The Most Dangerous Age For Retirement
If you’re 55 or over, your retirement may be more uncertain than ever before. Despite that more people than ever are retiring early in the face of an ongoing pandemic, uncertain economy and record low interest rates.
A recent report released by the Retirement Equity Lab at The New School, estimates that as many as four million people will be forced into early retirement before the end of the COVID-19 pandemic. So far, the crisis has pushed 50 percent more workers over the age of 55 out of the labor force than the Great Recession twelve years ago. And once they leave the workforce, older workers have a harder time getting back in. Already “42% of the 2.9 million older workers who left the labor force report retiring, compared to the 28% at the start of the Great Recession,” according to the report.
To make matters worse, the impact on the job market isn’t going to improve until the number of new virus infections comes down to a rate that makes people comfortable going out to eat and back to theaters. With no prospect of a widely available vaccine until Q2 or Q3 2021, it’s unlikely the unemployment rate will dip below 5% until 2022 and maybe not until 2023 or later.
The job market’s recovery from the Great Recession was ultimately the best the U.S. has ever seen with unemployment hitting a record low 3.5 percent. But it’s easy to forget that the recovery was more than a decade in the making and that unemployment stayed above 5% for more than five years. Though the jobs recovery since the depths of the COVID recession in April has been amazing — there have been nearly 4 million jobs added in five months — the pace of job creation has slowed considerably. Neil Irwin at the Upshot points out that at the current rate it will take a year and a half to get back to January 2020’s unemployment rate, and if hiring slows due to the deep damage inflicted on employment relationships, business ties, and financial markets, a full recovery could be another decade off.
Being forced into retirement early has many negative consequences, not the least of which are reduced Social Security benefits if you file at 62 and the loss of savings either because you stopped contributing to retirement accounts or because you drew on them. According to economist and professor Theresa Ghilarducci who studies retirement at the New School for Social Research in New York City, workers who are 55 and up now have a 50/50 chance of falling into poverty in retirement.
The best option for workers who have already lost their jobs is to refrain as much as possible from dipping into retirement savings accounts to replace lost income. Though many expenses feel like they’re absolutely necessary, especially when you already have an emergency fund to draw from, cutting spending if at all possible is the best way to go. That means taking a long look at your present budget and the budget you expected to have after retirement.
Even if you’re over 55 and you haven’t lost your job, you should still review your current budget and how you plan to spend money in retirement. If you don’t have an emergency fund, now is the time to start one. Professor Ghilarducci recommends saving at least six months worth of current expenses. And if you haven’t been regularly contributing to your retirement accounts, this is the year to start maximum contributions, including catch up contributions.
The pandemic has laid bare the fragility of most people’s retirement preparedness. We should also keep in mind that COVID isn’t a once-and-done, once-in-a-lifetime historical event. Already in the 21st century we’ve seen a major terrorist attack, a global financial crisis that almost produced a global depression and a major pandemic. Three of the four horsemen of the apocalypse have been represented, and is that the sound of hoofbeats in the distance?
Christine Benz from Morningstar MORN also recently wrote about how people should adapt their financial plans in the face of COVID. She suggests ways for people to think about
- Emergency savings
- Managing health care costs
- Planning for early retirement
- Accounting for low yields
From the threat of ultra-low interest rates to runaway inflation, the many unpredictable impacts of climate change and the political changes that will result from them, the window of focus on the future hasn’t been this cloudy since the Second World War. Investing rules for retirement savings that held good for thirty years are coming under scrutiny as savers grapple with these uncertainties.
One key lesson everyone should take away is we need to be more proactive in our retirement saving and build a comprehensive and robust retirement plan.