Prior to COVID-19, markets were strong, unemployment was low, and consumer confidence levels were high. The retirement industry was moving in a very positive direction as well.
We saw some needed relief and support coming from the SECURE Act. Most retirement plan providers were investing in financial wellness services and capabilities designed to help American workers take a holistic approach to money. As a part of these efforts, we also helped many address a broader range of challenges, including managing student loan debt and health care costs as well as underscoring the importance of having a will or an estate plan.
For many workers, immediate financial needs took priority over long-term savings goals. However, as is the case with most economic downturns, personal savings rates increased, as high as 34% in April 2020 [according to Statista.com], and spending rates plunged. For those who kept their jobs and had extra cash on hand, they were effectively shut down from spending in many areas, like travel, entertainment, and hospitality.
Some retirement plan sponsors reduced or suspended matches. Many participants in retirement plans took advantage of the withdrawal provisions in the CARES Act and reduced their long-term savings to satisfy current spending needs and wants. With that said, we did see a lot of resilience among workers who kept on saving, and in many cases, saved even more. There was less reaction around the volatility that emerged in the market, and while retirement income was not a big focus, there was, and is still, interest in planning for it.
Strike the right balance between spending and saving
So here we are in the early stages of 2021. Spending is up, and personal savings rates are plunging (from that high of 34% in April 2020 to 13.6% in February 2021). Not only is spending up, but revenge spending is up.
What is revenge spending? It’s that vacation people didn’t take or that wedding they didn’t hold. It’s the boat they never bought or the addition they never put on their house. In this case, it’s what was put on hold in 2020. In the first quarter of 2021, we’re already seeing significant uptick in travel spending.
So, when it comes to long-term savings, what is the message to the millions of American workers that we all serve? It’s pretty simple. Don’t “revenge-spend” everything away. Now is an excellent time to help clients lock in any gains from 2020, and continue to position themselves for improved financial health in the years ahead.
There are several simple action steps you can encourage among your individual investors and plan participants as a part of your education efforts this year, including:
- Get back to planning and thinking about the long-term. Start with writing it all down in one place—assets, debts, and all sources of recurring income and expenses. Add a “to-do list” of financial action steps such as developing or updating a budget and creating a will.
- Take advantage of the low interest rate environment. Consider shortening the duration of their mortgage.
- Review 401k and IRA plans. Assess if they are contributing enough and diversified enough. If your client is nearing retirement, engage in conversation about retirement income. Help them assess if they will have the paycheck they need in retirement, and if they know how much income they will need.
- Pay back any COVID hardship withdrawals from retirement. If repaid to the plan within three years, there are no adverse tax consequences.
- Encourage parents to talk to their kids about money. They are still the biggest influencer on them when it comes to money.
The last year has been a real struggle for millions of American workers. For many, a vacation may be well deserved. The key for us is to help workers strike the right balance and, where possible, help them lock in gains from the reduced spending and higher levels of savings over the last year. Let’s not let revenge spending erase all those gains.
Jerry Patterson is Senior Vice President of Retirement and Income Solutions at Des Moines, Iowa-based Principal Financial Group.
Editor’s Note: This op-ed column originally appeared in 401(k) Specialist Magazine, Issue 2 2021