According to the UN’s World Population Ageing Report, in 2019 there were 703 million persons aged 65 years and above and is expected to double in 2050. People aged 65 and above living in 2015-2020 is expected to live, on average, an additional 17 years. Advances in healthcare and technology have contributed much to a person’s longevity that we could be seeing more persons living a 100-year life span.
But as much as we should be celebrating longevity, one important question remains: How will a 100-year life span be financially secure? The COVID-19 pandemic has affected all walks of life and has forced most people to reassess major plans, including financial plans for retirement. In this article, we will go over the existing challenges faced in financial planning for retirement and the impact caused by the COVID-19 pandemic. We will also go over what steps you can do to your financial plans for retirement.
Pre-Existing Challenges In Financial Planning For Retirement
Building a financial plan for retirement helps individuals feel more financially confident and secure when they exit the workforce. Creating a retirement budget plan on Excel or with a financial advisor helps in answering questions such as: How much retirement savings do I need? How long will my retirement savings last? How often do I review my budget plan on Excel? Regardless of the answers and whatever financial goals you may have there are 5 principal hurdles an individual faces that could potentially threaten a strong financial plan for retirement.
- Longevity. Thanks to advances in preventive medicine and treatment as well as the rising trend of living a healthy lifestyle, people live longer today compared to their forefathers. But the risk of outliving one’s retirement savings is a frightening prospect. This pivots your financial plan for retirement to earn enough income to meet daily expenses for the next 25-30 years of your life.
- Volatility. Economic downturns or unpredictable events such as the 2008 financial crisis and 9/11 attack greatly affects the stock market. The huge fluctuations in the stock market impact an individual’s financial plan for retirement. Almost overnight a person’s investments plummeted along with the stock market.
- Inflation. Inflation is the rate at which prices of goods and services increase. The majority of retirees who live with a fixed income may not have enough to cover these rising costs of day to day expenses.
- Low-interest rates. Low-interest rates are great for young ones as they have access to debt at a lower cost. On the other side of the coin, for those nearing retirement financial plans for retirement have a negative effect as conservative investments such as bonds have lower returns.
- Healthcare costs. Expenses for prescription medicines, surgeries, therapies, home care services, etc. are increasing year after year. This can slowly drain your retirement savings plus any serious health issue can turn it upside down.
Given these current challenges, you can see that financial planning for retirement is more like training for a marathon than a race. It takes commitment, perseverance, and focus to cross the finish line. Use financial planning retirement tips to help you combat these challenges.
5 Impacts Of The Pandemic On Financial Planning For Retirement
The impact of the COVID-19 pandemic has been widespread and was felt in every corner of the world. This has added unique challenges to the current financial planning for retirement. Investments in stocks plummeted due to stock market fluctuations were very apparent. What are the other negative impacts on financial plans for retirement?
- Employee contributions will shrink. With wage cuts, employee layoffs, and businesses shutting down; this lowers the ability to contribute to retirement savings plans by individuals. This means individuals may have to work for a longer period of delay retirement date to achieve goals on their financial plans for retirement.
- Employers suspending or altering contributions. Due to low demand, a decrease in revenue and income, and continued economic slowdown some employers might end retirement plans or stop contributions to employee plans. When the 2008 financial crisis swept the US, about 18% of companies suspended or altered contributions.
- Working age-people dipping into their retirement savings. Due to the lack of emergency funds, not enough assistance from the local authority, indebtedness, or personal circumstances, most people have been withdrawing funds from their retirement account to ease the financial burden.
- Pension plans are at risk. An increase in pension liabilities and a fall in pension assets in retirement savings such as defined benefits retirement plans and life annuity. COVID-19 poses a great risk for pension plans, private and public pensions plans have not yet fully recovered from the most recession of the 2008 financial crisis. In US public pension plans alone, Moody’s Investors Service estimated losses of $1 trillion in the market sell-off caused by the pandemic. The economic slowdown caused by the health crisis has certainly dampened any returns.
- Financial instability for Social Security. With the slow wage growth and high unemployment rate, government collections from payroll taxes will be reduced. Coupled with low birth rates and an increasing number of workers entering old age, this further exacerbates the growing worries that Social Security might run out of funding.
Do These In Financial Plans For Retirement
Financial planning for retirement is not a “one-and-done” process, it requires regular revisions and adjustments. Although there are areas beyond an individual’s control, there’s always light at the end of a tunnel. Here are 5 courses of action to consider:
- Do continue contributions or add more. If you are still employed and your income remains unchanged, continue contributing to your financial plan for retirement. It is highly likely you have saved money from not eating out in restaurants, traveling, etc. so you can add these extra savings to your contributions.
- Do keep retirement account untouched. If you lost your job, preserving what you have in your retirement account is a priority. Before withdrawing funds from your retirement account, make sure to exhaust all available options. For example, review the household budget plan on Excel and cut back on unnecessary expenses, take advantage of any financial assistance from the local authority or use your emergency funds are steps to take in the meantime until you get yourself back on your feet.
- Do postpone or delay retirement. The prospect of working a while longer might not be attractive if you’re above 65 years of age but the flip side is it allows you to save more for your retirement. If you can delay retiring for 3 to 5 years and creating a budget plan on Excel going forward, this allows you have higher benefits once you decide to retire.
- Do avoid panic selling and stay invested. A financial plan for retirement is a long-term process so avoid panic selling your investments. With the huge ups and downs in the stock market, the impulse to protect what you have is strong. It is tempting to sell your stocks and revert to cash. It is helpful to know that gains and declines in the stock market are normal. If you give, you risk selling at low prices and lock in losses. Staying invested means you can benefit from potential market recoveries.
- Do keep your head up. The abrupt disruption brought by the COVID-19 pandemic caused a lot of financial stress. The goal of financial planning for retirement may seem far away now. It is completely understandable to feel frustrated and anxious but giving up is the last option. Instead, reach out and strengthen your network, try updating your skills, or share your years of experience by teaching or volunteering. Carefully review your goals and realign it with a budget plan on Excel to give you more financial breathing room. Remember, age is nothing but a number.
Some of the scenarios may be bleak and the steps to do are easier said than done. If you have a less than ideal situation, the only option may be to work hard to find doable solutions. Financial planning for retirement in a pandemic not only requires commitment, perseverance, and focus but also resilience and resourcefulness.
Age-Specific Tips On Financial Plan For Retirement
Asking yourself How much retirement savings do I need? How do I create a budget plan on Excel and stick to it? Is best done at an early stage in your life. If you just landed your first job, retirement may seem light-years away. But as the old saying goes “the early bird gets the worm”.
Depending on what age you are or stage in life, here are tips to consider in financial planning for retirement.