These days, older workers and retirees are understandably concerned that their retirement plans will be disrupted by the COVID-19 pandemic and the resulting economic downturn.
There are concerns that pre-retirees and recent retirees may have about any economic downturn, and strategies that are designed to help them withstand multiple financial crises, crises that are inevitable during a long retirement. These strategies are being stress-tested by the current environment; so far, they’re faring quite well due to the high level of risk-protected retirement income the strategies can help generate.
80% of older Americans can’t afford to retire – COVID-19 isn’t helping
Let’s look at five retirement planning mistakes to avoid during the current financial crisis—and, for that matter, any future crisis—and tips for implementing these strategies in today’s environment.
Mistake No. 1: Retiring too soon
You can significantly increase your ultimate retirement income by delaying your retirement, even if for a year or two.
Of course, people who get laid off or furloughed may not have control over their retirement date. If that describes you, you could be in a tough spot. If possible—and this could be a big if—try to find any work, even part-time work, that can help postpone the time when you start your Social Security benefits and begin tapping into your retirement savings.
If you need money to make ends meet, try to find any other source of cash, including any type of gig work or unemployment benefits (yes, they could be hard to obtain, but try). If you’ve been laid off, ask your employer for severance benefits, part-time work or contract work, or any other form of assistance they may be able to supply, such as outplacement counseling or financial advice services.
Mistake No. 2: Starting Social Security too soon
Suppose you do get laid off or furloughed and you’re age 62 or older. You’re certainly eligible to start your Social Security benefits, but for most people, starting benefits early would be a mistake. Social Security benefits offer significant advantages to retirees: They offer triple protection against common retirement risks: living a long time, stock market crashes, and inflation. And the longer you wait (but no later than age 70), the higher your benefits will be, and the greater protection you’ll get.
The fact is, most people are better off financially if you tap your retirement savings and any other savings, such as investment accounts or whole life insurance, instead of starting your Social Security benefits. That source should be the last financial resource you tap.
To help you maximize your lifetime Social Security income by delaying the start of these benefits, you can use your retirement savings to fund a Social Security bridge strategy. This strategy enables retirees to delay starting Social Security benefits after the age they retired. Use a portion of your retirement savings to pay yourself the Social Security income you would have received had you started Social Security when you retired. Pay this benefit until you start your actual Social Security benefits, but don’t delay beyond age 70.
Mistake No. 3: Making hasty investment decisions
It’s easy to get swept up in the fear of stock market crashes or the fear of missing out on future stock market gains. Both of these fears are prevalent today, and they can set you up for unnecessary investment losses and overwhelming mental stress.
Instead of focusing on your fears, design an investment strategy that lets you survive stock market crashes without knowing when the market might crash. Start by covering your basic living expenses with guaranteed sources of retirement income that won’t drop if the stock market crashes. Such sources can include Social Security, pensions if you have one, annuities, and tenure payments from reverse mortgages.
Then, before you make any investment decision, estimate the proportion of your total retirement income that’s risk protected; for many people, that income might comprise two-thirds, three-fourths, or more of their total retirement income. If the proportion is high, you could justify taking calculated risks by investing in the stock market to generate the rest of your retirement income, which you should use to cover your discretionary living expenses, such as travel, hobbies, and spoiling the grandchildren. These are expenses you could reduce if the stock market drops.
With this strategy, you can ride out the ups and downs of the stock market, knowing that you have a reasonable long-term investment strategy.
Mistake No. 4: Ignoring medical insurance
If you retire before age 65, when you’re eligible for Medicare, you’ll need to find health insurance to bridge that gap. Possible sources could include COBRA continuation coverage, insurance exchanges, employment that offers coverage, or your spouse’s employer. If you’ve been laid off, ask your employer if they can continue health insurance for you for a period or if they can extend your eligibility for COBRA coverage.
If you’re eligible for Medicare, it’s important to be aware of Medicare’s substantial deductibles and copayments. In addition, Medicare doesn’t cover many expenses commonly covered by employer-sponsored health care plans, such as dental, vision, hearing, acupuncture, and some chiropractic services. As a result, you’ll need to spend time shopping for health care coverage to supplement Medicare. There are two types of this kind of coverage: Medicare Supplement Plans and Medicare Advantage Plans. Each type has its pros and cons—do your research to find out which type of plan is best for you.
Today, more than ever, it’s critical to make sure you have the health care coverage you need to stay healthy.
Mistake No. 5: Giving up
It’s entirely understandable to be both intimidated and frustrated by all the challenges you might face, particularly with respect to finding work if you’ve been furloughed or laid off. It may sound easy to just give up and call yourself retired. Instead, be relentless with your networking efforts and updating your skills, including learning how to navigate the virtual world. Possibly investigate starting a service business. Or try volunteering—you might make contacts that could lead to paid work.
Also, look for ways to keep your spirits up—there’s a good chance you might need them.
I acknowledge that some of these steps can be easier said than done, but if you find yourself in a less-than-ideal situation, your only option may be to work hard to uncover a workable solution. Planning for retirement nowadays requires resourcefulness and resilience. Marshall all your resources—you can do it.
Steve Vernon, FSA, is the author of seven books on retirement planning, including his recent book “Don’t Go Broke in Retirement: A Simple Plan to Build Lifetime Retirement Income.” He is also a research scholar at the Stanford Center on Longevity, and president of his retirement education firm Rest-of-Life Communications.