According to the StreetWise Retirement Confidence Index released in May, 26% of respondents said they would postpone retirement due to the coronavirus. Or more specifically, due to the economic conditions it’s caused.
That’s not surprising, given the level of fear surrounding both the pandemic and the financial uncertainty that have gripped the nation and the world.
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But should you postpone your retirement due to the coronavirus? Is postponing retirement the right strategy? Or does staying with your original retirement itinerary make more sense?
Let’s take a look at both options.
How the Coronavirus is Affecting Retirement
Though it’s hard to get solid numbers on exactly how many people are currently unemployed in the US, it could be as many as 40 million people. A report issued this month by the Becker Friedman Institute for Economics at the University of Chicago estimates that as many as 42% of those workers will not be rehired.
That employment uncertainty, in combination with volatility in the financial markets, is worrying many Americans who are approaching retirement age.
For some, unemployment may force an earlier-than-expected retirement. But for others, withdrawals of retirement savings to pay current living expenses due to a job loss are causing them to favor postponing retirement. The delay may help enable them to regain employment and rebuild retirement assets.
Whatever your long-term plans might be, a crisis as sudden and pervasive as the coronavirus is bound to raise such questions. As Mike Tyson once famously said, “Everyone has a plan until they get punched in the mouth”.
The coronavirus seems to have delivered that punch to millions of people who thought they had their retirements all planned out.
The Benefits of Postponing Retirement
You Still Have a Job Not Threatened by the Coronavirus
The economic shutdown brought on by the coronavirus pandemic hasn’t affected all occupations equally. While millions previously employed in retail, restaurants, hospitality, and travel have lost their jobs or have been reduced to part-time status, many employed in healthcare, education, government, and information technology have been relatively unaffected.
If you’re employed in one of the more stable fields, there’s no need to change your retirement plans. You can exit the workforce on your own timetable.
You’ll Increase Your Social Security Benefit the Longer You Postpone Collecting
The longer you can delay collecting your Social Security benefits, the higher the payments will be. For example, you can increase your monthly benefit by 8% for each year you delay collecting after reaching your full retirement age. If that age is 66, you can increase your monthly benefit by 32% by delaying your claim until age 70.
The same situation applies in reverse if you take early retirement by collecting benefits before reaching your full retirement age. For example, if that age is 67, and you begin taking benefits at 62, your monthly benefit will be reduced by 30%.
By postponing retirement, even if that means accepting a reduced salary, you’ll increase your Social Security benefit the longer you delay, up to age 70. Delaying collecting benefits for even two or three years can fetch a significant increase in your monthly benefit.
You’ll Have More Time to Build Your Retirement Portfolio
According to a retirement survey published by Transamerica in May, the median retirement savings for baby boomers is $144,000. That’s not nearly enough for the average person to comfortably retire with, especially on a reduced Social Security benefit.
Postponing retirement will give you an opportunity to continue building your retirement savings to a healthier balance. For example, if you participate in an employer-sponsored 401(k) or 403(b) plan, you can contribute up to $26,000 per year if you’re 50 or older. That will enable you to add $130,000 to your retirement portfolio by working and contributing for an additional five years.
Later Retirement Means Delaying Retirement Plan Withdrawals
The flipside to having additional years to make contributions to your retirement plan is you’ll also avoid taking withdrawals.
For example, if you retire at 67, you may need your retirement portfolio to last for another 20 years. But if you retire at 62 and begin taking withdrawals immediately, your plan will need to last for at least 25 years.
By continuing to work for an additional five years, you’ll reduce the number of years you’ll need to draw funds out of your retirement portfolio. That can be an especially important strategy for making an underfunded retirement portfolio last longer.
By delaying retirement, you’ll avoid taking those plan withdrawals for as long as you can continue working. This will be especially necessary if your retirement portfolio is already a bit on the short side.
“Some families have no choice but to delay retirement because, at their desired retirement age, their savings are inadequate to support their lifestyle,” writes Forbes Contributor, David John Marotta. “For those who have a choice, delaying or staggering retirement can mean a higher standard of living and better life planning.”
Second Careers May Be Harder to Come by in the Pandemic Economy
It’s often thought a second career can be developed in retirement. While that’s certainly a possibility in a healthy economy and job market, it may be a tall order – or even impossible – in an environment depressed by a pandemic.
That being the case, the best strategy may be to hold on to your current position as long as possible. That will keep a paycheck coming in – and eliminate reliance on retirement benefits and savings – while you wait for an improved economy that will open up second career opportunities in the future.
Loss of Health Insurance if You’re Under 65
One of the complications of retiring early are the very limited health insurance options if you’re under 65 and don’t qualify for Medicare. If you’re currently getting your health insurance through an employer-sponsored plan, the monthly payments are probably heavily subsidized by your employer. For example, you may be paying $600 per month out of a total monthly premium of $2,000.
If you lose your job – and the employer health insurance subsidy with it – you could be stuck with a sky-high monthly payment. While you may be able to continue coverage through the COBRA provision, it would see you making the full payment of $2,000 per month. And at that, the coverage will continue for no more than 18 months in most cases.
That said however, if your income drops as a result of early retirement, you may be eligible for a heavily subsidized health insurance plan under the Affordable Care Act.
For example, the health insurance premium for a married couple, each 62 years old, earning $100,000 per year would be $2,072 per month. But if the same couple were retired and earning just $40,000 per year, the premium would drop to just $260 per month, as a result of a tax subsidy of $1,812.
Either way, you’ll need to carefully evaluate your health insurance options if you plan to retire early. If they don’t look good, the best option will be to continue to work as long as possible, at least until you’re eligible for Medicare.
The Benefits of Retiring According to Your Original Plan
The Risk of Coronavirus Infection from Work
Not all the factors affecting your retirement timetable are financial. The entire purpose of the shutdown that began in March was to minimize the number of coronavirus cases spreading throughout the population. Since the economy has reopened, and more people have returned to work, infection risk is back on the table.
Wrote Forbes Staff Writer, Sarah Hansen, earlier this month, “Some states are seeing a dramatic surge in new coronavirus infections even as reopening measures continue across the country, raising tough questions about whether those reopening efforts were premature and how officials will balance maintaining public safety with preventing more economic damage.”
Retiring now, or in the near future, will reduce the likelihood of contracting the virus.
A Furlough Turns into a Permanent Job Loss
Earlier I referenced the statistic from the University of Chicago of 42% of all furloughed workers not being rehired. But due to age discrimination, and fears over greater susceptibility to coronavirus infection, the likelihood of a furlough becoming permanent is more acute among older workers.
“Americans of all ages are feeling the devastating economic impacts of the coronavirus outbreak,” noted Forbes Contributor, Richard Eisenberg. “But older workers in their 50s and 60s — especially women — have been among the hardest hit. Based on recent studies and views of retirement and aging experts, this much is clear: The whacks older workers have felt to their jobs and retirement savings may have long-lasting, painful financial implications for many of them.”
Against the backdrop of a job market that’s less accommodating of older workers, it may make more sense to retire sooner rather than later.
Delaying Retirement May Not Increase Your Savings
Delaying retirement to plow more money into retirement savings makes sense but only if you’re able to maintain your pre-pandemic income level and continue making large contributions. But if you’re either unemployed or underemployed, the extra income may not be available to continue making contributions.
Continuing to work may help you avoid taking retirement withdrawals. But if you’ll be working at a reduced income level, there may not be much you can do to build up your savings. The most you may be able to accomplish is to give your portfolio a chance to continue to grow through investment earnings. But that will only be the case if the financial markets continue to rise in the next few years. And that outcome is hardly guaranteed.
You May be Able to Retire Now, then Return to Work in a Stronger Economy
There’s no question the economy has entered a rough patch, especially on the employment front. Continuing to work in that environment may prove to be a losing proposition.
If you’re in a position to retire now or in the very near future, you may have a valuable opportunity to sit out on what currently looks to be the worst job market since the Great Depression.
But that may not be the case two or three years from now. The economy will eventually return to growth mode, and once it does, jobs will be more plentiful than they are right now. When that happens, opportunities will be available that don’t exist at present.
This is an excellent time to remember the job market enjoyed record low unemployment at the beginning of this year. Until then, jobs were plentiful, and employees were in short supply. After a couple of years of pandemic generated recession, the tight job market may return for all the same reasons it came to be in the first place.
You can think of the retire now/work later strategy as something of an employment timeout. You’re not leaving the job market permanently, but rather taking a mini-retirement until the situation improves.
Retiring Now May Free up Your Time to Pursue a Post-retirement Career
Even before the coronavirus pandemic damaged the economy most Baby Boomers planned to work into their retirement years. But that may not have included continuing to work full-time in a pre-retirement occupation. In most cases, post-retirement work involves either part-time employment or self-employment. In fact, nearly a quarter of the workforce over age 65 are self-employed.
Clearly, the trend toward continuing employment into the retirement years was already in the works before the crisis hit. Taking retirement now or in the near future is unlikely to change that direction for many retirees. For many, the onset of the coronavirus pandemic may have actually strengthened the motivation to continue working in some capacity after retirement.
If you retire now, you’ll be able to get a head start on building that retirement second career. Though recessions can have a devastating effect on general employment, they often create niches for special occupations, freelancers, and small businesses. It’s a natural part of the economic cycle that has some businesses and careers disappearing, while new ones spring up in their wake.
Having a retirement income, even if it’s not at the level you hoped for before the pandemic, can provide the perfect financial foundation for launching a second career. If you already have that career idea in place, there may be no real advantage to delaying the venture any longer.
You’ve Positioned Your Investments to Reduce Risk
Not everyone is concerned about potential pandemic-driven investment losses. If your portfolio is constructed in a way that will insulate you from market swings in the short run, you may not be concerned at all about how your risk investments are behaving. This can be accomplished by having a significant amount of your portfolio held in cash and cash equivalents, to provide you with living expenses while the markets are going through a period of instability.
“I position clients to have a certain number of years of income positioned in cash or other safe liquid investments, like short term bonds,” advises Brian Behl, CFP and founder of Behl Wealth Management. “The exact number of years depends on a client's risk tolerance but allows them to understand risk with a bucket approach. If we have, say four years of a client's needs in very conservative funds and cash, we know that income needs are met and can allow longer term investments to ride out the market ups and downs.”
If your portfolio is positioned to protect you from short-term market swings, there’s no need to change your retirement plans.
Final Thoughts
The coronavirus pandemic and the economic fallout it’s created has put a lot of older Americans on the fence about retirement. That’s understandable, but exactly which side of that fence you should step into mostly depends on your personal circumstances and financial resources.
If you’re inadequately prepared for retirement, and post-retirement career options seem limited, it will be best to postpone retirement in favor of continuing preparations. But if you have the basic elements of retirement already in place there’s probably no serious reason to delay taking the plunge now.
