The novel coronavirus pandemic has impacted all of us in some way. Almost overnight, the U.S. was hit hard with record unemployment. Many household incomes have been abruptly shut off. Several industries have slowed down to a crawl or else been shut off.
Millions of former workers have been forced to dip into their savings accounts in order to pay their monthly bills. Some have even been forced to take distributions from their retirement savings in order to make ends meet.
Of course, there is no question that better days will be ahead at some point. The U.S. economy is strong, and we will emerge all the stronger for it.
Even so, those without the benefit of continuing income from full-time employment or those with a shorter window before retirement may want to take a step back. It’s prudent to take stock of the situation, seeing what they can do to protect themselves. And that can helpful especially if something like this ever happens again.
How can this black-swan event affect seniors and baby boomers nearing retirement? In an April column of the Retirement Income Journal, a former International Monetary Fund official lays out some of the medium-term and long-term possibilities.
The Impact on Retiree Financial Wellness
George A. Mackenzie wrote that the finances of older Americans will depend on a few factors. Those include the sector of the economy they work in, the amount of unemployment insurance they receive, and how quickly unemployment benefits are distributed by their respective states.
According to Mackenzie, the average age of an employee in the U.S. economy is 42. The service sectors are what have been hit the hardest (and continue to be so now).
What is Happening to Employment of Mature Workers?
The service sectors cover hospitality, retail, and leisure. These sectors have been forced to shut down almost entirely.
Currently, they can't facilitate walk-in business as they did before. However, many retailers and restaurants take orders by phone for pickup or carry out. This situation will also change as more states "reopen" for business.
Older Americans tend not to be as much in these industries, but many of them do have public-sector jobs. Hence their employment status isn't as likely to be affected. Or they may see job furlough if their employing government's finances are stretched tight.
Many Americans within the retirement red zone (ages 55-64) depend primarily on the job market for their income. Historically, according to Bureau of Labor Statistics research, labor force participation tends to decline heavily among workers aged 65 and up. And of course, this is the trend in normal times.
Pre-crisis, unemployment among the pre-retirement crowd was already low. But if they lose jobs now, it may be difficult for them to find new employment. Some will be able to reclaim their old jobs when the country opens up for business again. But many of them will also be left out in the cold.
The Big Unemployment Question
As Mackenzie points out, here is the big question. Will mature-aged workers continue to look for new employment with job loss? Or will they permanently exit the workforce?
If a mass-exit is in store, that will put increased strain on Social Security and other retirement benefits programs. Mackenzie recognizes that a long period of unemployment may spurn some Americans who turn 62 to claim Social Security early.
However, this means they will receive diminished benefits for the rest of their lives. This can often be disadvantageous for many retirees who would be able to delay taking Social Security until they reach their full retirement age or even age 70, when they can collect the maximum possible benefit.
He encourages working-age Americans to wait it out and let their benefits to accrue before claiming, if they can. The payout will be that much bigger on the backend with delayed claims.
Older workers who are willing and able to work for another five years or so can increase their retirement savings. Meanwhile, they would reduce the amount of time that they have to cover with their savings here in Del Mar.
Both of these factors, combined with delaying Social Security, can have a huge impact on retirees' quality of life in the long run.
What About Those Crazy Market Swings?
It's also apparent that most American households, including San Diego don't hold a ton of wealth in stocks and bonds. Mackenzie addresses this issue in his column:
"According to the Federal Reserve’s Survey of Consumer Finances, even the top 10% of households by income with a head aged 55 to 64 held on average just nine percent of their total assets—which include a household’s principal residence and other real property—in directly and indirectly held stocks in 2016. For the 65-74 age group, the share in stocks was twelve percent."
He recognizes that the temptation is to liquidate shares but recommends holding off. That is also with the recognition that "the key question investors need to ask is whether they could survive financially if the stock market did not recover strongly."
This is during a time when stock market swings of 500 points to 1,000 points -- swings that historically took months or years -- have happened in just days now.
History suggests strongly the market will recover. But how long it might take is the question.
It's also good to remember that this is uncharted ground. And the horizon that retirees have for recovery is what matters in weighing how much portfolio risk to carry.
Retirees' Homes May Not Be As Affected
For many near-retired and retired households, a big asset that they might own is their home. Mortgages are likely to be paid down more. Depending on their respective community of residence, they may qualify for some property tax relief, assuming they own a home.
However, it's hard to say what might happen to housing market values if mortgage payments are affected economy-wide and mortgage companies start being affected. There might be 'spillover' effects for homeowners.
A Silver Lining for Tax Planning?
There may be a silver lining that retirees and workers can use to capitalize on the current market turbulence. Taxes might go up in the future, and if people are able, it might be a good time for tax planning.
This could be an ideal time to do a Roth conversion, especially when the markets are down as they are now. If a retiree's stock portfolio has dropped in value by over 20%, then there may never be a better time to do a conversion.
That can especially be true if the retiree is able to pay the tax on the conversion out of pocket instead of from the retirement account. Your financial professional can guide you on this.
Plotting the Course Going Forward
The pandemic crisis has brought lots of change and uncertainty. For those retired and near retirement, lots of the uncertainty is around their retirement income.
Consulting with us, your San Diego financial advisors, about current or future sources of retirement income, and how we can navigate financially these possibilities, can make all the difference for peace of mind. Ask Wealth Preservation about what steps you can take for now and the future.
Call 800-313-7526 for more information and to contact our wealth solutions experts here in San Diego today.