Traditionally, American workers reach a full retirement age at 66 or 67. Due to COVID-19, however, some are retiring much earlier.
Since March, 2.9 million older workers, those between the ages of 55 and 70, have left the labor force, according to a study by The New School’s Retirement Equity Lab. According to the U.S. Bureau of Labor Statistics (BLS), the prevalence of employed U.S. workers age 65 years or older has fallen by roughly 16%. A working paper conducted by researchers at Tulane University, in conjunction with the National Bureau of Economic Research (NBER), found these workers are disproportionately impacted by the novel coronavirus, and at a higher rate than other age groups.
Evan Press, a financial adviser at Equitable Advisors, recommends pre-retirees work with their advisers to address sequence of returns risk.
“It is important to have a very specific withdrawal strategy and have a specific asset allocation to make sure you don’t get hit too hard early on in retirement,” Press says. Critically, such planning must be done well in advance and plans should not be created and enacted during periods of acute financial stress.
Additionally, the management of taxes across different accounts should be considered well in advance, Press says.
“There is a pecking order for what types of accounts to withdraw from first for maximum impact to reduce tax liability,” he says. “The reduction in tax liability during retirement can make the money last longer.”
While retirees are encouraged to wait until their full retirement age (FRA) to draw down Social Security, Juan Carlos Cruz, founder of Britewater Financial Group, explains strategies that older couples can take to get the most out of their Social Security income. He uses two former clients as an example: At age 67, a spouse can file a restricted application so that their younger partner—who is 66-years-old in this example—can file for spousal benefits. Once the older spouse passes their FRA at age 70, they would file for their full retirement income after the delayed credits and accumulate more Social Security income. The younger spouse, now age 69 or 70, who was collecting the spousal benefits, would have been able to delay her credits and can now file for her full Social Security claim at a higher income, says Cruz.
“This is how you can bridge the income needed today from Social Security and be able to grow your full Social Security income by a significant amount,” he says. It is important to note that gap structures change yearly, and therefore Cruz suggests clients and advisers check with the Social Security Office before taking these actions. He clarifies that some of these strategies are now grandfathered in under the Bipartisan Budget Act of 2015, therefore they may not apply to every couple filing for Social Security.
“Some strategies are grandfathered in, but with strains in Social Security funds, strategies are being removed or discontinued. There is a benefit to comparing the Full Retirement Age income and then filing spousal benefits when a spouse is ready to file,” Cruz says.
Aside from retiring early, workers are noticing the toll the economic downturn has had on their retirement planning. In a research study conducted in June from the Bankers Life Center for a Secure Retirement, 54% of working adults say their retirement planning has taken a hit amid the pandemic, with losing money in the stock market (36%) and being forced to prioritize short-term savings (36%) cited as areas of top concern.
“People who retire early may need to use money from their retirement fund sooner than planned to make ends meet. Losing employer-sponsored health benefits along with an increase in out-of-pocket health expenses can create further financial strain for early retirees,” says the advisory team at CNO Financial, who collaborated with Bankers Life, in a statement to PLANADVISER.
Mike Heard, president of the CNO financial worksite division team, recommends clients evaluate their experience, and whether retiring earlier is a sound and realistic option. Completing a thorough inventory of all finances and savings, including assets, debts, interest rates, income and expenses, and creating a realistic monthly budget outlining how much cash will be needed to cover those expenses, is a helpful starting point.
“You might also want to encourage your clients to think about how expenses might change based on how their personal situation could evolve in the next year,” he says. “For many, this might be the right time to find a ‘Second Act’ in retirement, pursue a different interest or hobby, or even a new job that allows for more flexibility.”
Cruz echoes a similar statement, asking retirees how they plan to supplement their income and how much they need to live a comfortable lifestyle. Heard says to consider timing—as early withdrawals can incur hefty fees—along with prioritizing health care and considering the high costs associated with it. Supplemental insurance can help cover some costs and should be a part of retirement planning, he adds.
“Many supplemental products are portable, which means if an employee faces an unexpected retirement or is furloughed, that supplemental health product remains with them wherever they go,” Heard continues. Many clients believe they are fully protected with a standard health insurance plan in the event of critical illnesses including cancer, stroke, or heart attack, but these additional costs in treating life-threatening illnesses can be higher than some plans will cover. Critical illness insurance, Heard suggests, can help by paying out benefits if an individual is diagnosed with a covered critical illness.
Lastly, Heard urges advisers to speak with their clients about adding life insurance to a holistic retirement portfolio. A “living benefits” rider option allows policyholders to exercise a portion of future life insurance proceeds should they meet certain medical criteria, such as a long-term event.