The impact of the global COVID pandemic is physically and financially devastating, disrupting lives and ruining best-laid plans.
The economic consequences sent individuals scrambling to enact emergency stop-gap measures to deal with day-to-day uncertainty. As a result, many retirement plans and saving strategies were upended, which can now be restarted as the crisis wanes. Yet how is it done and where do participants begin?
Joel Schiffman, Schroders’ Head of Intermediary Distribution, North America, has specific and actionable steps that workers can take to get back on track. While they might be understandably apprehensive and shell-shocked, Schroders’ research about recent trends points to a way forward.
“The broad statement around COVID and its impact is that it’s disrupting retirement readiness timelines,” Schiffman said. “As a result, it’s forced people to potentially lose their focus in terms of planning, which has implications for the decumulation, or retirement income, phase of life.”
Referencing the CARES Act signed into law on March 27, 2020, he noted the relief it provided for those in need. It allowed for withdrawals up to $100,000 without penalty and no taxes if repaid within three years. It also allowed individuals to borrow up to $100,000 from their plans, an increase from $50,000.
Between the various provisions in the act, $200,000 could be taken from a retirement account. While needed to address the immediate crisis, long-term savings goals were nonetheless affected.
“Taking money from the plan meant a loss of tax-deferred growth,” Schiffman explained. “If you start compounding that out at 5% or 7% for however many years until someone retires, that’s real money. It changes the outlook of what you may have available at the date you want to retire.”
Retirement income research
Referencing the company’s annual retirement survey, he said everything from planning to saving to investing has been impacted.
“We found that 39% of Americans did spend more time and attention on saving for the future during the lockdown, and it still wasn’t enough. People spend more time figuring out what to watch on Netflix than they do on retirement planning.”
Conversely, researchers analyzed the 60-to-67-year-old cohort and found just 26% of those not yet retired believed they had enough money for retirement, while 60% said they did not have enough. Additionally, 14% said they had no idea if they did, or did not, have enough for retirement.
“We found that 39% of Americans did spend more time and attention on saving for the future during the lockdown, and it still wasn’t enough. People spend more time figuring out what to watch on Netflix than they do on retirement planning.”
Joel Schiffman
“Those are people that are theoretically knocking on retirement’s door,” Schiffman emphasized.
To get back on track, participants must go back to whatever their plan is. If they don’t have one, the pandemic’s aftermath made it even more important to develop one. If they paused contributions, they need to be restarted, at least at a level to get the company match. And a more aggressive asset allocation may be necessary to regain lost time.
“You have to think about the full complement of income sources when deciding how to get back on track,” he added. “Not everyone is wired in a way that saying, ‘Hey, save more,’ will resonate. You have to develop a plan or modify your plan depending on what the impact was to your assets; whether or not you took a loan, whether or not you took a withdrawal, etc. Many people had to take loans and withdrawals, and you can’t fault them for that.”
The impact of Social Security is also critically important, as is the consequences of receiving benefits before full retirement age or not waiting to maximize benefits by waiting to age 70.
Catch-22 conundrum
The research did point to what Schiffman called a Catch-22; investors generally said they don’t have plans because they don’t feel like they have enough assets to justify it, yet a plan is needed to gather assets.
“It all points to decumulation,” he said. “That’s a challenge. Our survey showed that almost three-quarters of those in the survey express concerns that they do not know how to generate income or draw down assets in retirement.”
Thankfully, several products are on the way, and while reluctant to discuss specifics, Schiffman hopes a sustainable income solution from Schroders will be available before the end of the year.
It all points to decumulation or retirement income,” he said. “That’s a challenge. Our survey showed that almost three-quarters of those in the survey express concerns that they do not know how to generate income best or draw down assets in retirement.”
Joel Schiffman
“If you think about what can be done, get back on a plan and continue to contribute to the best of your ability, so you get the company match,” he concluded. “Set a more aggressive asset allocation. You’re trying to develop a portfolio or solution for yourself that provides a consistent level of monthly income. It should protect against inflation, potentially help in terms of downside protection, and have an aspect of liquidity so you can assess your assets as circumstances change.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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