The coronavirus pandemic's effect on the economy has hurt many retirement accounts. But there are strategies for regaining your financial footing.
The major coronavirus relief bill passed by Congress in March included provisions to allow Americans affected by the crisis special dispensation to withdraw from their retirement accounts, including 401(k)s and IRAs, without incurring the standard early withdrawal penalty. Eligibility is limited to those who are directly affected by the illness – those who have been diagnosed or have a spouse or dependent diagnosed with the illness, as well as those who have been furloughed, laid off, or have had hours reduced.
However, withdrawing funds early from a retirement account, even without incurring a penalty, may not be advisable if it can be avoided. The COVID-19 crisis has presented most Americans with challenges related to their retirement savings and plans, and especially so to those closest to retirement or already in retirement. The stock market plunge, potential extra health care costs, furloughs and more have left many wondering what they can do now to ensure they will be able to retire comfortably in these uncertain times.
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24/7 Wall St. reviewed some of the challenges and opportunities people should consider as they move into retirement. The strategies listed below offer different ways to approach retirement plans according to one's needs at this time of great upheaval and insecurity.
Some questions about retirement have not changed entirely. At what age should people take Social Security? Is it time to sell risky stocks and move money into bonds? Should people move to warmer climates, particularly in states with low costs of living? Should future retirees withdraw funds from their 401(k)?How to offset coronavirus retirement hit
1. Cut down on 401(k) contributions
When you reach 50, you are able to make catch-up contributions to your 401(k) and IRA accounts. The amounts you can add change periodically. For 2020, you may contribute up to $6,500 annually to a 401(k) and, if you're over 50, up to $1,000 above the $6,000 annual limit to either a traditional or Roth IRA. If you have more than one IRA account, the total contribution cannot exceed $1,000. Also consider reducing your contributions. If you have credit card debt or a car loan or some other indebtedness, paying off that debt before retiring might be more important than building your nest egg. Remember that when you do retire, your savings would be your main source of income.
2. Dip into your IRA
You may begin withdrawing funds from either an IRA or a 401(k) account at age 59 and a half. If you are still working and your employer offers a 401(k), you can continue to contribute to it as long as you are eligible, but you must begin withdrawing funds when you reach 72. You cannot continue contributing to a traditional IRA once you reach 72. There are no similar age restrictions on Roth IRAs. Like in most other retirement savings accounts, the longer you can leave your savings untouched (or keep adding to them), the more you'll have when those savings become your main source of income.
3. Consider leasing a car
First, consider whether you need a new or fairly new car at all. If you decide to acquire a new vehicle, you will notice that the down payment on a lease is typically lower and so are the monthly payments. After the lease term is up (usually three years), you can get a lease on a new car and begin the process again. Considering that it takes about five years to pay off a new car loan and you will be driving it payment-free for 10 or more years if you keep it for 15 years, buying a vehicle may be a better choice – though leasing may be the more affordable option for the short term.
4. Take Social Security
When you turn 62, you can start collecting Social Security retirement benefits. You get another opportunity at age 65 or later (depending on your birth year), and at age 70 you have to take it. In 2020, if you begin collecting benefits at age 62, the maximum monthly payment is $2,265; at 65 or later, the monthly benefit is $3,011; and at age 70, if you waited that long, the maximum benefit is $3,790. The standard advice is to wait as long as you can to take the benefit because your monthly income will be higher when you need it most, i.e., when you are older.
5. Take out a second mortgage
By federal law, lenders cannot discriminate against potential borrowers on the basis of age. If you need money and you are qualified for a loan, you should get it. However, taking on new debt once you retire and are living on a fixed income can be risky.
Reverse mortgages are one option to gain access to some money, but if your mortgage is paid off you might consider a home equity loan. If you still have a mortgage, a cash-out refinance is another option. While neither is technically a second mortgage, each serves the same purpose – turning the equity you have in your home into cash (actually new debt) that is secured by the house itself.
6. Start to move investments into fixed income
The average annual return for the S&P 500 from 1957 through 2018 was about 10%. Equities have been a good place to park retirement money. And as bond yields have dropped to near all-time lows, they have become very unattractive. All of that may have changed because of the economic fallout of the coronavirus.
In the last recession, stocks fell almost 50%, wiping out retirement savings for many. Investment bonds do not offer big returns, but they are safe. People have complained for years that owning U.S. bonds was the top way to undermine retirement nest eggs. Now, they may be able to protect rather than hinder investments in retirement savings accounts.
7. Take out a reverse mortgage
Reverse mortgages often get a bad rap, but there are circumstances where they can be a reasonable strategy. If your home is your largest asset and you need cash and have no other way to get it, this may be your best option. To get a reverse mortgage, your mortgage must be paid off (or nearly so).
Weigh the amount a cash sale would net against the amount you could get from a reverse mortgage, including all fees. An additional consideration is that taking a reverse mortgage means you do not have to move and are already familiar with the ongoing costs (heat, maintenance, etc.)
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8. Plan to move to a less expensive home
More than a third of American homeowners' wealth is tied up in their homes. If you have fully paid off your mortgage, or nearly so, you might want to consider selling your home and purchasing something smaller. By downsizing, you might be able to pay cash for the smaller home and use the rest of the proceeds from the sale of your old house to pay off any remaining debt. Being debt free headed into retirement is (or should be) a top goal of any retirement plan. Of course, making a move will have to wait until regional stay-at-home orders have been lifted.
9. Move to states that are less expensive
Cost of living varies widely from state to state – and there are several states that are popular with American seniors. In a very rough economy, a lower cost of living can help you make a dollar go farther. If the average cost of living in the U.S. is indexed to 100, the state with the lowest cost of living is Mississippi with an index of 86.1. Other countries with good lifestyles and low costs of living include Ecuador and Panama.
10. Plan on living to 90
According to the Social Security Administration, if you were a 62-year-old male in 2016, your life expectancy is just over 20 years, to 82. A 62-year-old woman can expect to live until she is 85. For the purposes of retirement income, it might be wise to determine how much you and your partner will need assuming you live to be 90. Can your retirement savings be stretched to age 90, and how would it change your expected retirement income? Do not forget to add inflation, both to your Social Security benefits and the cost of living.
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