How Has COVID-19 Changed Retirement Investing Calculus?

January 18, 2022

The COVID-19 pandemic isn’t just impacting every aspect of our everyday life. It’s also impacting our future.

In fact, 1 in 5 Americans are now saving less for retirement due to COVID-19. But on the other hand, 16% of Americans say they’re now saving more for retirement due to the forced spending decrease.

Of course, knowing COVID-19 changed the retirement playbook and playing by the new COVID-19 retirement investing calculus are two different things. Here’s a look at how COVID-19 changed the game—and how you can update your investing to reflect the new normal.

How COVID-19 Has Changed Retirement

Regardless of how the pandemic has affected you personally, it has changed the way many people think about retirement. According to the National Institute of Retirement Security (NIRS), 51% of Americans are now more concerned about their retirement security in light of COVID-19.

Here’s the thing: COVID-19 has affected retirement investments differently depending on your financial health and your personal circumstances. In general, though, we see the biggest retirement changes in three areas:

  1. Earlier retirement
  2. Delayed retirement
  3. Real savings rates

Here’s a look at how that breaks down in each category.

Earlier Retirement

The pandemic drove nearly 3 million Americans to retire early. In fact, the number of baby boomers who retired in 2020 was more than double the increase in 2019.

Many more Americans are considering early retirement as a valid option. There are several reasons for it. Some workers are concerned about safe work, especially older workers in higher risk professions like teaching and healthcare. Some workers are joining the Great Resignation surge in deciding that enough is enough.

Either way, retiring early brings a few key challenges. The biggest one is obvious: the earlier you retire, the longer your retirement savings have to last. For example, if you retire at 55, based on current life expectancy, you’ll need your nest egg to last at least 20 years, though it may need to stretch as long as 40 years.

Delayed Retirement

On the other side of the spectrum are Americans who delayed retirement due to COVID-19. In fact, more Americans considered delaying retirement than taking early retirement, typically due to unforeseen financial stressors brought on by the pandemic.

Financial advisors almost always recommend delaying retirement as long as you can. Delaying retirement can significantly benefit your retirement security—since you have more time to grow your assets and less time you need to rely on them, your nest egg can go much further. You also get bigger Social Security checks the longer you delay retirement.

That said, the decision to delay retirement may not be entirely in your control. Usually, people are forced to retire for three reasons:

  1. Health concerns
  2. Job loss
  3. Caregiving responsibilities

While you can’t predict such concerns, you can plan for them. Either way, you should still save for retirement as aggressively as you can afford, just in case you’re forced to retire earlier than expected.

Real Savings Rates

Back in April 2020, when the pandemic first picked up speed, savings rates hit a record 33% as Americans cut back spending and stockpiled in the event of a health crisis. And while the savings rate cooled in the last year, it’s still startlingly high—as of May 2021, the Fed reported personal savings rates at 26.6%, which is remarkably high when you consider that pre-pandemic savings hovered below 10%.

Basically? Americans are still scared.

For one thing, Americans are still gun shy after the stock market roller coaster ride that was 2020. For another, historically safe investments are performing worse than pre-pandemic levels. Either way, Americans saw the devastation circling the country and started planning for worst-case scenarios, including lower risk investments.

Planning for the New COVID-19 Retirement Investing Calculus

How you modify your retirement playbook depends on where you hit the spectrum. An early COVID-19 retiree and a delayed COVID-19 retiree need to plan differently, and either way, both sides need to look critically at how they use safe investments.

Earlier Retirement

If you plan to retire early, you have to plan for the practical financial implications.

First, consider your age. Early retirement is generally defined as before the age of 65. This used to be the age that both Social Security and Medicare kicked in, but Social Security now uses full retirement age instead, which is based on the year you were born. If you apply for benefits prior to full retirement age, your benefits are reduced. For example, if your full retirement age is 65 and you retire at 62, your Social Security benefits may be reduced by as much as 30%.

Here’s the thing: the age you retire and the age you start receiving Social Security are not married, and you should take advantage of that if you can afford it. You can retire in your early 60s, make some smart financial planning moves, and not begin Social Security until age 70, when you receive the largest benefit for delaying retirement.

Delayed Retirement

If you plan to delay retirement, you still have to save as if you’ll retire earlier, and you have to plan ahead for potholes.

Most older workers hit two of them: whether or not you actually need to keep working, and the potential for layoffs once you pass your 50s. One way or another, you’re at peak income once you’re in your 50s and 60s, which makes you the first cut for layoffs, and older workers rarely earn as much at subsequent jobs.

This is why many people continue to work as long as possible, not necessarily because they need to, but because they’re afraid. Spend some quality time assessing if delayed retirement is necessary, and if it is, be strategic about investing in case the decision is taken out of your hands.

Real Savings Rates

Both sides need to be strategic about safe investments and real savings rates.

First, you have to be realistic about returns on safe investments. Optimism doesn’t pay out. Plan your finances as if the returns will be lower than hoped.

Second, be strategic about shifting asset allocation away from cash and bonds. It is frustrating to see assets not earning strong returns, but if you need your investments to generate income for retirement, riskier investments are a dangerous game.

Get Smart About Your Retirement Investing

The COVID-19 retirement investing calculus looks a little different from pre-pandemic life—much like every other corner of our lives. But that doesn’t mean you have to give up on retirement. It just means you have to be smart about it.

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