The coronavirus pandemic has likely attacked your finances on several fronts. Your retirement portfolio may be worth less, you may have lost your job, and you may be turning to credit cards to keep the bills paid. Any one of those outcomes individually can affect your retirement plan for the worse -- but all of them together can be disastrous.
Retirement plan disasters, however, can be mitigated. Try the following four strategies to minimize the long-term effects the coronavirus pandemic has on your finances.
1. Delay retirement
If you have a way to keep making money, it's a solid strategy to delay your retirement temporarily. Ideally, you still have a job. But if that's gone by the wayside, could you pick up consulting or project work that can be done remotely?
Reach out to all of your contacts right now and let them know you're on the market. If possible, offer friends, family, and acquaintances some incentive for making appropriate introductions. You might return the favor or, depending on your area of expertise, give away some of your services.
When you postpone retirement and hold off claiming Social Security, your monthly Social Security benefit increases. This works in two phases.
- Your monthly benefit will increase by up to 42% if you delay your claim from age 62 until your Full Retirement Age (FRA). FRA is based on your birth year, and it's between the ages of 66 and 67.
- Once you reach FRA, your benefit continues to increase by two-thirds of 1% for each month you put off your claim. These increases stop when you reach the age of 69.
A higher monthly Social Security check reduces the amount you have to pull from your savings each month. And that means you can keep more of your money invested and producing returns over time.
2. Slash spending
Budgeting discipline will be critical as you work through these tough times. If you're newly unemployed, try slashing your spending enough to survive on unemployment alone. That will help you keep credit card spending to a minimum until you can get back to work.
You'll have some temporary help in this, thanks to the CARES Act. This federal stimulus package added a $600 weekly supplement to your state's standard benefits. You'll see this supplement in your unemployment income through July 31.
In a perfect world, you'd live on less than the supplemented unemployment income and stash the excess in your emergency fund. That way, you'd have extra cash reserves to help out once that weekly supplement expires.
Even if you're still working, spending less now protects your retirement timeline by supporting higher savings and emergency fund contributions. If you're not sure where to begin cutting back, start this way:
- Review credit card and bank statements for the last three months.
- Cancel any monthly or quarterly subscriptions that aren't critical. For any you don't want to cancel, call those service providers and ask for better rates.
- Check with your auto and home insurers to see if they have coronavirus relief programs. Many insurers are offering temporary premium reductions and credits.
- Get serious about lowering your grocery spend. Cut coupons, buy generic, cook simpler meals, and give up all specialty beverages.
- Designate one day during the week for discretionary purchases. Throughout the rest of the week, keep a running list of items you wanted to buy. On your designated day, review your list and decide what's really necessary. Chances are, the urge to buy will have faded and you can make clear-headed spending decisions.
3. Diversify your income
Diversifying your income isn't an easy thing to do, but the rewards are plenty. Any stream of income you build now allows you to leave more money in your retirement account later. Here are six ideas to get your creative juices flowing.
- Start a blog or write e-books.
- Make unique jewelry out of low-cost materials and sell it on Etsy.
- Sell your old clothes. And once the economy reopens, thrift shop for bargains you can resell at a higher price online.
- Start tutoring kids online.
- Pick up gig work as a virtual assistant. Look for opportunities on Indeed or SimplyHired.
- If you can afford it, try low-cost real estate investing on crowdfunding platforms like Fundrise.
4. Manage your risk
On March 23, the S&P 500 was down about 30% for the year. By the second half of May, the large cap index had rebounded to show a year-to-date loss of roughly 8%. Your portfolio has probably rebounded, as well, which means you could make some adjustments without locking in huge losses.
Review the composition of your investments across stocks, bonds, and cash. The Rule of 110 can tell you if that composition is appropriate for your age. The underlying idea is your investment style should evolve as you get older from chasing growth to preserving your capital. You can do that by reducing your stock holdings, which are more volatile than fixed income and cash.
To use the Rule of 110, subtract your age from 110 -- the result is the percentage of stocks you should keep in your portfolio. If you're 60, for example, you'd hold 50% stocks and the remainder in fixed income investments and cash.
Rise to these challenging times
These are challenging times, for sure. You'll have to make hard decisions, but remember what you're working toward -- a comfortable, carefree retirement. If you can do the work to spend less, make more, and manage risk now, you have a better shot at the retirement you want later.