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Avoid these 5 Retirement Mistakes, In The Time of Covid-19

Retirement Funding Insights Taxes

The pandemic uprooted many of our lives in early 2020, and it continues to permeate through our lives as we approach the end of the year. If you just recently retired, or you plan on retiring in the next few years, the virus most likely has you questioning if you are actually ready from a financial standpoint. Before you make any making any sudden changes, that may be based on an emotional thought process rather than a rational one, it’s important to avoid these five retirement mistakes below.

Mistake #1: Neglecting Your Emergency Fund

If we were to use a single word to describe 2020 so far, it would have to be "unexpected."  After living through 2020 thus far, you may not be shocked to see that preparing for the unexpected sits at the top of the list. When life happens and times get tough, it can be easy to forget important financial habits - like building and maintaining your emergency fund. 

If your income has been affected by COVID-19, it's very possible you are struggling to make ends meet right now. But that doesn’t mean we should begin to neglect our emergency fund, although the reasons may be legion. Preparing now can go a very long way when the unexpected does hit - and make no mistake, it will. Issues like a health emergency or a car repair, you never know what surprises may come your way in retirement.

Mistake #2: Making Unnecessary Withdrawals

Withdrawing from any retirement accounts early could mean big tax penalties. While the CARES Act has temporarily waived the 10 percent penalty for early 401(k) withdrawals (up to $100,000), utilizing this option before considering other alternatives may be unwise.1 

The money you withdraw from a traditional IRA will still be subject to income tax and may create some avoidable taxes. To avoid robbing your future retirement, you’ll want to develop a plan to repay or replace that lost income. If you’re struggling to cover your expenses due to the pandemic, it's imperative that you talk to your financial advisor about some other options that could be available to you. Look into all relief programs your state or local government offers, decide when, where, and why to withdraw money from a specific account, and if necessary reevaluate your budget.

Mistake #3: Making Emotionally-Driven Investment Decisions

It's nearly impossible at this point, to go a day without hearing the word “coronavirus.” On social media, in advertisements, and seemingly the only topic news outlets want to talk about, there’s just no escape. If we eliminate COVID-19 for a second, (and it would be a blissful second!) big news stories are just as hard to avoid  - the upcoming election, the staggering number of unemployment claims, the stock market volatility, etc.

After being pounded on by these outlets day in and day out, it’s almost impossible to totally eliminate it from your decision-making process surrounding money. 

  • Should you sell-off your portfolio and stuff it under the mattress? 
  • Should you rebalance now? Or wait? 

Working with a professional can bring an objective, scientific and education-based approach to the question of what to do with your assets. Together you can focus less on the noise and more on your individual economy and goals as you head into retirement.

Mistake #4: Forgetting to Reassess Your Current Budget

If your circumstances have changed since you last made your monthly budget, now may be a good time to go through that exercise again. It's likely you used to commute to work, and now you’re working remotely. Or you went to a happy hour one night a week, now you enjoy a quiet evening at home with Netflix on. It’s a virtual certainty that your daily habits, and what you spend money on, have been drastically affected by the pandemic.

In many cases, this is great news! You spend less on gas or a train pass, vacation, eating out, gyms, and much more. Reevaluate how much you have spent and where you have been spending it over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your timeline, a few hundred or thousands of dollars could go a long way toward securing your future retirement.

Mistake #5: Ignoring CARES Act & Other Legislative Changes

The CARES Act was passed on March 27, 2020, meaning you’ve likely heard of it by now. It’s possible you even received a stimulus check in April or May. But did you know that the CARES Act offers some significant changes for retirees and those about to retire?

As mentioned earlier, the CARES Act has waived the 10 percent tax penalty for coronavirus-related withdrawals from your 401(k) account up to $100,000. 

Those who may qualify for this option include:

  • Someone who has contracted the virus
  • Those caring for an immediate family member who has the virus
  • Anyone experiencing financial distress due to being furloughed or laid off during the pandemic
  • Business owners who needed to cease operation or reduce hours
  • Any additional circumstance in which the IRS deems acceptable1

In addition, required minimum distributions (RMDs) have been waived for the remainder of 2020.1 If you don’t need this money to pay your bills, leave it invested to maximize potential growth. This will also lower your tax obligation due to your now lower income.

If the pandemic has created some cause for concern when it comes to your retirement, don’t hesitate to reach out to us!. We work with retirees and pre-retirees to develop retirement strategies and determine if things need to be adjusted.

 


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About the Author 

James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here

 

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  1. https://www.congress.gov/bill/116th-congress/senate-bill/3548/text