In the blink of an eye, the coronavirus and the resulting economic downturn have created a new world for retirement planning. I’m sure many of you are feeling worried and stressed about how the short- and long-term effects of our current environment will impact your retirement plans. That’s probably even more true if you’re anywhere from a few months to a year or two away from retiring.
If you’ve been reading this column for some time, you’ll know that the underlying goal of the strategies I’ve long recommended has always been to help you survive the financial crises that are inevitable during a long retirement. And now that we’re in the midst of one of these crises, it’s time to review key decisions that will help you successfully come out the other side with your finances still in good shape.
In that spirit, let’s take a look at three critical decisions that pre-retirees should be considering that will impact your financial security for years to come.
Decision #1: Determine when and how to retire
If you haven’t yet fully retired, you can significantly increase your retirement income by delaying your retirement. This will not only increase your ultimate Social Security retirement income, but it will give your retirement savings a chance to bounce back from the recent stock market decline. It might also extend the time you receive subsidized health insurance while you’re an active employee, thus saving you money, since health insurance premiums often increase substantially in retirement.
Of course, if your company is planning to or has already laid you off or put you on furlough, you might not have a choice when it comes to extending the time you work. In this case, any income you can earn would be a help. See if you can negotiate or seek part-time work at your current job or another place of employment instead of being completely furloughed, or try asked to be furloughed instead of laid off so you can extend your health insurance.
If you can work part time for even a few months or years, you’ll still realize increases in your eventual retirement income, even if you earn just enough to cover your living expenses while you delay Social Security and drawing down your retirement savings.
Decision #2: Decide when to start Social Security benefits
Social Security provides the most protection against common retirement risks, compared to any other retirement income generator. It protects against these three risks:
- Longevity risk, since it’s paid for the rest of your life, no matter how long you live
- Investment risk, since your income won’t decrease if the stock market crashes
- Inflation risk, since your benefits receive an annual cost-of-living adjustment
Middle-income retirees who optimize their Social Security benefits will risk-protect a large portion of their total retirement income—often two-thirds to three-quarters or more.
Risk protection is looking pretty darn good in today’s scary investment climate!
Because of all the above advantages, it makes sense for most people to delay starting their benefits as long as possible, since you receive a permanent increase in your monthly income for each month that you delay the start of benefits. However, there’s no advantage to delaying your benefits beyond age 70, since at that age, you’ll stop receiving increases for delaying the start of your benefits.
If you’re eligible to start early retirement benefits from Social Security and you’ve been laid off, it might be a natural reaction to start your Social Security benefits right away to help make ends meet. However, in this case, you’d be giving up the significant lifetime financial advantages that come with delaying the start of your benefits. Explore other alternatives first, such as working part time if possible or using your retirement savings to fund a Social Security bridge payment.
Decision #3: Make careful decisions if you participate in a pension plan
If you’re lucky enough to earn a significant benefit from a traditional pension plan or cash balance plan, good for you! But if your employer offers you the option to take your benefits in one lump sum instead of the monthly pension check, resist the temptation. By taking the lump sum, you’d trade a retirement income that’s protected against longevity risk and investment risk for an investment account that isn’t guaranteed to last for life and isn’t protected against investment losses.
Remember: Risk protection is looking pretty good nowadays!
You’ll feel better during these uncertain times if you develop solid plans to survive the next few years, and the next 30 years. Take care, and please stay safe!