How to adjust your retirement plan for unexpected changes
Are you reconsidering your retirement strategy because you lost your job, suffered a financial setback, or your retirement account took a hit due to the coronavirus crisis? If so, try not to panic.
Whether you are years from retiring, nearing retirement, or already retired, if the retirement you envisioned doesn't seem possible now, don't be too quick to imagine the worst. You may have more options to stretch your investments and income than you realize.
1. Know what changed under the CARES Act
The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March, changed certain rules and requirements for retirement accounts, including:
- Retirement account holders can take up to $100,000 in “coronavirus-related" distributions from a 401(k), IRA, or similar retirement accounts through December 31, 2020, without paying the usual 10% withdrawal penalty that applies if you're younger than 59½. For instance, you can take a coronavirus-related distribution without penalty if you (or a family member) receive a COVID-19 diagnosis, lose your job, or get furloughed due to the public health crisis.
- Retirement account holders 72 years or older are normally required to withdraw a minimum amount from certain retirement accounts annually. However, the minimum withdrawal requirement is temporarily waived for 2020.
- 401(k) loan limits increased from 50% of the vested value of your retirement account to 100%, up to $100,000.
While it’s good to know your options, taking a distribution or loan from your retirement account should be an option of last resort since that money is designated for retirement income. If you still have a job, increasing 401(k) and IRA contributions is a better move, since investments can buy more in a down market and may be worth more in the long run.
Now is a good time to buy, not sell, so selling stocks and bonds in a market downturn is not generally a good option. Even if you are unable to continue contributing to a 401(k) or IRA, do your best to leave your retirement investments and savings in place to allow time for your portfolio to recover.
2. Adjust spending habits
How much money could you save if you cut your dining-out budget in half for a couple of years? If you're a two-car family, can you get by with one vehicle for a few years and deposit the amount you'd typically spend on a car payment in savings each month? You might save $1,000 a year by cutting cable TV and using streaming services.
You may find your new spending habits so beneficial that many become permanent, decreasing your monthly expenses in retirement, so your money stretches further.
3. Surrender life insurance assets
If you need immediate income, and have a universal or whole life insurance policy that has accumulated cash value, you may be able to surrender the policy to acquire extra funds. You may also be able to take out a loan on a life insurance policy's cash value.
Money from a life insurance policy could allow you to hold off on taking a retirement distribution to cover bills. Better yet, depositing the money in savings could bolster retirement account funds significantly.
4. Reduce debt
If you have several years left before retiring and time to recover from a setback or recession, paying extra directly to the principal on your loans each month can help pay off your debts before you retire to ease financial pressure and lower expenses during retirement. Look into refinancing your mortgage and developing a payoff strategy for other loans and credit cards.
5. Delay Social Security benefits
If you delay claiming social security benefits past 62, the age of eligibility, or even your full retirement age of 66 or 67, your benefit amount will be higher.
For example, if you were born after 1959 and your monthly benefit at your full retirement age of 66 or 67 is $1,000, claiming social security at 62 reduces that amount by 30% to only $700 a month. Your monthly social security benefit amount increases by around 8% every year, so if you wait until age 70 to claim, you would receive $1,320 a month, 24% more than if you begin receiving social security at 62. Of course, the monthly payment is just one determining factor—take your whole financial situation into consideration and test multiple scenarios before deciding when to claim your benefits.
6. Downsize or relocate
It may feel drastic to say goodbye to your family home, but many retirees downsize their homes to something smaller, less expensive, and with less maintenance required. You may be able to sell your home, purchase a new house or condo outright, and still have extra funds to pad your retirement account.
If you’ve always dreamed of moving after retirement, it might be financially beneficial as well. Moving to a city with a lower cost of living can add years to how long your retirement savings lasts. For example, in May 2020, the median home price in Baltimore, Maryland, was $328,000 according to Realtor.com while the median home list price in retiree-friendly city Winston Salem, North Carolina, was $209,000. Home prices in the Midwest and South are generally less expensive than in other parts of the country.
Whether a financial setback is temporary or requires a new approach to help meet retirement goals, wisely adjusting spending and saving can put you back on track to the comfortable retirement you envisioned all along. Finally, we recommend you talk with a professional, before you make any adjustments to your plans.