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Effect of Covid-19 on Recent Retirees

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COVID-19 has ravaged many economies around the world. It has caused shivers such as a loss of employment, elimination of incentives, cruel methods of cost-cutting etc. Everything needs prudent evaluation and consideration right now to ensure that it can sustain the impact of such vulnerable times. An aspect that requires urgent attention is the effect of the novel coronavirus on recent retirees. Retirement is usually an anticipated and well-planned phase. But the uncertainty portrayed by the COVID-19 pandemic has caused retirees to reassess their plans and make necessary amendments to stay afloat.

Here is how the novel coronavirus has affected the recent retirees:

Reduced savings

The impact of COVID-19 on retirement savings has been significant. Reduced incomes, corporate cost-cutting, dropping incentives, and even the loss of jobs has caused a negative impact on retirement accounts. With employers restricting and suspending matching contributions, accounts such as the 401(k) have suffered a big setback. Employer-sponsored programs like a 401(k) account are considered among a person’s primary retirement savings. As per the Russell 3000 Index, retirement saving accounts lost more than $3.8 trillion by the beginning of April. This was when the novel coronavirus had just begun to spread. Given its increased magnitude now, the impact is expected to have aggravated more. Delaying retirement can be one way to manage this condition. By continuing to work, you can save more and ensure that your retirement goes as you had initially planned. Moreover, a sincere reduction in overall spending and debts can also significantly improve savings for the future non-working years.

Diminishing investment value

The effect on the stock market has been a critical matter of concern, especially for recent retirees. The plunging graphs, dropping value of stocks, and increasing volatility have caused a considerable dent in everyone’s portfolio. Hence, for new retirees, the investments are worth a lot less than expected. There was a 10% decline in the S&P 500, Dow Jones, and Nasdaq earlier this year. Given the increasing severity of the condition and gloomy sentiments, the stock market is expected to be hit more harshly. This has further driven down the investment’s worth. However, instead of panicking, retirees can hold their investments and wait for recovery.

Minimized Social Security benefits

As per some reports, the Social Security benefits for 2020 have already tapped on trust funds for help. And now, with the given financial implications of the pandemic, Social Security benefits are set to suffer even more. This is because the main source of Social Security funding is the income from payroll taxes. Both the employer and the employee pay 7.655% up to an income of $137,700. However, due to the pandemic, there has been a rise in unemployment and employers are shedding costs by getting rid of workers and cutting pay. When payroll reduces, the corresponding taxes suffer, thereby shifting the load on the benefits for retirees. The cost of Social Security also shoots up, surpassing the revenues, and thereby causing a reduction in benefits for retirees.

Decreased pensions

COVID-19 has brought in some significant investment volatility. This is likely to create a lot of instability for defined benefit plans such as pension schemes. Pensions are considered a very reliable source of finance for retirees. But given the financial pressure placed by COVID-19, coupled with rising deficits across companies and sectors, retirees might have to rely upon elsewhere. In such critical times, it can also be beneficial to freeze sponsored benefit plans since these may need extra contributions because of the uncertainty brought on by the pandemic.

Realignment of goals

A major setback of coronavirus for retirees is that they now need to realign and restructure their goals. The new alignment has to be in accordance with the near future and their expectations. For retirees aiming to travel post-retirement the plans may need to be put on hold, not only in terms of safety concerns but also because there maybe a certain level of personal financial instability. Also, retirees who planned to boost or redirect their investments may have to stay put and let this phase pass, while allowing their portfolio to recover. Retired people can readjust their portfolios and savings to ensure their retirement targets are delayed but not absolved indefinitely. For instance, retirees who have a lot of funds with near-to-date maturity can consider re-investing it at the appropriate times unless the funds are required for other urgent purposes. Moreover, if a person can choose to delay retirement than planned, readjusting their goals becomes easier for an extended period.

Lower returns

Retirees were already facing a crisis with increasing housing costs, inflation, and other rising expenses. The global COVID-19 pandemic has made matters more difficult. The financial well-being of a retired person is considerably affected with not enough money and jobs to help sustain them. This has made U.S. workers file for unemployment benefits. More than 22 million people from the U.S. workforce have already filed for it, and the number is increasing by the day. Without jobs, people are unable to contribute to their retirement accounts and other savings. This has reduced the overall returns for retirees. Existing lack of income has also forced many people to withdraw from their savings, reduce distributions, or even file for loans against their retirement plans, hence reducing returns in the longer period. Moreover, with delayed or no contributions to retirement accounts such as the individual retirement account (IRA), the 401(k) account, etc. recent retirees are likely to lose compound interest. This may eventually require them to work longer than anticipated to provide for funds.

Loss of opportunities

It is not very hard to imagine the economic scenario currently. Even if the economy recovers soon, there will be a massive loss of opportunities, especially for recent retirees looking for a part-time job after retirement. People who wished to continue working post-retirement may find it difficult to get a job. On the other hand, the compensation may also be inadequate. Due to the economic downturn and a lack of funds, a multitude of job openings and smaller organizations may die out. This could leave recent retirees with fewer options to engage in post-retirement. Furthermore, this could also further increase the burden on savings and retirees might have to draw more from their funds.

To sum it up

The negative impact of the coronavirus pandemic has been massive across spheres. However, in concern to new retirees, it has been more damaging. The Government has come up with relief programs such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide for economic hardships with direct payments and unemployment benefits. But the overall impact of COVID-19 on the coming years is still hard to ascertain. That said, it is advisable for people who have been affected by the crisis to delay their retirement, work longer, and not make withdrawals, if possible. Instead, choosing to invest time in creating short-term financial plans can be a useful strategy. Building a solid retirement corpus and reducing your spending, minimizing debts, as well as choosing new investments more prudently than ever before, can be other effective ways to tackle the situation. For others, who retire this year or the next and have been religiously saving for it, the retirement phase can begin smoothly with cautious spending.

Regardless of your current situation, seeking help from professional Financial Advisors can help you sail through the crisis.

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.