since decreased, those that were laid off may have a difficult time finding new employment. Those that are still working may face the dilemma of continuing to work or jeopardizing their health. This group of individuals often has less time to recover from an economic downturn. Often, people view retirement as something to which they have control. They may have selected a retirement year and focused their planning on that particular year. What usually occurs, however, is a person is forced to retire due to a job loss or a health issue, and the current pandemic will only magnify this.
As evidenced by epidemiologists, those most at risk for the virus are those older in age. Though those nearing retirement may not be as at risk as older generations, many have underlying health conditions. According to Centers for Medicaid & Medicare Services, about 48- 86% of people age 55 to 64 have some type of pre-existing condition. The dilemma facing many in this age group is the risk associated with returning to work. There are numerous factors that come into play and should be weighed. Some may have the option to work remotely which may alleviate some risk. Depending on the type of work, however, remote working may not be feasible for instance those in the service industry or health care industry.
Issues with Retiring Sooner than Planned:
1. Increase in Expenses:
If retirement occurs prior to age 65, a major expense to consider is the cost of health care. Medicare begins at age 65 and an individual in their late 50s and early 60s can expect to pay as much as $12,000 a year for health insurance premiums. This is a significant and unexpected increase in expenses for anyone covered by an employer plan. This amount could double in situations with married couples where only one spouse worked or only one spouse had an employer sponsored health care plan.
2. Decrease in Income:
In certain situations, it may also be necessary to claim social security benefits before full retirement age. There tends to be some confusion with full retirement age as most people associate this age with the Medicare age. An individual’s full retirement age depends on the year in which they were born. Individuals born between 1955 and 1959 can expect their full retirement age to be between age 66 and 67. Those born after 1960 will have a full retirement age of 67. Full retirement age is the age when you can expect to receive full retirement benefits from social security. Though an individual is allowed to claim retirement benefits as early as age 62, the retirement benefits will be significantly and permanently reduced. According to the Social Security Administration, an individual born in 1960 or later with a full retirement age of 67 would have a 30% reduction in their benefits by claiming at age 62.
If an individual was a member of a union, they may have the option to begin collecting pension benefits at an earlier age. Just as with social security benefits, these benefits may also be reduced by collecting early. Depending on the type of pension, the benefits may not have a cost of living adjustment. The lack of inflation protection can have a major impact on future cash flow. Over the period of retirement, income would remain constant, but expenses due to inflation may increase, ultimately limiting buying power.
3. Depletion of Retirement Savings Faster:
Depending on the situation, an individual may need to start to withdraw retirement assets for cash flow. Not only does an early retirement mean withdrawing assets sooner than expected, but typically there would be no additional savings. Withdrawing funds sooner extends the retirement time horizon and may deplete assets sooner than planned.
There are numerous studies on the timing of retirement and the correlation that timing has on the likelihood of running out of money. This is known as “sequence of return risk”. According to an article published in Forbes, “When you withdraw money from an investment portfolio, negative returns early in retirement can cause the portfolio to fail faster than if those same negative returns instead occurred later in retirement.” Performance of retirement savings in the early years of retirement, is crucial to your retirement outlook.
In the current Coronavirus environment, there may be no other option but to retire early. As with anything in life, there is no “cookie cutter plan”. Each individual and couple must assess what is best for them.
Options to Help Alleviate Early Retirement Issues:
1. One Spouse Continues to Work:
In situations where both spouses were working and both were eligible for an employer health insurance plan, perhaps it is possible to live on one spouse’s income. If one spouse loses their job or voluntarily resigns, the working spouse’s employer health insurance plan may be available. Though some may still need to withdraw funds from retirement savings for cash flow, they may not have to withdraw nearly as much.
2. Part-Time Employment:
In situations where an individual does not feel comfortable working given the current situation, it may be feasible to stop working until it is safe to return to the workplace. Though they may not be able to return to their previous employer, they may be able to find part-time work to help supplement health care expenses or cash flow to avoid withdrawing from retirement savings. This would help retirement savings continue to grow. With that said, it’s important to note that there may be some complexities with doing so. For example, if an individual is working part-time, and needs to claim social security retirement benefits early, social security benefits may be further reduced due to income. This could greatly reduce social security benefits and purpose of claiming early. In addition, it may also be challenging to return to the workplace after having taken time off. Perhaps a new routine and a new way of life has been adapted, going back into the workplace may be more challenging than originally imagined. Even with all the challenges, part-time work is an option worth considering.
3. J.P. Cannata & Associates is here to help:
At J.P. Cannata & Associates, we work with clients to create custom financial plans taking into consideration the options mentioned above and many more. Working with a trusted financial planner is critical, especially in times like these. As mentioned earlier, every individual and couple is unique and as such, each retirement plan should be individualized based on their unique goals, objectives, risk, and obstacles. In addition, it is critical to continuously monitor retirement plans to not only plan for the perfect retirement, but more importantly, to help plan for the unexpected.
If you are nearing retirement and would like to meet with our firm to discuss your unique situation, please don’t hesitate to contact us by email at email@example.com or phone at 847-318-0700.