Here are the new rules for post-pandemic retirement
Your retirement will be unique to you, but it often helps to have some rules of thumb as a guideline.
Over time it may make sense to revisit those rules. For example, experts used to talk about retirement being based on a threelegged stool: a pension, Social Security and personal savings. Such a scenario isn’t applicable for most people these days, or at least not those working for a private-sector company.
Fewer employees have pensions that guarantee lifetime monthly payouts. There’s a lot of uncertainty about the financial stability of Social Security. This means some of the advice that worked in years past won’t apply to future retirees.
And now with the coronavirus pandemic throwing tens of millions of Americans out of work and causing extraordinary stock market volatility, it’s time to give a makeover to some retirement rules of thumb.
Make retirement savings your No. 1 priority.
Make paying off debt, especially highinterest debt, a priority.
The longer you wait to get rid of debt, the more likely it will hinder your retirement savings goal. You’ll find that so much of your income is devoted to paying interest on your debts that you feel you can’t afford to save.
This makes paying off debt just as important as saving for retirement.
If you’ve got high-interest credit card debt, you need to make it a priority to get out from under this liability. Student loans dragged out over several decades can grow and become burdensome to your budget.
The longer you have until retirement, the more you should focus on paying down debt. If you’re looking at retiring at 65, and you’re in your 20s, 30s, and even 40s, you can afford to slow down saving for retirement to get rid of liabilities, especially if it’s high-interest debt.
There’s at least one caveat to this rule of thumb.
If your employer offers to match your retirement savings up to a designated percentage, try to save enough to contribute enough to receive the match, said Marguerita Cheng, a certified financial planner based in Gaithersburg, Md.
The most popular match formula among companies that have a 401(k) is a 100% match up to the first 3% that the employee contributes; then a 50% match for the next 2% contributed, according to Fidelity Investments, one of the country’s largest administrators of workplace retirement accounts. About 40% of 401(k) plans use this formula, according to Fidelity.
Once the debt is gone, you can contribute substantially more to your workplace retirement account or an IRA.
“I like to strategically manage that situation so I am not a proponent of tossing all accumulated savings onto the debt, leaving the coffers bare,” Burley said. “That is not a safe position to be in. I always let clients know this is short-term pain to reap long-term rewards. A timeline is another ray of hope I like to give. We look at all the debt then I give an aggressive recommendation to pay off the debt by a certain date so they know they’ll be back on track after that date.”
For instance, Burley says he might recommend taking $500 a month to pay off $6,000 in debt, then revisit the situation after the debt has been paid off to reassess the financial picture and plan the next steps such as allocating funds to build up savings and retirement accounts.
Your home is a great retirement investment.
Your home is not a great retirement plan.
Your home is an asset but it is illiquid, meaning you can’t quickly access the equity should you need cash. Yet, for most Americans,
their home is their biggest asset.
“Just like the stock market, real estate returns vary widely,” said Carolyn McClanahan, a physician turned certified financial planner who founded the fee-only Life Planning Partners based in Jacksonville.
“We may have years of real estate growth and then significant pullbacks and long-term recessions in the real estate market,” McClanahan said. “When you need money, you will be hurt if you have to sell your home in a down market. And unlike stocks, your home is not very liquid, so it may take years to sell.”
Or, if you are forced to price your home to sell, you could take a significant loss.
“This is another rule that should have never been taught,” Burley said. “Owning a home is very, very important but it is not a retirement investment. Ask those who suffered losses on their properties from 2008 to 2009 and are still underwater or at break-even while the stock market has quadrupled in value since that crash. Your home is just that, a home. It is an ‘illiquid asset.’ You can’t cash in your front door or some shingles off your roof if you need money from your house.”
There is one way to tap the cash in your home. If seniors have substantial equity in their homes, they can take out a reverse mortgage.
Unlike a traditional mortgage, with this loan product, you don’t have to make monthly payments. With a reverse mortgage, borrowers don’t pay back their loans until they move, sell or die. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.
To qualify for a reverse mortgage, you have to be 62 or older. You have to have paid off your mortgage or paid down a considerable amount so you have equity to tap. Your home must be your principal residence. Most important, borrowers have to maintain the home and pay property taxes and homeowner’s insurance.
Many consumer advocates warn about the downside of using a reverse mortgage as a source of retirement funds. If someone is using the money from a reverse mortgage to cover a significant shortfall in monthly expenses, they may quickly exhaust this source of funds. There are pros and cons to a reverse mortgage. Despite commercials touting just the advantages, the complexity and cost of this financial product call for an abundance of caution. Don’t overlook the disadvantages.
You’ll only need between 70% and 80% of your preretirement income.
You may need to replace 100% of your preretirement income.
Don’t underestimate your retirement spending.
“People think their expenses will go down during retirement because they don’t commute to work and do myriad other things associated with that period of time,” Burley said. “But other expenses often take the place of the supposed savings from retiring. Many people still have a mortgage going into retirement, home and vehicle upkeep, giving to or spending money on grandchildren and possibly other relatives. It is better to plan for 100% of what you were living on before retirement. This is the more conservative approach. It won’t hurt to have more saved than needed, but it’s a pickle the other way around.”
Retirement has three phases: the go-go years, the slow-go years and the no-go years, McClanahan says.
“During early retirement, many people spend as much if not more than what they were spending preretirement doing all the travel and making transitions they didn’t have the time for preretirement,” she said.
The spread of COVID-19 has grounded many travel plans of course, but eventually, things will return to normal. In fact, there may be a lot of demand to get away.
“In the slow-go years, as they get bored with travel and settle down, spending decreases,” McClanahan said. “In the no-go years, healthcare costs can skyrocket, and they need to be