Few decisions will impact your clients’ financial plan as much as when they retire.
Every additional year of work past age 62 produces income that can facilitate a delayed filing for Social Security. Each of those years can translate to more saving and investing—and fewer years living on those savings. They may also provide more years of employer-subsidized health insurance and lower lifetime health care expenses.
Most people think of age 65 as the traditional point for hanging it up, but actual retirement ages are all over the map, judging by Social Security claiming data. In 2018, 35% of the people who claimed benefits were 62; 25% were full retirement age (66); just 13% claimed at age 67 or later. More affluent people—who are less likely to work in physically demanding occupations—are more likely to work well past that age.
Public opinion polls show that people expect to work longer in response to the recession—a recent survey by TD Ameritrade found that 37% of baby boomers and 39% of Gen Xers said they had delayed retirement or were considering doing so in response to the pandemic.
But whether they’ll be able to pull that off is another matter entirely. Even before the pandemic, numerous research studies found that roughly half of workers retired earlier than planned due to ill health, family responsibilities or job loss. All of those factors will be on steroids for the foreseeable future as the nation struggles to get the coronavirus under control and dig out from a severe economic slump.
Against that backdrop, it’s easy to see that the pandemic will scramble retirement timelines for millions of Americans. The economic uncertainty adds new elements of risk just as great as the risk your near-retirement clients face in the stock market—perhaps greater.
And the fact that this recession is induced by a health crisis adds a unique dimension for older workers. In a typical recession, the unemployment rate for older workers runs a bit lower than the general jobless rate, mainly due to their longer tenure and job stability. But the jobless rate for older workers actually has been running higher in this recession, especially among those age 65 and older.
Guidance from the Centers for Disease Control and Prevention states that adults over 65 are at higher risk of severe illness from the coronavirus than others. That complicates the prospect of a return to the workplace.
Evidence already is surfacing that the pandemic is producing a wave of early retirements. A report published recently by three economists found that among people who had left the labor force through early April, 60% said they were retired, up from 53% in January, before the pandemic. The largest increase was among people over 65, but nearly half of this group were 50 to 65.
Data from the Bureau of Labor Statistics shows that the highest jobless rates for workers over age 55 are in leisure and hospitality; transportation; education; and wholesale trade. Older professional services and health care workers also are experiencing very high jobless rates. So far, finance, government and information are doing better.
The Congressional Budget Office is projecting that annual real growth of gross domestic product for this decade will be 3.4% lower, on average, than projected in January. The annual unemployment rate, which was projected to average 4.2%, is now projected to average 6.1%.
I’m especially concerned about small businesses. The New York Times reported recently on a wave of small business closures that began in March, and many experts think that’s just a start. A poll of consultants to workplace plans earlier this year by the National Association of Plan Advisors concluded that over 200,000 small-business plans are at risk of termination from the pandemic.
Emergency response
If you have clients who already have lost jobs, this is a good time to revisit earlier strategies.
The question on the table will be: Where do I find income to live on now? This should lead to a conversation about the interplay of Social Security and retirement savings.
Conventional pre-pandemic wisdom was to delay filing as long as possible to boost annual income. To review the bidding, filing at full retirement age (FRA) gets you 100% of your earned benefit; filing earlier than that age will reduce benefits as much as 6.7% annually, depending on when you claim. For example, filing at 62 would yield only 72% of the full benefit. Filing after FRA yields an 8% boost for every 12 months of delay up to age 70.
That’s a strong argument for delay—especially considering the possible tax efficiencies associated with drawing down tax-deferred savings in the early years of retirement when tax brackets are lower. The argument is even stronger considering the current low brackets under the Tax Cuts and Jobs Act, which expire in 2025.
But pandemic risk could give some clients reason to file earlier than later if their savings are modest and might be needed for emergency purposes—either for themselves or family members who may also face job loss and economic stress in the next few years.
Plan retrofits
The current outlook also should be an opportunity to revisit other aspects of client plans, including.
- Equity exposure? Forecasting the market is a fool’s errand and I never indulge. But as Allan Roth, a CFP and head of Wealth Logic in Colorado Springs, Colo., pointed out in a recent edition of my podcast, “Most of the clients who come to me have already won the game, or they’re winning it—so their need to take risk is low. Dying the richest person in the graveyard is not the goal.”
- Health insurance strategies. A recent study found that 5.4 million American workers lost their health insurance just between February and May. Medicare eligibility still starts at age 65, so older clients who lose jobs below that age will need to navigate their options under the Affordable Care Act—assuming that law withstands the latest assault in the courts. You can add value by providing help figuring out ACA coverage and also for Medicare, which presents unfortunately complex consumer choices.
- Pare debt. Debt burdens have been rising among near retirees, especially boomers born from 1951 to 1960. That can squeeze standards of living and make your clients more financially fragile.
- Wherever possible, work with clients to pare or eliminate debt, especially high-rate credit card or student loans. It’s also a good time to consider accelerating or getting rid of mortgages, considering the gap between safe rates of returns on CDs and typical mortgage rates.