Why You Might Have to Retire Later Due to COVID-19

The COVID-19 pandemic in general increased retirement uncertainty. In fact, Lincoln Financial Group reported three different sentiments regarding the pandemic and specific age groups: 

• Pre-retirees: The age group from 55 to 64 saw the biggest drop of retirement-ready confidence.
• Mid-career: Individuals between the ages of 35 and 54 saw a smaller dip in confidence during COVID-19.
• Early career: The 18 to 34 age group saw a six-point drop with early signs of market volatility, but then rebounded. 

The rate of early retirement for individuals who are 65 or older increased by at least seven percent between April 2019 and April 2020, and a survey by TD Ameritrade found that 71% of Americans believe the pandemic will have a negative impact on their retirement plans. Even 39% of Generation X think they might need to delay retirement. 

Overall uncertainty could also derail Americans' savings plans. Will you have to retire later than usual, or right on schedule, due to pandemic (albeit temporary) volatility? Let's learn more.

Retiring Later Reason 1: Your retirement savings suffered losses.

Retirement savings usually comprise stocks, especially for younger investors. Long-term returns were affected when stock markets reported their largest one-week declines since 2008. As global markets became affected, individual stocks faced downturns. 

Obviously, people nearing retirement saw losses that could not allow them to retire on time or with the same amount of savings. Retirement plans heavily invested in stocks were negatively impacted by COVID-19. In most cases, people with time on their side have seen their stocks recover about 79% from the lows, with stocks expected to continue to rally. 

Retiring Later Reason 2: You may have had to pull money out.

Nearly three in 10 people decreased the amount of money they've set aside for retirement. They may have also stopped saving altogether due to COVID-19.

According to Fidelity, 1.6 million Fidelity customers took out an average of $9,400 from their qualified retirement accounts under the CARES Act. This means that people 59½ and under could withdraw up to $100,000 from accounts like IRAs or 401(k)s without paying a 10% penalty. These people could pay back or spread the income tax burden over three years.

Not having saved during the pandemic could set you back years. In fact, assess whether you have the following: 

• By age 30: The equivalent of your annual salary saved ($100,000 if you make $100,000 per year).
• By 40: Three times your income ($300,000 if you make $100,000 per year).
• By 50: Six times your income ($600,000 if you make $100,000 per year).
• By 60: Eight times your income ($800,000 if you make $100,000 per year).

Pulling out for even a little while can hinder your progress toward those goals. 

Retiring Later Reason 3: You may have had to drop out of the workforce.

When you lose your job or leave your job, you naturally lose out on contributions to your retirement savings plan sponsored by your former employer. With no income coming in, you might have found it a challenge to make up for it with an IRA. That loss of income can drastically reduce the amount you'll save per year. You'll also affect your pre-layoff savings rate. However, you may be able to make it up later if you figure out the difference and keep track of it.

Women could be most affected. About three million women in the U.S. left the labor force due to pay inequality and caregiving needs for children and family members. Many women, particularly mothers of young children, had to choose between working and caring for their kids when daycares closed and remote schooling became prevalent. 

Retiring Later Reason 4: Lower bond yields could affect retirement.

Lower bond yields may make the traditional rule-of-thumb 4% for retirement obsolete. In the past, you could withdraw 4% and give yourself an annual raise to account for inflation in retirement and not run out of money.

This means that a $1 million portfolio could offer you a withdrawal of $40,000 in the first year of retirement and increase to $40,800 your second year of retirement.

However, low bond yields could mean that you need to save more. It could mean having to save more than that.

Retiring Later Reason 5: You tweaked your financial plan in reaction to the markets.

Did you rush out and change your retirement plan when the markets dipped? Unless you focused on what you personally wanted to — and needed to — achieve, this could have affected your portfolio in a major way. 

It's easy to forget that the markets are resilient and a steep market decline combined with excessive retirement account withdrawals make it tough to recoup the upturn in the markets. 

Think You Might Be in Danger of a Delayed Retirement?

The pandemic has triggered plenty of specific financial problems, from loss of jobs to having to pull money out of retirement accounts. Individuals in their 50s and 60s may have had to take early retirement. No matter what the reason or circumstances, it's a good idea to evaluate your current trajectory. 

Retirement savings damage caused by COVID-19 could take years to fully understand, but there's also good news: Employers and financial advisors will do more to talk to clients about long-term effects of the COVID-19 pandemic and how they can make their portfolios stronger. Companies will offer more access to retirement savings. Many individuals have also indicated that they'll pay more attention to their retirement savings post-pandemic and their short- and long-term money plans. 

If you think you're in danger of retiring later (or have already faced it), you can utilize tools (both online and through financial advisors and plan advisors) to plan for the future.