Clearing Up Confusion About Retirement Timing

The effects of COVID-19 on employees’ finances has caused many to question whether they need to rethink their timing for retirement. For some, that could mean the time is now.

Kalimah White, senior trust adviser and vice president at TD Wealth in Wilmington, Delaware, says she tried to get her mother to retire because of her possible exposure to COVID-19. “She was worried about it, but I worked to help her realize she had sufficient funds and could retire,” she says. “Retirement isn’t as scary when you are forced to face it.”

“People are not going to the theater or taking a cruise in the last few months when they would be in retirement. However, this shows people they can cut back if they need to,” says Anna Rappaport, fellow of the Society of Actuaries (SOA) in Chicago. “Some people will be able to afford to retire, and some will be willing to say they can downsize.”

Shane Bartling, a retirement consultant at Willis Towers Watson in San Francisco, says people have more resilience, flexibility and adaptability than they give themselves credit for. “It’s been a fact that a large number of retirements have been affected by outside events at not an ideal time—their or a family member’s health or their company’s health is often the factor. In stats I’ve seen, retirement happens several years earlier than people originally contemplated and forces them to adapt,” he says. “Capital markets will always be volatile and having a degree of flexibility in lifestyle as well as resources to draw from is important in retirement planning and the navigation of retirement.”

The Society of Actuaries’ 10th biannual Risks and Process of Retirement Survey found more than half (53%) of pre-retirees expect to retire at age 65 or older. However, the majority of retirees (54%) retired at age 61 or younger. More than three-quarters (76%) of retirees surveyed are financially as well off or better than they expected before retirement. Pre-retirees are more likely to expect their savings or an employer retirement plan to be a major source of income (37%) than retirees report that they are (13%). Meanwhile, Social Security turns out to be a more important source of income for retirees (64%) than pre-retirees expect it to be (50%).

“We’ve been doing these surveys since 2001 every two years and, repeatedly, what we find is pre-retirees say how long they expect to keep working and retirees retire four to five years earlier on average,” Rappaport says. “This is frequently because they were laid off or had job problems, had a sick family member or were in bad health themselves. It’s pretty common to retire earlier than expected.”

Bartling says Willis Towers Watson ran some analyses and found that the effect of the market drop in March—with no change in lifestyle at all and no change in disposable income or health care—was surprisingly favorable and had a smaller than expected impact on retirement timing. “Many people I spoke with initially said this will add four or five years to the time they will be able to retire, but, in the analysis, few had an impact more than 12 to 18 months, and, for the vast majority, the impact on retirement timing was less than a year.”

“People have become more receptive to changing their lifestyle and scaling back to have a comfortable retirement on their own terms and also have a nice cushion,” Bartling says.

Tim Joyce, co-owner of Fidelus Advisors in Abingdon, Virginia, says this is a good time for people to assess whether they are ready for retirement. “With a lot of people not working and the drop in the market earlier this year, we’ve seen a lot of people are serious about talking now,” he says. “They really don’t know what to know. They’re just looking at the total of the money they’ve saved and don’t know if it’s enough and where to start [to figure it out].”

Helping Participants Figure It Out

In Willis Towers Watson’s research on benefits packages, even before the COVID-19 crisis, employees said they were least satisfied with employer support in helping to manage finances, Bartling says. “This is particularly a concern when transitioning to retirement. It’s not easy to undo retirement,” he adds. “Having multiple perspectives when planning for retirement, including multiple tools to evaluate their situation, is something employers can do better on.”

Bartling notes that his firm has found that roughly one-third of larger employers are in the process of evaluating new financial counseling services. And such services are not unusually expensive to offer, he adds. “Employers can offer robust planning tools and a human touch, which is important—a combination of technology with a person they can speak to—for about $8 per employee per month,” he says.

Ray Radigan, head of personal and corporate trust groups at TD Wealth in New York City, also says one-on-one education and advice is important. He notes that his firm’s own plan offers retirement advice both through technology and wealth planners. “About a year ago, wealth planners told us we should keep six months of income saved in case of emergency, but once we retire, we should keep a year’s worth saved. People calculated this and many found they could still manage retirement,” he says. “The most important thing is to offer tools that are very visual and interactive and pair it with advisers.”

White says one of the things that has been important to her is more education being offered by providers. “My 401(k) provider had a webinar about what participants can do about taking money out of the plan. It highlighted the calculators on the website participants can take advantage of,” she says. “Facilitating that education is a great thing plan sponsors can do. And they can help participants navigate through the tools available. People are afraid, and with more knowledge they have less fear.”

During a pandemic or not, a big fear of many approaching retirement is whether they can afford living without a paycheck, says Nancy DeRusso, senior vice president and head of Coaching at Ayco, a provider of company-sponsored and individual financial counseling services, in Irvine, California. But the current crisis has highlighted that worry.

“People are now looking at what they have, what they care about and what they should be doing,” she says. “People are used to thinking about what’s coming in. Now they have to make a decision about from where to get money they are not getting.”

DeRusso suggests that when people are afraid, they should take actions within their control. “Without information, there is more fear and paralysis. The first step is to find out where they stand. They may be surprised and see they are on track to retire. If not, at least they’ve taken action to determine their next steps,” she says. “They can also reassess their goals for what the next 20 to 50 years will be like.”

Not knowing how to turn savings into income makes people leery of retiring, Joyce says. “Answering the question, ‘If I can’t go back to work, can I retire?’ takes sitting down with someone who can show them how to turn savings into income,” he adds.

Joyce says the first thing people need to know is how much they will need, and he points out that most people will not need as much as they currently spend. “They should start with writing down what their bills will be, then what kind of retirement they want—from just being able to meet daily expenses or more. They need to know how much income their savings will provide and allocate it toward expected expenses,” he says.

Joyce adds that people often don’t understand how much income Social Security will provide. He finds that some retirees can make it on Social Security and don’t need much, if anything, from defined contribution (DC) plans.

Teaching participants how to translate savings to income is an area where Joyce says DC plan sponsors could improve. He says he sees many DC plan clients that do not have advisers who help employees, and plan sponsors should hire one that does.

Joyce notes that the Setting Every Community Up for Retirement Enhancement (SECURE) Act gives DC plan sponsors guidance to offer annuities in their plans. “This will be a really big help with employees,” he says. “It’s the only product that will provide income for life and provide peace of mind no matter what the markets do.” Still, he warns that plan sponsors should work with their advisers to analyze which annuities are best—costs vary and some provide more income than others.

Retirement planning should include an evaluation of how much income is already in a stable annuity type income stream not subject to volatility, Bartling says. This would include Medicare and Social Security, a defined benefit (DB) pension plan and a guaranteed component of other savings.

On the income side, DeRusso says people should look at all streams and sources and consider how to take distributions. In addition to Social Security, annuities and pensions, sources of income may include investment income, rental income, retirement savings, cash savings, health savings accounts (HSAs) and equity compensation plans.

DeRusso says after considering income sources, a potential retiree needs to examine expenses, their tax situation and their asset allocation.

“Take stock of all expenses. People often underestimate expenses—the amount, frequency, additions and subtractions,” she says. Hobbies, travel and health expenses may be additions. Subtractions may include financial help for children and a mortgage. “People should also remember the money they were setting aside for retirement they will no longer be setting aside. That wasn’t necessarily an expense, but it is something no longer coming out of income,” she notes. DeRusso adds that, when looking at expenses, people should determine what is fixed and what is discretionary. And even fixed assets can be reassessed. For example, she says, someone could decide to move.

Rappaport says the SOA did focus groups with those recently retired to those retired 15 years or more and found that, when planning, a lot of people looked at regular expenses, but they didn’t consider what might happen down the road, such as fixing a roof. Likewise, people considered health care premiums and prescription drug spend, but not dental expenses or unexpected health expenses. “Many people forget to include giving money to children or other family members, doing things they enjoy, and long-term care in their retirement planning, she adds.

“When determining whether you can afford to retire, it’s important to think about the shocks,” she says. Rappaport says the SOA found people may fare well with single shocks but not multiple shocks.

However, when considering how expenses change over retirement, expecting to spend as much after retirement as before is not realistic, Rappaport says. There’s no commuting expense and no Social Security taxes on income, for example. However, she admits that it’s complicated to calculate all expenses when, for example, health care costs increase more than inflation.

Bartling says health care is a top priority when evaluating retirement preparedness. He says employees can improve their retirement readiness by several years by taking full advantage of HSAs and their “triple tax-free” nature.

People also need to understand how taxes work in retirement, DeRusso says. They may be in a different tax bracket. She warns that the first year in retirement may look different than others, so people should look forward. She adds that people should consider which income streams are pre-tax and which are post-tax.

 “Tax implications are a key part of what we do,” DeRusso says. “Employers do great education, but each individual’s situation is unique, and employers are not able to know what they don’t see,”

Roth is an overlooked opportunity, especially given current tax law that will sunset in 2026 for the majority of the workforce, Bartling says.

When looking at asset allocation, people need to consider the time horizon for investments and their risk tolerance. DeRusso says people should do or re-do a risk tolerance assessment. “Years ago, they may have thought one way about risk, but how did they feel about the market drop caused by the pandemic, and what is their thought about risk now?” she notes. Also, when considering the risk to take in their asset allocations, specific situations can affect it. For example, DeRusso says, if the participant has a spouse or partner, he must consider whether their retirements will happen together or whether they will have one income for a period of time to rely on.

Plan sponsors that provide resources should make them as personal as they can be, DeRusso says. They can look at the data they have and target education to employees to make it resonate with them. She also suggests plan sponsors can offer checklists to pre-retirees that show what to do in the months or in the year before retirement.

However, employees may not want to share all their information with plan sponsors, so two employees that seem to be in the same situation may not be. “That’s what financial planners are for,” DeRusso says. “We can look at all sources of income, the family situation and employees’ goals and can help sort things out. Pulling it all together can be the hard part, and that’s where one-on-ones come in.”

“The more people plan on a regular basis, the more prepared they will be,” DeRusso says. “If someone had been preparing before the pandemic, they likely feel more comfortable now than someone who hadn’t.”

When determining if one is prepared for retirement, Radigan says measuring financial wherewithal is obvious. “Then, in my opinion, it’s a mindset thing: What am I going to do and how am I going to be satisfied in retirement?”

White notes that people sometimes stay in the workforce because they want to. “It’s a personal decision, for sure,” White says.

Rappaport says the SOA’s report, “Managing Post Retirement Risks: Strategies for a Secure Retirement,” has about 15 risks in it and each one describes how to manage the risk. “That’s a guide employers can offer employees,” she says.

In addition, the SOA worked with Financial Finesse to create a guide for choosing financial planning software that is suited for employees.

“People who think they can go ahead and retire need to be careful to think about financial shocks and things they may have left out of their planning. On the other hand, if they have a good savings balance and are willing to moderate their spending, they will be fine,” Rappaport says.