The sudden and dramatic economic downturn caused by COVID-19 is unsettling for many, but especially for those nearing retirement. From the impacts of the market drop on retirement savings to the potential for late-career job losses, the pandemic raises all sorts of concerns and questions for pre-retirees.
It’s hard to know what the future holds. But fortunately, there are actions you can take now to help preserve your assets, reduce your risk, and shore up your retirement savings plan. Consider the following four steps if you’re approaching retirement:
1. Preserve Your Cash
If you’re planning to retire in the next few years, there’s a high chance that a good portion of your investment portfolio is in cash. While the recommendations regarding how much cash to maintain vary, soon-to-be retirees usually have at least 5% of their portfolio dedicated to cash reserves. More conservative investors may have 20% or more in cash vehicles, such as high-yield savings accounts and money market deposit accounts.
With the market reaching recent record lows, it may be tempting to re-invest some of your cash into suddenly cheap stocks. But if you’re planning to retire soon, proceed with caution. Reducing your risk now should be your top priority. What’s more, if you do find yourself in a sudden cash crunch due to a job loss or work slowdown, you’ll be able to draw on your cash reserves instead of tapping into your equity investments or running up debt.
2. Stay Invested
Even with a good portion of your pre-retirement portfolio allocated to bonds and cash, the market volatility hasn’t done your equity investments any favors. Equity indexes dropped by 30% from mid-February to mid-March, hammering portfolios as investors panicked about the economic impacts of the COVID-19 crisis.
However, even amidst the volatility and uncertainty of the current moment, pre-retirees should stay invested equities. Let’s be clear—you don’t need to increase your equity allocation. But given that your retirement assets will remain in the market in some form for years, even after you retire, staying invested with what you have is smart.
Research from Franklin Templeton shows that investors who stayed invested after big market drops over the past 20 years also benefited from the big recovery days; they averaged a 6% annual return over two decades. Those that missed the best 10 days averaged a 2.4% return, and those that missed the best 30 days over the 20 years posted an average annual loss. History suggests your equity investments will recover. But you need to give them a chance.
3. Plan, Review, and Revise
It may seem impossible to plan for 20 years into the future when we don’t even know what will happen next month. But those approaching retirement must review their current retirement savings plan and re-evaluate whether it’s still appropriate given the current circumstances.
For example, if you or your spouse have lost your job, then your savings rate for this year may end up less than what you expected. Work with your financial advisor to adjust your plan accordingly. Test your plan with tough questions such as what happens if you don’t get back your original savings track, and at what point do you need to delay your retirement.
Revise your plan with your new information in mind, and revisit it as your financial circumstances change over the course of this year. Continuously reviewing and revising will ensure that you’re not caught off guard with a plan made for a different time.
4. Monitor Your Emotions
These are stressful times for everyone, and it’s easy to let emotions drive your decision-making. But when it comes to your retirement plan, do whatever it takes to keep a level head and a long-term view. The last thing you want is to make rash decisions based on what’s happening this week or what happened yesterday. As you get closer to your retirement, short-term actions can have long-lasting impacts.
To stay calm, assess your savings, and evaluate what you do have stashed away. Take comfort in the money you have saved in bonds and cash, which remains a low risk and will help fuel the early part of your retirement. Review your retirement plan and put numbers to your concerns so that you can root your thoughts in something concrete. Then plot your next steps.
The coronavirus pandemic is an unprecedented crisis, and its impacts are far-reaching. For pre-retirees, the fallout may threaten plans you made years ago. However, you can regain some control of your financial situation by making a few smart moves sooner rather than later.