COVID-19 has changed the way we interact with one another, how we work, how we spend our free time, and even how we spend our money. But one thing it hasn't changed for a lot of people is retirement plans. Seven in 10 Americans surveyed by the Alliance for Lifetime Income reported the pandemic has had no impact on their retirement plans thus far.
With everything else going on right now, it's understandable that altering your retirement plan isn't top of mind, but it's something everyone should do when they get a chance, especially if they have been unable to save for retirement recently or have taken early withdrawals from their retirement accounts to help them these difficult times. That changes things. You need a new retirement plan to ensure you don't end up way behind on savings. Here are a few tips on how to do that.
Take stock of what's changed
The pandemic is affecting people's retirement plans in several ways. Retirement portfolios plummeted as the pandemic spread across the country, and with millions of Americans now out of work and the country looking at a recession, it will probably take some time for retirement accounts to get back to where they were. If your retirement plan had counted on a high annual rate of return, you may have to adjust your expectations, at least for the time being. That means contributing more of your own money to make up for the lower investment returns you're getting right now.
Then, we have millions of Americans struggling to save for retirement right now without their normal source of income. Some of these workers have even had to tap their retirement savings to cover their expenses. These actions set people further behind on retirement savings, and they'll have to either step up their savings rate in the future or delay their retirement to avoid running out of money prematurely.
Many companies are feeling the strain of COVID-19 as well, and some of them have had to do away with 401(k) matching, at least temporarily. This shifts the full burden of retirement savings onto workers and makes an already challenging task even more difficult.
By understanding the factors affecting your retirement plan right now, you can get a better sense of the challenges ahead and how you may need to alter your plan.
Examine ways to pick up the slack
Do your retirement calculations again to estimate how much you must save to have enough money to retire at your original planned retirement date. If you're not currently able to save for retirement, it might make more sense to delay creating a new retirement plan until you are able to begin saving again.
Look over your estimated annual retirement expenses and your estimated life expectancy and decide if you would like to alter either of these things. Don't forget to add 3% to your living expenses annually to account for inflation. If you don't make any changes, your savings goal should still be the same as it was before. The difference comes in how you'll save.
It's always smart to assume a 5% or 6% annual rate of return on your investments. It's possible you may see higher returns in some years, but the lower estimate will protect your retirement plan against derailment if the economy hits another rough patch or two between now and your retirement. If you are nearing retirement and find you've managed to save more than you'd expected, you can always consider retiring early. But you don't want to be too optimistic about your investment growth only to find you were mistaken when it's time to retire.
A retirement calculator and the above information can help you figure out how much you need to save monthly in order to have enough to live comfortably. This number might be a lot higher than what you were budgeting for before the pandemic, especially if your company cut your 401(k) match or you've taken a withdrawal from your retirement account.
If you're not able to save this amount every month, consider delaying your retirement by a few months or years. This gives your investments more time to grow before you must withdraw them and it also gives you more time to save for retirement while reducing the number of years of savings you need.
You could also try cutting some expenses in the present to free up more cash, like canceling unused subscriptions, or rethinking your plans for retirement. For example, you could try scaling back your retirement travel plans to reduce your retirement costs. Explore a few different options until you find a new plan that works for your budget.
Finally, go over your retirement plan at least once per year, even if you haven't experienced any major life changes since then. If you realize you are a little behind where you want to be, these small annual corrections can help you get back on track without causing too much stress or putting an even bigger strain on your budget.