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Retirement Planning in a Pandemic

Key issues financial planners need to consider as COVID-19 permanently impacts clients nearing retirement.

The pandemic is reshaping many parts of the U.S. economy, and financial planning is no exception.

There’s plenty of buzz about heightened demand for planning in uncertain times and how practitioners will operate in the coronavirus-induced shift to all-virtual meetings.

But how about the meat-and-potatoes job of advising clients on their retirement?

A new focus is likely in several areas, including unexpected early retirement, health care costs, emergency financial cushions and managing assets in a persistent low-yield environment.

“The pandemic will have lasting implications for how people think about creating their financial and investment plans,” says Christine Benz, director of personal finance for Morningstar, who wrote about the implications for how planners will work with clients going forward in a recent article.

Here’s a look at some key issues Benz and others who watch the planning field are pondering.

For a longer discussion of the pandemic’s impact on planning, listen to contributor Mark Miller’s recent podcast conversation with Christine Benz of Morningstar.

Early Retirement

Premature retirement will pose urgent challenges for many clients. Growing evidence suggests that the pandemic will disrupt timelines for millions of Americans who are getting close to retirement.

For the first time in 50 years, joblessness in a recession is higher for workers over age 55 than for their younger counterparts, due to the health risks associated with COVID-19. Finding new work always takes longer for jobless older workers. Many who now face prolonged joblessness due to the pandemic likely now face de facto early retirement.

The impact should bolster the demand for planners, she thinks.

“It’s important to get a second opinion on the viability of your portfolio to support an early retirement, so even dedicated do-it-yourself investors should be sitting down with a certified financial planner and really crunching the numbers and stress testing their retirement plans.”

Benz urges planners to focus on the financial viability of early retirement for clients, with a particular focus on how to source cash flows on a year-to-year basis.

Planners should focus on Social Security as part of these exercises, since it will be such a critical source of income. “One of the key things that planners should want to think about is tying in Social Security claiming strategies with your investment assets, and making smart decisions about where you go for funds,” says Steve Vernon, a retirement planning expert and author of Don’t Go Broke in Retirement—A Simple Plan to Build Lifetime Retirement Income.

Working with clients to increase monthly benefits through delayed claiming will be especially challenging, he adds. “I’d look at every opportunity to find money to live on. I realize that can be tough, but some kind of part time work is one possibility,” he adds. “Making sure you’re getting all the unemployment benefits you have coming also can be important.”

Vernon also thinks it can make sense to draw down IRA or 401(k) assets to meet living expenses while delaying a Social Security claim. “That's a better choice than starting Social Security early.”

Health Care Costs

It’s a simple fact that older people utilize more health care. Forecasting the future of retiree health care costs is especially difficult right now due to the volatile climate, but it’s a safe bet that health care costs will remain one of the most important categories of spending for your clients.

Unfortunately, when older workers step outside the protected climate of employer-sponsored health insurance they are forced to navigate a bewildering array of insurance marketplaces for coverage.

Clients who lose employer health coverage due to job loss will rely on the Affordable Care Act exchanges, assuming the law survives the legal challenge now before the U.S. Supreme Court. It’s also possible that the eligibility age for Medicare could fall, depending on the political landscape next year.

Even the Medicare system has been heavily privatized, requiring enrollees to sort through marketplace choices for insurance covering prescription drugs, Medicare Advantage plans and Medigap supplemental policies.

Help your clients by making sure they evaluate their Medicare coverage annually during the open enrollment period that runs from Oct. 15 to Dec. 7. Coverage for Part D prescription drug or Advantage plans should be evaluated annually, because the plan your client uses now might change what is covered next year. Advantage plans can—and do—drop health care providers from their networks.

Yet, human behavior being what it is, many Medicare enrollees don’t tackle this chore. A recent study by the Kaiser Family Foundation found that 57% of Medicare enrollees do not review or compare options annually—and that group includes 24% who never compare plans and 22% of beneficiaries who rarely do. Kaiser found that two-thirds of beneficiaries ages 85 and older do not review coverage options annually, compared with 56% of beneficiaries ages 65 to 74. Another disturbing finding: More enrollees in fair or poor health don’t review coverage options annually compared with individuals in good, very good or excellent health (61% versus 56%).

For clients with access to health savings accounts, Benz suggests that advisors put greater emphasis on putting them to their best use where appropriate. For high-net-worth clients, that means using HSAs as long-term tax-advantaged saving vehicles, and using other resources to fund out-of-pocket health care expenses.

“When we look at data on how people who are covered by high deductible insurance plans fund those costs, what we see are the health savings accounts, which are allowable, alongside high deductible plans are really underutilized,” she says.

Low Yields

Yields on fixed income investments have been terrible for much of the past decade—and now bonds are generating barely enough to cover inflation, so this is a reality that will impact retiree portfolios and drawdown strategies for the foreseeable future.

“It really calls into question what will be a sustainable retirement portfolio withdrawal rate,” Benz says. “We’ve never seen this specific confluence of events where we have high valuations on the stock market, coinciding with very low yields on safe securities, so new retirees are coming into a constrained environment from the standpoint of what their portfolios might earn.”

Dynamic draw-down plans will be more important than ever, rather than rigid adherence to earlier formulas, such as the 4% rule, she adds.

Persistent low bond yields also point to the need for higher rates of saving, adds Ryan Barrows, head of the RIA channel at Vanguard Financial Advisor Services. “We've always encouraged clients to think about bonds as ballast for their  portfolios, as opposed to the sort of true yield portion—that said, we believe the returns for the next 10 years will be significantly lower than the returns for the past 10 years. So that's something everyone needs to be planning for, and people who aren’t retired yet probably need to be saving more than they would have a decade or two ago.”

Emergency Reserves

Our financial system’s drumbeat of messaging about the importance of saving for retirement sometimes overshadows more fundamental household financial goals, such as debt management and maintaining an adequate emergency savings cushion. The pandemic has put a bright spotlight on the emergency savings question—the CARES Act passed in March is a tacit admission of this, since the law marks a profound short-term liberalization of rules for tapping into tax-deferred accounts.

Advisors should help clients set goals for emergency reserves. A Pew Research Center survey conducted in April found that just 23% of lower-income households said they had sufficient funds to tide them over a three-month job loss, but that also was true for more than half of middle-income and 25% of higher-income households.

“This is something we've seen in previous financial crises, and we’re seeing it this time too—and it’s a big problem,” Benz says. “It’s especially problematic for people who have jobs that are inherently lumpy—they’re not salaried, and they’re working in the gig economy or as contractors—they need to have more in liquid reserves as a matter of course.”

A nonretirement account is the easiest repository for short-term cash needs, but Benz notes that Roth IRAs can serve as a multitasking vehicle, since contributions (not investment returns) can be withdrawn without taxes or penalties at any time. HSAs can be used to meet health care expenses and nonhealth expenses under certain circumstances, she adds.


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