Retirement during a coronavirus pandemic

Retirement During Coronavirus

Retiring During a Covid-19 Pandemic!

High stock valuations. Low bond yields. Sequence of return risk. And now a retirement during a Coronavirus Pandemic? Yikes! What’s one to do? Is 2020 the best time to retire or the worst?

Can you retire during a Coronavirus Pandemic?

It’s always a good time to retire if you have a plan. And if you manage your risks.

What risks are important to consider and how has the Covid-19 pandemic changed retirement?

Let’s look at the 18 retirement risks  and discuss.

RICP®’s 18 Retirement Risks

The RICP® is a certification program for financial advisors offered through the American College. Among the garbage heap of certifications for advisors, it sits on top. It was last updated in 2014 so it is starting to smell a bit.

Here’s how the risks stack up for retirement during Covid-19.

RISKS OF OUTLIVING RESOURCES

RISK 1: LONGEVITY RISK

Plan on living a long time. Why not? What is the alternative!

Folks are living longer, and longevity risk is the great multiplier. That is, every other retirement risk increases when you live a long time.

Believe it or not, the Coronavirus pandemic actually increases the risk of longevity. Though there will likely be a short term increase in mortality, if you survive it, you are more rather than less likely to live a long time thereafter.

What are the considerations for longevity risk during the coronavirus pandemic?

Delay social security by building Bridge Assets. For most folks, delaying social security is the most effective longevity insurance on the market. Most, unfortunately, claim early which permanently reduces claiming credits. You can get anywhere between 70% and 124% of your primary insurance amount depending on when you claim! Social Security is also adjusted yearly for cost of living, and you need to consider the surviving spouse in your claiming strategy.

Annuities should also be mentioned (since social security is an annuity as well). Take a Single Premium Immediate Annuity if you need income, but Deferred Income Annuities are better for longevity risk. Deferred Income Annuities are also called longevity annuities!

If your plan shows a gap in non-discretionary expenses as you age, consider a longevity annuity to provide guaranteed income, especially if you plan on living a long life.

RISK 2: INFLATION RISK

Inflation? Seriously? What risk?

Those retiring in 2020 may remember CDs with double digit yields. Inflation was higher than that, though, leading to real negative nominal returns. That’s right, you can lose money on CDs even when they are paying more than 10%!

More insidious that a spike of inflation, even low continuous inflation can devastate portfolios over 30 years.

Retiring during the Covid-19 pandemic is tricky in regards to inflation. The Fed is not only considering helicopter money (where it dump money out of helicopters to save the economy), but jumbo jet money!

For the duration of the pandemic, the Fed has pledged to drop as much money as needed in order to keep business flowing. All that money has to lead to inflation at some point. Or will continued deflationary pressures keep pace as we have seen in the last few decades?

If you plan to retire in 2020, how do you address inflation risks? TIPS might be a consideration for your bond portfolio, especially in your pre-tax accounts. Or, remember, even when you Go Conservative with your asset allocation, you need to have enough equities to overcome inflation.

RISK 3: EXCESS WITHDRAWAL RISK

There is a lot out there on SWR, the Safe Withdrawal Rate, which is 4% for traditional retirement and 3.25% for early retirement.

When taking withdrawals from your portfolio, plan to be flexible in your spending. Most folks won’t go on blithely spending during a massive downturn in the economy even if they can on paper.

This pandemic is good practice. What happened to your spending recently? Were you able to cut back on your expenses? Can you be flexible with your spending as you age?

RISKS ASSOCIATED WITH AGING

RISK 4: HEALTH EXPENSE RISK

As a physician, I’m embarrassed with the health care system in America. We are all complicit in letting this monster get away from us. Shame, Shame on us.

Health Expense Risk is a preeminent risk associated with aging. Hope you are part of the retirement “smile” where you spend more on fun stuff early and on healthcare late.

One of the best planning opportunities out there: watch out for IRMAA. If you can control your income during retirement, you can avoid nasty surcharges on your medicare!

It is entirely unclear what the coronavirus pandemic will do to healthcare costs. As they say, never let a good pandemic go to waste! Maybe this will be impetus to entirely revamp the way healthcare is delivered. More likely, it will just be another complex layer of bureaucracy on top a already broken chassis.

RISK 5: LONG-TERM CARE RISK

Everyone needs a little help as they age. This isn’t a surprise to anyone.

Deciding on Long-Term Care Insurance, however, may be the most intractable problems currently facing those who want to retire in 2020.

Self-funding Long-Term Care is a difficult decision.  Hybrid Life Insurance/Long-Term Care Insurance policies, on the other hand, are not a good deal! Most advisors will try to talk you into a hybrid policy, but they likely don’t understand the future tax implications when they are selling you the policy.

Remember, the real risk is not that you are going to need help. Everyone will need some help! The risk is the rare person who will need to be in a nursing home for more than 5 years and has a spouse in the community who needs retirement security.

RISK 6: FRAILTY RISK

Estate documents including powers of attorney in order, please. Frailty planning takes time and sensitivity. Remember, that estate planning is not just about planning on your death, it is planning on your incapacity. Lovely words!

Death planning: though it is not pleasant to think about, this is the only true certainty in life.

Incapacity planning: we take care of loved ones while we can. When we no longer can, love is helping them take care of us.

RISK 7: FINANCIAL ELDER ABUSE RISK

INVESTMENT RISKS

RISK 8: MARKET RISK

The stock market is more often than not at all time highs.

What to say about the market in 2020? A rapid bear market followed by rapid restoration.

And who knows what will happen from here. But that is the point! No one ever knows what the market will give you. All you can control is: asset allocation, withdrawal plan, and risk mitigation.

RISK 9: INTEREST RATE RISK

With interest rates being so low, where else can an investor go aside from the market to get returns?

CDs and Bond are not going to fund your retirement. They are volatility buffers.

Do you need bonds? YES! Lots of them. Please understand this. There is so much hating on bonds right now by people who don’t understand why you need them in your portfolio.

Hint, it is not for income! Where do you take risk in your portfolio?

Don’t go chasing income or yield using bond alternatives in your portfolio–bonds are for stability!

RISK 10: LIQUIDITY RISK

Drink plenty of water!

Or make sure you have 2-3 years of expenses in cash when you retire. Especially when retiring during a coronavirus pandemic. Cash is cheep right now. There is significant risk of cash drag but very little implications on the taxes given low returns.

RISK 11: SEQUENCE OF RETURNS RISK and Retirement duirng a Coronavirus Pandemic

This is the meat and potatoes of Retirement Income Planning.

Surviving your first 10 years of retirement is the most important factor in a long-lived portfolio.

Retire during a pandemic

Figure 1 (Sequence of Return Risk by years in Retirement) From Wade Pfau

As seen in figure 1, if you are going to retire soon, get your asset allocation right-sized right now! You can’t do this after a correction or a bear market.

I have written extensively about Sequence of Return Risk for both traditional and early retirement.

Here is: A Conservative Asset Allocation for Sequence of Return Risks.

If you don’t understand how sequence risk can ruin your retirement, stop here and learn everything you can about it. There is no more important issue than this. Sequence risk is longevity risk, and market risk, and withdrawal risk, and all of the others tied into one.

Fortunately, the current bear market recovered so quickly, I doubt many were forced to sell any equities for income while the market was down. The coronavirus pandemic is not an example of sequence of return risk at play.

Which means that this recent sequence of market returns did not re-set the clock! Stock valuations are still high, so sequence of risk is still a real concern when retiring during a covid-19 pandemic!

WORK

RISK 12: FORCED RETIREMENT RISK

Unfortunately many people were forced to retire during the covid-19 pandemic. This can certainly hurt if you were not planning on retirement.

RISK 13: REEMPLOYMENT RISK

And

RISK 14: EMPLOYER INSOLVENCY RISK

Have a plan and remember that there are useful models and wrong models.

FAMILY

RISK 15: LOSS OF SPOUSE RISK

See my bit on Widow/Widower Tax Penalty for details. When you lose your spouse, there will be emotional as well as financial pain.

I really consider this a risk that needs more attention. Loss of spouse in not a financial risk, but again, is a risk multiplier. Every risk is compounded and the emotions great.

RISK 16: UNEXPECTED FINANCIAL RESPONSIBILITY RISK

RISK 17: TIMING RISK

And

RISK 18: PUBLIC POLICY RISK

Who knows what will happen here?

Will taxes be higher or lower in 10 years? Public policy can change on a dime.

For instance, look at the SECURE Act that was recently signed into law and takes effect in 2020.

The stretch IRA is no more. Instead: Compare to a 10-year forced distribution to the Stretch IRA?

What about doing a pseudo-stretch IRA?

Most will be considering Roth conversions to combat the loss of the Stretch IRA.

Conclusion: Retire during a Covid-19 Pandemic!

Retire in 2020! It is a fine time to retire during a pandemic if you have a plan.

RICP has a list of risks which discussed above. Does your plan mitigate these risks?

Your plan will be wrong, of course, but at least with a plan you can adjust rather than react.

Since I have been paying attention to retirement income planning, there has been a subtle shift in what it means to retire. Traditional retirement has moved from a stodgy, old philosophy to one of Financial Independence. Trust me, this is not the FIRE movement, but FI informs traditional retirement income planning.

What is retirement, truly, if not Financial Independence, where your non-work income replaces your working income?

Retire during a Covid-19 pandemic! Have a plan that mitigates known risks.

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