“Retirement is wonderful if you have two essentials – much to live on and much to live for.” – Unknown
While it seems like years ago, the COVID-19 pandemic hit hard in February 2020, and it continues to remain prevalent as we near the end of the year. Whether you’ve just recently retired, or you will be doing so within the next few years, it is likely the virus has brought about some financial uncertainty regarding your readiness for retirement. Before making any rash decisions, it is important to remain rational and avoid these five big retirement mistakes below.
Mistake #1: Neglecting Your Emergency Fund
The word that is most synonymous with the year 2020 is “unexpected.” Therefore, it should come as no surprise that preparing for the unexpected sits at the top of my list of retirement mistakes to avoid. When times get tough, it can be tempting to forego or forget important financial habits - like padding your emergency fund. If your income has been affected by COVID-19, you may be struggling to make ends meet for the time being. But that doesn’t mean adding to your emergency fund should be the first thing to go. A little preparation now can go a long way when the unexpected does hit. From a health emergency to car repairs, you never know what surprises may come your way in retirement. An emergency fund remains a key component of a successful retirement plan.
Mistake #2: Making Unnecessary Withdrawals
Withdrawing from your retirement account early could mean big tax penalties and less income in retirement. 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 is unwise.1
The money you withdraw from a traditional IRA will still be subject to income tax come 2021. And to avoid robbing your future retirement, you will want to develop a plan to replace that lost income in the coming years. If you’re struggling to cover your expenses during this pandemic, talk to your financial advisor about other options you may have at your disposal. Look into what relief programs your state or local government offers, tap into your emergency fund if necessary, and reevaluate your budget. Withdrawals from your retirement accounts should be a last resort.
Mistake #3: Making Emotionally-Driven Investment Decisions
The coronavirus is the leading news story just about everywhere that you turn. Whether it's on TV, in the newspaper, or the banner headline on your favorite website, it seems as if we cannot go a day without hearing the word “coronavirus”. There seems to be no escape from this pandemic. COVID-19 aside, other big news stories are hard to avoid as well - the rioting in major cities, the upcoming election, the elevated rates of unemployment claims, the stock market rising and falling, etc.
After absorbing info day in and day out, it’s nearly impossible to not let it affect your decisions about money as well as your investments. Should you drain your portfolio and stuff it under the mattress? Do you need to look at rebalancing assets amidst this market volatility? Working with an investment advisor can bring an objective, scientific, and education-based perspective to the question of what to do with your assets. Together you can focus less on the world around you and more on your individual goals as you head into retirement. Please try to tune out the noise. It has nothing to do with achieving your personal financial goals.
Mistake #4: Forgetting to Reassess Your Current Budget
Have things changed since you last made your monthly budget? Maybe you used to commute to work, and now you’re working remotely. Or you used to spend every Friday at happy hour with friends, now you enjoy a quiet evening at home. It’s very likely that your daily habits, and what you spend money on, have been affected by the pandemic.
In many cases, this could be good news. You’re spending less on gas or commuter passes, travel and vacation, eating out, gyms, and more. Reevaluate what your spending has been like over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your timeline towards retirement, an extra couple of thousand in savings this year could grow significantly over the coming years.
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 make ends meet, leave it in your retirement account so that it can continue to grow tax-deferred. Plus, your income taxes will be lower without this additional 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 help you to determine if you are still on the right path to achieving the retirement that you have always dreamed about.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.