The COVID-19 pandemic hit hard in early 2020, and it continues to remain prevalent as we near the end of the year. Whether you’ve just recently retired, or it’s coming up in the next few years, it’s likely the virus has brought about some financial uncertainty regarding your readiness for retirement. Before making any sudden changes, it’s important to remain rational and avoid these five big retirement mistakes below.
Mistake #1: Neglecting Your Emergency Fund
No word describes 2020 better than “unexpected.” Back in 2015 if someone asked you where you would be five years from now, I don't imagine anyone would see themselves living this new life. Therefore, it should come as no surprise that preparing for the unexpected sits at the top of our list. When times get tough, it can be tempting to forego or forget important financial habits - like padding your emergency fund. If your income has been affected by COVID-19, you may be struggling to make ends meet for the time being. But that doesn’t mean adding to your emergency fund should be the first thing to go. A little preparation now can go a long way when the unexpected does hit. From a health emergency to car repairs, you never know what surprises may come your way in retirement.
Mistake #2: Making Unnecessary Withdrawals
Withdrawing from any retirement accounts early could mean big tax penalties and less income in retirement. While the CARES Act has temporarily waived the 10 percent penalty for early 401(k) withdrawals (up to $100,000), utilizing this option before considering other alternatives is unwise.1
The money you withdraw from a traditional IRA will still be subject to income tax come 2021. And to avoid robbing your future retirement, you’ll want to develop a plan to replace that lost income in the coming years. If you’re struggling to cover your expenses amidst the pandemic, talk to your Certified Financial Planner practitioner about other options you may want to take first. Look into what relief programs your state or local government offers, tap into your emergency fund if necessary and reevaluate your budget. Here in Massachusetts, there are a variety of resources available.
Mistake #3: Making Emotionally-Driven Investment Decisions
Nobody can go a day without hearing the word “coronavirus.” From social media posts to advertisements and news outlets, there’s no escaping the pandemic. COVID-19 aside, other big news stories are hard to avoid as well - the upcoming election, the staggering rates of unemployment claims, the stock market rising and falling, etc.
After absorbing info day in and day out, it’s nearly impossible to not let it affect your decisions about money. Should you drain your portfolio and stuff it under the mattress? Do you need to look at rebalancing assets amidst this market volatility? Working with your Certified Financial Planner practitioner can bring an objective, scientific and education-based perspective to the question of what to do with your assets. Together you can focus less on the world around you and more on your individual goals as you head into retirement. What's right for your neighbor, coworker, or Uncle Billy may not be right for you.
Mistake #4: Forgetting to Reassess Your Current Budget
Have things changed since you last made your monthly budget? Maybe you used to commute to work, and now you’re working remotely. Or you used to spend every Friday at happy hour with friends, now you enjoy a quiet evening at home. It’s very likely that your daily habits, and what you spend money on, have been affected by the pandemic.
In many cases, this could be good news. You’re spending less on gas or commuter passes, travel and vacation, eating out, gyms and more. (My grocery bill has increased but I'm now getting three months to a gallon of gas). Reevaluate what your spending has been like over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your timeline towards retirement, an extra couple of thousand in savings this year could grow significantly over the coming years. Just this past week, i spoke with a client that has built up some savings so we decided she was now in a position to increase her 401K contributions until the end of the year.
Mistake #5: Beginning Social Security too soon
The earliest one can generally begin collecting a retirement benefit is age 62. Just because you can, doesn't mean you should. It is critical you look at all of the available options i.e collecting a benefit as a divorced or widowed spouse as well as other Social Security filing strategies. Seeking the guidance of a Certified Financial Planner practitioner who is well versed in this area is important.
Mistake #6: Ignoring CARES Act & Other Legislative Changes
The CARES Act was passed on March 27, 2020, meaning you’ve likely heard of it by now. It’s possible you even received a stimulus check in April or May. But did you know that the CARES Act offers some significant changes for retirees and those about to retire?
As mentioned earlier, the CARES Act has waived the 10 percent tax penalty for coronavirus-related withdrawals from your 401(k) account up to $100,000.
Those who may qualify for this option include:
- Someone who has contracted the virus
- Those caring for an immediate family member who has the virus
- Anyone experiencing financial distress due to being furloughed or laid off during the pandemic
- Business owners who needed to cease operation or reduce hours
- Any additional circumstance in which the IRS deems acceptable1
In addition, required minimum distributions (RMDs) have been waived for the remainder of 2020.1 If you don’t need this money to make ends meet, leave it in your IRA. Plus, your tax obligation can be lower without this additional income.
If the pandemic has created some cause for concern when it comes to your retirement, don’t hesitate to reach out to us!. We work with retirees and pre-retirees to develop retirement strategies and determine if things need to be adjusted.
As always, please feel free to reach out to me anytime for a conversation. Click HERE to see my calendar or just shoot me an email or give me a call.
In good health.
All the best.
Rick Fingerman, CFP®
*This blog article is meant to be just a simple primer. I'm happy to speak in more detail one on one.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.