Assessing COVID-19’s Impact on Your Retirement Plan
By: BILL STORDAHL, CFP®
The COVID-19 pandemic has caused many Americans to experience adverse financial effects, from business owners shuttering their storefronts, to employees taking pay cuts, to investors seeing their portfolio values drop. Such effects can have long-term consequences—right into retirement. If you are wondering whether COVID-19 has disrupted your retirement plan, take the time to do a damage assessment. This article describes financial areas to assess.
Retirement Plan Balance
The value of the assets in your 401(k) plan and other retirement accounts may have dropped early in 2020, so it’s crucial to take stock of where you stand.
If you didn’t panic and sell when the market plummeted early in the pandemic, then you are probably watching your portfolio recover along with the market.
If you sold stocks as the market crashed, you could have a long way to go until you get back to where you were before the coronavirus pandemic. Revisit your investment strategy, and consider talking to a financial advisor, especially if you see your investment portfolio as a primary income source in retirement.
Asset Allocation/Risk Tolerance
Assessing your retirement plan balance can raise questions about asset allocation and risk tolerance. If you panicked and sold stocks as the market crashed, you may want to adjust your asset allocation toward less volatile investments so that you feel less tempted to panic-sell in the future.
On the other hand, you might want to try to make up for a drop in your portfolio. If you’re comfortable with taking on more risk, you can adjust your asset allocation to a larger share of equities. However, you should carefully think through this strategy if you are very close to retirement, as equity volatility could disrupt your retirement plans.
Keep in mind that much uncertainty remains in the market, as both the health and economic effects of the COVID-19 pandemic continue. The Investopedia Anxiety Index, which measures investor sentiment of Investopedia readers globally, is down from its highs earlier in the pandemic, but anxiety remains.
Rather than chase returns or try to time the market, choose an asset allocation that balances your risk tolerance and long-term return goals.
Retirement Savings Rate
Increasing your retirement savings rate—for example, increasing the percentage of your paycheck that goes into your 401(k) plan—can help get your retirement plan back on track.
Take time to assess whether your savings rate has changed due to such issues as your employer eliminating matching 401(k) contributions. If that’s the case, you may need to reduce spending in other areas of your life to make up for the loss.
Income Outlook
If your income has fallen due to COVID-19, consider how long the shortfall might last and what you can do to make up for it. For example, if you had to take a temporary pay cut to avoid a layoff, you might not be putting as much money into savings or investments as you focus on paying for everyday expenses.
See if you can cut back on spending to get your savings back on track for however long your pay cut lasts. If your income outlook seems bleak, you may need to make more significant changes, such as looking for a new job or taking on freelance work to supplement your income.
Debt
While you generally want to work on bringing down your debt, one bright side of the COVID-19 pandemic has been a significant drop in interest rates and more loan flexibility. As such, you could take steps such as refinancing your home, perhaps even extending your mortgage duration in exchange for lower monthly payments.
Assessing these areas can help give you a better picture of the steps to turn your retirement plan around. If you want a professional’s advice, consider working with a fiduciary, fee-only financial advisor with expertise in retirement planning. The financial advisor can assess your financial situation in its entirety and offer concrete recommendations to help get on course.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
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