Savings: Not a good time to retire
“The coronavirus is tempting those of a certain age to stop working,” said Alexis Leondis in Bloomberg.com. Many older Americans have “grown accustomed to staying home and are worried about commuting and returning to crowded workspaces.” So should you just pull the trigger now? “For most Americans, even wealthy ones, the answer is clear: Don’t do it.” There’s no way to perfectly time the market for retirement, but the current volatility means “former assumptions about stock and bond returns may no longer be valid.” And unfortunately, if the numbers don’t work out, in an economy racked with layoffs “it’ll be harder than ever to change your mind.” On the other hand, now is a good time to negotiate a part-time schedule, perhaps one that has you “continuing to work from home after colleagues have returned to the office.”
Experts often estimate you’ll “need on average 70 percent of your pre-retirement income to live comfortably after exiting the workforce,” said Alessandra Malito in MarketWatch.com. The traditional rule of thumb on withdrawals is that you can expect 4 percent a year, “so someone with $1 million in savings would withdraw $40,000 a year.” You might think you have enough in savings to sustain that. But the current crisis “has the potential to upend that model.” Low interest rates introduce “problems galore,” said Jeff Sommer in The New York Times. It’s a “boon when you’re buying a house, refinancing a mortgage, leasing a car, or paying off student debt,” but it also means that savers have to live on less. Long-term government bonds that paid 6 percent 20 years ago are now yielding less than 1.3 percent, meaning “if you were to retire today and stash your $1 million nest egg” in 30-year Treasuries, “you could only count on an income stream of less than $13,000 per year.” Interest rates are expected to remain low—or could even dip into negative territory. If that happens, buying a security would mean you’re paying the government to take your money.
This uncertainty about returns makes it especially dangerous to take advantage of one of the emergency provisions in the economic stimulus package, said Liz Weston in the Los Angeles Times. If you’ve been affected by Covid-19, you can get “emergency access” to your retirement funds, taking out up to $100,000 without penalty and paying the taxes on the withdrawal over three years. But even if you need the money badly, “consider other avenues first.” You have three years to return the funds to your retirement accounts, but most people who make these withdrawals won’t, and will lose out on future “taxdeferred returns.” And even spread over three years, the taxes on your withdrawal will be substantial.