Voices: Coronavirus economy makes early retirement a bad idea
The coronavirus is tempting those of a certain age to stop working. Some financial advisors report that they’re hearing from older clients who’ve grown accustomed to staying home and are worried about commuting and returning to crowded workspaces. If they were planning on retiring in the next couple of years, their thinking goes, why not just pull the trigger now?
For most Americans, even wealthy ones, the answer is clear: Don’t do it. The financial benefits of continuing to work, even for one more year as the pandemic crushes the economy, outweigh the health risks for most people.
A recent report from the New School's Retirement Equity Lab shows how dire the situation is for older employees. About 3 million more of them will fall into lifelong poverty than otherwise would have without a coronavirus recession. And the hit won't just be for the poorest. While only 15% of high earners are expected to lose their jobs, average retirement savings at age 65 for those with retirement assets are projected to drop by 31% post-recession.
For those who still aren't dissuaded, here are some other things to keep in mind. First, it’ll be harder than ever to change your mind. Many retired workers end up going back to work; one study showed that 40% of those working at 65 or after had been retired previously. Employers are now likely to be even more skeptical than usual about hiring older people, who expect higher earnings and are potentially the most vulnerable to the virus. That makes retiring now more of a permanent decision than it's ever been.
A better bet than quitting might be negotiating a part-time schedule, or continuing to work from home after colleagues have returned to the office. Alicia Munnell, director of the Center for Retirement Research at Boston College, said she thinks employers are likely to make accommodations for older workers who are valued.
It's important not to underestimate how much money will be needed to retire comfortably. Some people mistakenly think that their spending will be greatly reduced in retirement, which isn't what usually happens, according to Diahann Lassus, a financial planner in New Jersey. Retirees end up filling their time with activities that come with expenses, she said.
In the volatile financial markets of the pandemic environment, former assumptions about the long-term averages for stock and bond returns in retirement accounts may no longer be valid, said David Blanchett, head of retirement research at Morningstar. And the success of a retirement portfolio may be tied more to timing than investments. If the market tanks in the first few years of retirement, the impact is much more significant than if the downturn happens later on.
In addition to having a well-balanced retirement account, it's wise to create an emergency cash fund of at least one year of living expenses. That’s insurance against having to tap investments when the market is down or recovering.
The perennial question of when to start collecting Social Security benefits will also become more fraught as retirees and soon-to-be retirees look for ways to avoid locking in investment losses. For those who can manage it, the golden rule of waiting until 70 to maximize benefits still applies. That may not be possible now, though, so it's important to weigh factors like health, expected longevity and tax brackets, and to try to calculate the costs and benefits of early Social Security payments for one spouse or the other.
Early retirement can also mean heavy unanticipated health-care costs, which become the biggest expense for most Americans as they age. Retiring before 65 generally means no benefits from Medicare and therefore can add burdens of tens of thousands of dollars for commercial health insurance. The skyrocketing costs of long-term care also make working for another year or two pay off.