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Close to retirement? Prepare for the transition in an uncertain economy

Individuals 05.05.2020 4 MIN READ


Retirement is a big transition in normal times. With the COVID-19 crisis impacting retirement savings, employees who are close to retiring may need to rethink their plans. Here’s a primer to help ease the transition to retirement.

The prospect of retirement can evoke mixed feelings. It can mean more leisure time to spend on the things you most enjoy, but it also means changes to your traditional income stream. Regardless, approaching retirement given the COVID-19 pandemic and the current economic situation, can be intimidating.

Minimize the COVID-19 impact on your upcoming retirement

While market volatility has impacted most investors, those retiring in the near future are probably most concerned about recent developments. They may not have time on their side for the market to correct itself and recoup any lost value their investment and retirement savings accounts experienced. If you belong to this group, there are still things you can do to set yourself up for a more secure retirement.

  1. Delay retirement if possible. This could be the most important thing you can do right now. Delaying retirement not only buys you more time to build your retirement savings, it helps you maintain your current lifestyle and income levels. Another benefit of delaying retirement could potentially be a larger retirement benefit from Social Security.
  2. Don’t touch that 401(k). Not just yet. If delaying retirement is not an option, the next best option may be to keep your accounts invested until their value rebounds. If your finances permit, try and leave your 401(k) funds alone for a while. Once the market regains some of the momentum it’s lost due to the coronavirus crisis, the investments in your 401(k) account will potentially grow and add more muscle to your overall retirement fund.
  3. Downsize. Consider scaling down your day-to-day expenses by making changes in your lifestyle and living more frugally than you are currently used to. Every penny saved is potentially a penny added to your retirement funds. Have debt that you’re still repaying? Consider paying down your debt before you retire, to alleviate pressure from your post-retirement income. If you own the house you live in, consider selling it and moving into a less expensive home, and use the net proceeds from the sale to bolster your retirement savings or paying off existing debts.
  4. Create a budget and stick to it. Living by a budget is great advice at any life stage. But it’s even more relevant at a time when you know your income sources are going to be significantly reduced or become sporadic. Here’s a useful resource on how to get started with budgeting.
  5. Consider starting Social Security retirement benefits. Now may be the time to start your Social Security retirement benefit, especially if you’ve reached full-retirement age (between 66 and 67 years, depending on your year of birth). This source of income is fixed and will not vary with volatile markets, potentially making it the ideal choice in these turbulent times. Remember, starting your benefit before your full-retirement age will result in a permanent reduction to your benefit for your lifetime.
  6. Get a part-time job. Consider a part-time job to supplement your retirement savings, given these challenging times. Here’s a useful resource for part-time jobs that can keep some income coming in. Keep staying healthy and safe during the COVID-19 crisis your number one priority even as you consider part-time jobs. Refer to your state’s coronavirus safety guidelines before you start applying.

How much do you need to retire?

While there’s no one-size-fits-all when it comes to retirement income, studies have shown that you will likely need to be able to replace 80-100% of your pre-retirement income annually if you want to maintain a comparable lifestyle after you retire. A 2019 study of 401(k) participants showed that $1.7 million is the size of total retirement savings they thought they’d need after they stopped working full-time.1

If you have access to Ayco, visit Ayco360, to figure out how much you’ll need using our retirement calculator tool.

Note—The chart above is for illustration only, based on a level annual contribution rate and the following assumptions: 90% pre-retirement income replacement, 13%–34% of income need replaced by Social Security, depending on income level, 7% investment return prior to retirement and 6.4% investment return in retirement, 3.25% inflation, age 65 retirement and 25-year life expectancy in retirement, and no out of ordinary expenses. The ranges listed are based on an analysis of total compensation ranging from $80,000 to $200,000. If any assumptions prove not to be true, results may vary substantially. The amount of pre-retirement income required will vary by each individual and could be outside the range described above.

Sources of income in retirement

You may not be able to enjoy your regular paycheck post-retirement, but there are many ways to keep up a steady flow of income even after you’re no longer working full-time.

Employer-sponsored plans. One of the most common ways in which employers help to secure employees’ post-retirement years is by sponsoring retirement savings plans like the 401(k) or 403(b). In most cases, employers match the amount that employees contribute to their retirement fund, up to a limit. In 2019, the average employer contribution rate to 401(k) plans hit an all-time high of 4.7% of employees’ salaries.2

Social Security Retirement Benefit. If you’ve paid Social Security taxes for at least 10 years, either through an employer or via your income tax filings if you’re self-employed, you become eligible to receive income via Social Security upon retirement at a minimum age of 62 years. The amount of income you can expect to receive from Social Security is based on your lifetime earnings and the age at which you begin to receive the benefit. You can start receiving a reduced retirement benefit from Social Security as early as age 62, or get your full benefit starting at your full retirement age, which is between 66 and 67, depending upon your year of birth.

Other retirement savings plans. While the opportunity may be limited, you may be able to set aside additional retirement savings to supplement income from your employer-sponsored savings and Social Security. You might consider a traditional or Roth IRA, self-employed plan or even a taxable account as retirement savings options.

Part-time jobs. So what if your “regular” career has come to an end? A number of retirees take up part-time, post-retirement jobs to stay stimulated, busy and supplement their other retirement income. Whether it’s a special interest you always wanted to pursue or a second career that you train for post-retirement, a part-time job could be a great option.

Reverse mortgage. While the word “mortgage” may sound like you’re taking on more debt, a reverse mortgage on your home is a little different. A reverse mortgage allows those age 62 or older to access the equity in their homes, and lets them defer repayment until they move out or die. A reverse mortgage can be complicated and might not be right for you. An accredited reverse mortgage specialist can help you understand if this is an option you might consider to supplement your retirement income.

Other income. Income that is independent of your retirement status might come from sources like rent, interest, dividends, royalties on intellectual property owned by you and more. If you own properties, land or other assets from which you derive a steady flow of income, you might fall back on these sources for income in retirement.

If you have access to Ayco as a benefit through your employer, take a look at Ayco’s retirement checklist to make sure you’re making all the right moves before you retire. Prefer a more personalized approach? Reach out to our coaches and they can help you prepare for this new phase of life.