4 Things You Can Learn from COVID-19 to Improve Your Retirement Plan

COVID-19 has affected the global community. With more than 6.6 million cases around the world, the pandemic has caused many serious implications. The impact has not only been on the physical or mental health of people but has also affected their financial well-being. The crisis has become one of the most critical challenges faced by the human race globally. With such a strong blow to the financial markets worldwide, you must realize the consequences of the same on your retirement plan. COVID-19 has been a tough teacher. It has given us some serious lessons that need to be remembered and implemented for good monetary health in the future.

Here are 4 important lessons to learn from COVID-19 to improve your retirement plan:

1. Always keep an emergency fund

Several Americans are raiding their retirement accounts to manage coronavirus-related hardships. Many people are living off their retirement savings instead of banking on an emergency fund. This is reducing their future funds, diminishing investment values, and lowering returns. The main reason is the loss of income and lack of savings. As per research, one out of every fifth American is relying on their 401(k) plan, or other retirement savings account to make ends meet. 14% of people, retired, unemployed, and working have already tapped into these funds. The figures are alarming, but this could be avoided with a contingency fund.

Savings are the foundations of every plan. The more you save, the better financially equipped you are to take on everything – planned and uncertain. A critical lesson taught by the pandemic, which you must imbibe is to always have an adequate emergency fund. This holds truer in the case of people nearing retirement. An emergency fund is a crucial part of a sound financial plan. It helps you absorb shocks and bumps of life, such as medical costs, loss of income, etc. You must also note that an emergency fund is different from retirement accounts such as an individual retirement account (IRA) and a 401(k) plan. In general, retirement accounts help you meet your future demands of old age. These balances should not collide with your contingency fund.

A robust emergency fund can contain approximately 6 to 8 months of your current salary. This is needed to ensure that you can take care of your health and also cover your routine expenses, and pay your outstanding bills and liabilities on time. To be more accurate in the figure, you can calculate your average household expenditure and also your non-discretionary personal expenses. As per the 2019 consumer expenditure figures, the average annual expenditure of an American household was equal to $60,060 in 2017. Even if your household costs are lower than this, you must at least save this much to keep your finances afloat in such vulnerable times.

2. Have a secondary source of income

A major flaw highlighted by the COVID-19 pandemic is the dependence on one single source of income. Most people manage their expenses and fuel their retirement plans through their job earnings. In this process, the contribution is only limited to the amount of money left or set aside as savings after accounting all monthly expenses. But the funds might not be enough to help you sail through a crisis such as the one imposed on the world by the novel coronavirus. Relying on one source of income not only limits your financial contributions but also makes you vulnerable to a complete loss of income. The COVID-19 crisis has led to historic loss of jobs in the U.S. As per the reports of May 2020, the predicament has led to a loss of more than 36 million American jobs. With the increasing intensity of the situation, the expected figures are set to cross the mark of the Great Depression of 1933. In such times, one source of income completely fails to fund the expenses or mobilize the retirement contributions. As a precaution, you must always invest in some stable form of income which can provide you with secondary funding when the primary fails. These include part-time jobs, freelancing projects, online or rental avenues to make some extra money, etc. You could also choose fixed earnings from bank deposits or monthly investment returns.

3. Consistently review your assets

The most common form of funding for a retirement plan comprises of investments in assets such as equity, debts, etc. People often become complacent once they have invested their money in such accounts, assuming their retirement savings are on the right track. But, the pandemic has shed light on how this assumption can cause financial havoc. In general, people who have more than ten years to their retirement hold more equities, implying a larger risk and reward. However, people nearing retirement have more investments in secure assets. This might seem perfect until a situation like COVID-19 arises and shuffles the perspective.
The market fluctuations are beyond imaginable, and the impact on the stock prices has been drastically negative. This has further aggravated for people whose assets have not been reviewed timely. The assessment could have helped to shift investments from equity to debt, delay portfolio maturity, re-invest, and maintain flexible and dynamic portfolios.

The pandemic has highlighted the importance of actively reviewing asset distribution and adjusting as per your needs. Currently, the goal must be to invest in safer assets and consistently review your portfolio to manage your investments. Typically, for people nearing retirement, the combination should have more debts and lesser equities. Another critical aspect, in this case, is the diversification of assets. There must be a right balance of large-cap, mid-cap, and small-cap funds, with adequate distributions across sectors. That said, you must not make panic moves. All decisions must be carefully vetted and executed to check if they are in alignment with your new retirement plan.

4. Focus on personal budgeting

Budgeting and saving are two essential yet underrated pillars of a retirement plan. However, COVID-19 has made people realize this the hard way. A very critical lesson to learn from such times is the value of budgeting and saving for long-term financial adequacy. Often, people splurge and save only what is left. With the alarming figures of people withdrawing from their retirement accounts, the global pandemic has highlighted the lack of savings. According to a recent report from the U.S. Federal Reserve, almost a quarter of American adults have no retirement savings or pension. Given the crisis, these figures can cause inconceivable damage.

No matter how far your retirement years may seem right now, your plan should reflect your goal at all times, and your savings must be in accordance with your lifestyle. Budgeting and saving must be a way of life. You should list and track your expenses, set a savings goal, keep raising the bar, and borrow only when absolutely necessary.

To sum it up

As the world grapples to overcome the pandemic, retirement planners need to be on their toes to ensure they plan well for their post-retirement life. Every adversity brings some wisdom, and it is important to learn from it. You can seek help from financial advisors to improve your retirement plan and be financially safeguarded in the long-run.