Retirement Planning in the Pandemic’s Wake
The COVID-19 pandemic and resulting financial uncertainty – including widespread layoffs and stock market volatility – have taken a toll on many Americans’ short- and long-term budgeting and savings goals, particularly when it comes to retirement planning.
Facing immediate and difficult decisions, by fall 2020 many people were decreasing or even stopping their retirement savings, according to multiple surveys, hurting any plans they may have had for retirement. As Americans and the economy recover on many fronts, now is the time to begin, revisit or reevaluate a long-term investment strategy for building retirement funds.
A smart retirement plan can help deliver more freedom and security for your life down the road. Consider that Social Security only covers about 40% of the average earner’s income, meaning you’ll need to make up the difference with income from retirement plans, other investments and potentially working part time. A general rule of thumb is that you will need about 80% of your pre-retirement income when you leave your job.
This means that tax-deferred investing for retirement can be the key to retiring comfortably. Benefits of this approach include reducing the amount of tax you owe on the income with pre-tax savings, deferring tax on the earnings accrued on the investments, and providing an income stream in retirement.
Where to Start
Financial hardships related to the pandemic have served as a reminder of the importance of having a plan and being prepared, and the KeyBank team has heard from a significant number of customers who want to know more about planning for retirement.
Fortunately, there are a few simple things you can do to save – and save consistently – in support of your future retirement and the lifestyle you envision, even if setting aside money isn’t top of mind for you right now.
- First, build up an emergency savings account for unexpected expenses. We recommend beginning with the goal of keeping $1,000 in a savings account you can use for emergencies, then building that up to approximately six months of your take-home pay. Consider enrolling in an automatic savings plan to help make it a habit. Additionally, try to keep a cash buffer in your checking account to avoid accidental overdrafts.
- If your workplace offers a 401(k), contribute to it – and if your employer matches your 401(k) contribution, save up to the matching percentage to capture your company contributions. Don’t stop there, though. Consider contributing the maximum 401(k) contribution for the most gain over the long term.
- You could also start an Individual Retirement Account (IRA) or a Roth IRA (if you qualify per IRS guidelines), both of which allow you to begin with small contributions and increase them over time as you are able. (With a Roth IRA, note that the savings amount is taxed upfront, and not later when it is withdrawn.)
The key to saving is to be consistent and continuous, knowing that every little bit helps, especially if your retirement date is further away. And be patient with yourself: There may be times that you need to adjust your contributions due to other more immediate priorities, and that’s OK. Just be sure to reassess every year.
Staying on Target
Keep the long game in mind:
Clearly define your retirement goals by considering what you want from a typical day in retirement: Are you traveling overseas a few times a year, taking in Broadway shows in New York, or maybe upgrading your home with an art studio, exercise room or home theater? Your dream is yours alone – and no two retirements are alike.
A general rule of thumb is to estimate that every year, you’ll need between 70 and 80% of your pre-retirement income level to cover your retirement expectations, taxes and healthcare expenses.
Why reduced salary estimates in retirement? "Think of it this way," said Nancy L. Anderson, CFP®, Regional Financial Planner with Key Private Bank. "After paying your share of Social Security taxes and deferring income into retirement plans out of your paycheck, you may already be living on 80% of your salary today. Using a guideline of 70 to 80% of income in retirement may match what workers are already living on."
Anderson continued, "Stay flexible. Plan for an additional lifestyle buffer expense of 5-10% of your retirement income needs for the first 10 years in retirement. Many retirees tend to spend more in those early years of retirement due to pent-up demand for travel and/or enjoying hobbies."
All of these considerations will help shape and fulfill your retirement vision – whether you’re traveling the world or settling into your current home. You can use KeyBank’s Retirement Planner Calculator to get an idea of what it will take to make that vision real.
- Audit your income and current retirement contributions regularly and review your expenses to see whether you can make adjustments that would allow for additional contributions to your retirement planning. Look for supplemental or incremental sources of income options to boost your supply of short-term cash that would enable you to add to your retirement savings.
Consider other factors that will impact your retirement financially, including Social Security, healthcare options and alternative forms of employment such as part-time work. When it comes to Social Security, it may be tempting to claim it early – but the longer you hold out, the higher your monthly benefit will be.
Although Medicare eligibility begins at age 65, retirees may also find private health insurance before then through the Affordable Care Act’s federal exchanges. Finally, remember that retirement doesn’t have to be an all-or-nothing proposition: You may be able to bridge financial gaps with part-time or consultancy work.
What Else Should You Be Doing?
Look into mutual funds:1 These are low-cost investments that combine money from many shareholders to invest in a professionally managed and diversified portfolio. A mutual fund allows you to get started investing with a small amount of money and requires little effort on your part to manage.
To live the lifestyle you envision in retirement, you need a solid plan to get you there. Connect with us by scheduling an appointment with one of our personal bankers, and we can help you navigate the way to the retirement that’s right for you.