COVID-19 has shut down much of America, devastating the economy. Retirees, who are out of the workforce already, aren't among the millions left unemployed by the great lockdown -- but that doesn't mean coronavirus won't affect their finances.
In fact, here are four ways the fallout could affect seniors -- some of which could cause financial pain if the right precautions aren't taken.
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1. Most retirees got a big stimulus check
Retirees, like other Americans, are eligible for coronavirus payments.
Seniors are in line for the full $1,200 per adult and $500 per dependent child -- as long as they aren't claimed as dependents by anyone else and their income doesn't exceed $75,000 for singles or $150,000 for married couples filing jointly. For those with incomes above these limits, payments decrease by $5 for each excess $100 in earnings.
These stimulus checks are a major benefit, effectively giving a huge annual raise to Social Security recipients who receive an average benefit of just $1,503 per month.
If you get this windfall, using the money wisely is smart. Depending on your financial situation, that could mean bulking up an emergency fund, investing it, or living on it instead of selling investments that have lost value.
2. Required minimum distributions have been suspended
Speaking of investments, there's some more good news for seniors: Required minimum distributions have been suspended.
RMD rules normally mandate annual withdrawals from 401(k)s and other tax-advantaged retirement accounts after you reach the age of 72 (or 70 1/2 if you hit that age before Jan. 1, 2020). To make them, it's often necessary to sell investments. And you have to pay taxes on withdrawn funds.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows you to skip RMDs this year without facing the normal 50% penalty you'd owe if you didn't withdraw the mandated minimum. That means you can leave your money in the market if you want, avoiding a tax bill and enabling you to take advantage of the recovery likely to occur when the coronavirus chaos ends.
3. Stock market volatility could affect your investment account balance
The stock market has had a bumpy few weeks, and all this volatility could have a big effect. While suspended RMDs mean you don't have to take money out, you may still need to if you're reliant on investment income. If so, it's important to adjust to your changed reality if your account balance has fallen. This could mean living on less.
Many retirees follow a percentage-based rule for determining a safe withdrawal rate (such as the 4% rule). If you do, your withdrawals should be smaller automatically if your balance has dropped, so you'll need to modify your budget and make some spending cuts. If you don't follow a percentage-based rule, take a careful look at your strategy and modify your withdrawal rate if needed so you don't end up with too little in your later years.
4. A Social Security COLA may be less likely next year
COVID-19 could affect your income in other ways too. Specifically, it could mean you won't get much of a Social Security raise next year -- if you get one at all.
In most years, Social Security beneficiaries get a Cost of Living Adjustment. This happens if the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) shows prices rising year over year. Falling oil prices and the possibility of deflation resulting from a coronavirus recession could mean no raise is forthcoming in 2021, or that any COLA is a small one.
If you get a smaller raise than planned, you may need to tighten your belt further -- especially if it means your benefits lose buying power. Saving your stimulus money could give you extra cash, or you can rework your budget by imposing tighter limits on discretionary spending.
Be prepared for the effects COVID-19 could have on your finances
Don't assume you're immune from the financial consequences of coronavirus just because you're out of the workforce. Instead, be prepared that your income could be lower due to a decline in your investment balance or no Social Security raise.
By saving your stimulus check -- if you can -- and making smart decisions about RMDs, you can hopefully limit the economic fallout of COVID-19 and make sure your financial situation remains healthy.
