Retirement After the COVID-19 Pandemic

COVID-19 has complicated life for people planning their retirements as well as those who have recently retired.

Wildly fluctuating stock markets have wreaked havoc on 401(k) plans and other retirement accounts. Safer-at-home orders, business closings, layoffs and furloughs have left 26.5 million Americans unemployed over just five weeks as of April 23, according to a report from Bloomberg News.

Financial experts say it’s not time to panic, but to carefully consider your situation and revisit your investment strategies.

“As long as you’ve got money to cover your basic expenses, through either Social Security or other guaranteed income, maybe you’ve got some time to stay the course and hopefully get back on track,” Steve Rohrig, associate director of training in the Financial Planning Division at Nebraska-based Senior Market Sales, told RetireGuide.

More than 18 million people were expected to retire in the next five years, according to the Pew Center for Research. But the COVID-19 pandemic appears to be driving millions of American workers into early retirement — a decision that could permanently lower their retirement income.

On any typical day in 2019, around 10,000 American workers retired. The days since the COVID-19 pandemic hit the United States have not been typical.

An April 2020 study from the Becker Freidman Institute for Economics at the University of Chicago found millions of Americans are retiring early, potentially putting their long-term financial security at risk. Researchers found that the number of people who left the labor market during the first wave of COVID-19-related layoffs ticked up 8 percentage points.

“Early retirement almost fully explains the drop in labor force participation both for those survey participants previously employed and those previously looking for work,” the researchers wrote.

That would have been about 13 million workers opting to retire early based on the study’s findings in just the first weeks of the pandemic.

At the same time, other people who had planned to retire this year may decide to continue working to rebuild their savings.

Chris Magnussen, a financial advisor with Insuractive, saw people successfully recover losses after the 2008 financial collapse that led to the Great Recession.

“I saw within a couple of years after the financial crisis, there were quite a few account holders back to where they were before the downturn,” Magnussen told RetireGuide.

Perhaps the most common investment strategy financial professionals advise people to follow during any financial crisis is to not panic.

But people may need to reassess their savings and investment strategies during the COVID-19 financial crisis.

“We’re seeing people moving to safer alternatives,” Rohrig said. “I know we do a lot of indexed annuities that protects that downside.”

Indexed annuities charge you a premium and promise a guaranteed return along with one based on a market index such as the S&P 500.

Withdrawing money from your retirement savings should only be a last resort. Whittling down your savings will cost you more in the long run.

“We call it the sequence of returns risk,” Rohrig said.

This risk applies to the order in which your investment payouts occur and how it affects your long-term financial health. Putting in or taking out money from your investments in the wrong way can mean you’ll have a much lower rate of return over the life of those investments.

“It really hits people who are near retirement or just started retirement,” Rohrig said. “It hits them probably worse than people who were down the road into retirement.”

For those in the earlier stages of retirement planning, it’s best to avoid withdrawing from retirement savings early. Doing so gives you less of a foundation to build on and can stretch investments thin over the course of a lifetime.

“If you can avoid tapping your retirement savings at all costs, that’d be great,” Magnussen said. “If you have other assets that you can use before turning to the retirement account, that would be a whole lot better.”

Tapping your savings during the COVID-19 financial crisis means you’re selling investments at a loss. In addition, a lot of people could get hit with higher taxes.

If all else fails and you have to tap into your savings, the CARES Act passed in the wake of the COVID-19 pandemic makes it easier for you to dip into your retirement accounts.

In certain hardship cases, you may be able to withdraw up to $100,000 from your IRA, 401(k) or other retirement account without the usual 10 percent penalty. The act also doubles the amount you can take in loans from your 401(k) account to $100,000 or 100 percent of your balance, whichever is less.

Generally speaking, claiming Social Security benefits early should only be a last resort. Claiming benefits earlier than your full retirement age would cost you $8,952 a year in 2020. If you’d planned on waiting until 70 to file for Social Security, then you’re looking at giving up $18,300 a year.

“For those transitioning toward retirement, and thinking about doing it early, they’ve got a tough decision right now,” Rohrig said. “They may be asking themselves, ‘Do I go ahead and take Social Security before my retirement age at a discounted amount?’”

He said people need to think about the long-term ramifications. The longer you wait to apply, the higher your maximum monthly benefits will be.

“People need to consider the impact to their Social Security payments over the long-term,” Magnussen said. “Hopefully, that’s not the largest part of their retirement income, but it will certainly be impacted for the rest of their life.”

There are several things you need to consider before you accept a buyout or early retirement package from your employer during the COVID-19 financial crisis.

“I would evaluate whether it’s a lump sum or a more annuity-based option,” Rohrig said. “You’d want to think about your immediate needs compared to your long-term needs.”

The type of buyout can have a serious impact on your long-term retirement income as well as your current situation.

The math to determine if an early retirement package is right for you can be complicated.

“I would definitely work with a professional that could help with some analysis to determine whether it’s worthwhile to take that company buyout,” Rohrig said.

It’s not clear yet how the COVID-19 financial crisis will affect Social Security in the long run. Even before the pandemic, Social Security trustees predicted that 2020 would be the first year that the program paid out more money than it took in.

Social Security benefits that paid out come from people paying payroll taxes right now. With more than 26 million people out of work because of the pandemic, that’s a lot of money not going into Social Security’s trust fund to make payments.

The program has cash reserves, so it can absorb short-term shortfalls.

“For those who are already retired, Social Security should be solvent for at least the next 15 or 16 years ahead,” Rohrig said.

In addition to less money coming in, a wave of early retirements would mean more money going out of the system, further eating into the trust fund’s reserves.

The program’s trustees have warned for years about a day of reckoning for Social Security as the program depletes its savings. Congress has delayed solving Social Security’s looming financial crisis because any solution is politically charged and few if any are popular with all voters.

The COVID-19 financial crisis may highlight the threat of Social Security and make lawmakers more willing to compromise or make unpopular decisions that address the program’s long-term issues.

In the meantime, Social Security provides relief to people who may be reconsidering their retirement plans as well as a tool that you may be able to use to rebuild your investments.

“Having Social Security is going to bring in some much needed cash flow to people who have retired,” Rohrig said. “That’s money to pay some bills and build that foundation for tier one expenses like food and housing, transportation and health care — the things you need day-to-day.”

Medicare is already changing due to the COVID-19 pandemic. But long-term changes may lead to higher out-of-pocket costs for Medicare beneficiaries.

The Centers for Medicare & Medicaid Services (CMS) rolled out expanded telehealth services March 1, paying doctors the same for telehealth calls as in-person services. It applied to all diagnoses, not just COVID-19 cases.

Outside of Medicare, telehealth services, where doctors and patients have a virtual visit over the phone or through computer screens, have exploded since the start of the pandemic.

Medicare’s telehealth expansion may stick around beyond the crisis if it works well and proves cost effective. CMS has created fact sheets, rules and regulations and an online training website to get the service up and running.

CMS has taken other steps that are designed to meet immediate needs during the national emergency.

Most of these are temporary measures during the pandemic, but they are expensive.

Medicare spending related to COVID-19 is estimated to range anywhere from $38.5 billion to $115.4 billion for the 12 months ending in March 2021, according to the National Association of Accountable Care Organizations.

Like Social Security, Medicare is funded through payroll taxes. Before the pandemic, Medicare’s trustees estimated its fund for hospital coverage would be depleted by 2026. But COVID-19 costs may move that date up.

Fewer people working means less revenue from payroll taxes.

That could translate into possible increases for Medicare premiums, deductibles and coinsurance, according to a brief from Peterson-KFF Health System Tracker.

However, the same brief suggests that since Medicare is requiring health care providers to delay many elective procedures during the pandemic, the savings may be able to offset the need for raising out-of-pocket expenses.

There may be fewer hospitals after the pandemic and people in rural areas may have less access to a hospital.

With elective surgeries delayed, hospitals have lost a major source of revenue. Hospitals are also treating COVID-19 cases at a loss — losing an average of $1,200 for every patient they treat according to an analysis by Strata Decision Technology.

For some hospital systems, the loss is as high as $6,000 to $8,000 per patient. The Strata analysis estimated that some hospitals may not be able to survive 60 to 90 days.

Rural hospitals were already in financial trouble prior to the pandemic, with 128 closing in the past 10 years, according to the University of North Carolina Rural Health Research Program.

A February 2020 study from the Chartis Center for Rural Health identified 453 rural hospitals that were “vulnerable” to closure before the pandemic kicked into full gear.