If you've been planning on retiring soon, recent events may have you rethinking your choice. The coronavirus crisis has led to some significant declines in the stock market that may have affected your retirement account balance. Millions of Americans have also been left unemployed or with reduced income.
For some Americans, delaying retirement simply won't be an option, either because you've already set your plans in motion or because your job was affected by the crisis and you can't find a different one. But if you have the choice to wait a little longer, should you do so in light of current economic uncertainty?
To help you decide, ask yourself these four key questions.
1. Do you have liquid funds outside the market?
The stock market has been very volatile lately, to say the least. The recent swings are an important reminder to would-be retirees that you shouldn't have money invested that you'll need to spend within the next five years.
If you're retiring, you'll need to start relying on your savings to support you. If the entirety of your money is invested, you're violating that basic principle and could find yourself forced to sell investments at a loss because you need the money.
Unless you have several years of living expenses somewhere safe so you can easily draw from that pool of money while waiting out market downturns, you run the risk of your retirement account balance dipping too low if you're forced to sell losing investments in a bear market.
If you can, it makes sense to wait and start bulking up your high-yield savings account so you have readily available funds to live off, to leave your investment accounts alone for a while.
2. How will your health insurance coverage change?
Millions of pre-retirees get healthcare coverage from employers, and retiring could mean giving up your current policy.
Sure, you're entitled to keep your coverage under COBRA for 18 months. But if your employer was subsidizing premiums and stops when you retire, maintaining your insurance could become prohibitively expensive.
If you're 65, you'll likely qualify for Medicare, but this may not be as comprehensive as the coverage you had from your employer. And you'll probably want to buy a supplementary policy to limit out-of-pocket costs. This is an expense you have to plan for.
If you aren't yet Medicare-eligible, retirement does entitle you to a special enrollment period on the Obamacare insurance marketplace. And, depending on your income, you may be entitled to subsidies to help you buy insurance. But again, policies available to individuals are often far less generous in coverage than employer plans.
During an unprecedented public health crisis, you need to fully understand what giving up your job will mean for your insurance costs and coverage. If you aren't happy with the options available to you post-employment, it may make sense to stay at your job a little longer.
3. How much money will your investment accounts produce?
Social Security benefits are designed to replace only about 40% of pre-retirement income, which is far below what experts say you'll need to maintain your standard of living.
As mentioned above, you'll probably have to rely on retirement accounts to provide the rest of your money (especially since you want to leave your liquid savings alone when possible in case you need them).
To make sure you don't run your retirement accounts dry, you'll have to decide on a safe withdrawal rate. Traditionally, many retirees withdrew 4% of their account balance in year one and made annual increases based on inflation (a strategy dubbed the 4% rule). But changing economic conditions now have many experts recommending sticking closer to about 3% in the early years of retirement.
If your investment accounts have taken a hit, 3% of the balance (or even 4% of it) may not provide the money you need. Consider what you'd feel comfortable withdrawing and compare that to projected spending. If there's a clear shortfall, plan to work for a little longer to build your account balance.
4. Will you potentially want to return to work?
If you're kicking around the idea of retiring but aren't sure you're ready to exit the workforce permanently, now probably isn't a good time to leave your job.
If you have steady work, you're very lucky; millions have become unemployed. It's unclear how long it could take the economy to recover from the COVID-19 pandemic, and jobs might be few and far between if you decide retirement isn't for you and you want to get back into the workforce.
Make sure you're truly ready to retire during economic uncertainty
If it's too late for you to change your retirement plans, hopefully the coronavirus crisis won't change your financial situation too much. You can always aim to cut spending and limit investment account withdrawals to provide time for your portfolio to recover if you've taken a hit recently.
But if you can change your plans, consider the answers to these four questions carefully so you can decide what's right for you. You may decide moving forward makes sense, but there's also a good chance that you'll discover working a little longer is the best move for your long-term financial security. It's best to find that out before you leave work.