The COVID-19 pandemic hit hard in early 2020, and it continues to remain prevalent as we near the end of the year. Whether you’ve recently retired or it’s coming up in the next few years, the virus has likely brought about some financial uncertainty regarding your readiness for retirement. Before making any sudden changes, it’s important to remain rational and avoid the five big retirement mistakes below.
Mistake #1: Neglecting Your Emergency Fund
No word describes 2020 better than “unexpected.” Therefore, it should come as no surprise that preparing for the unexpected sits at the top of our list. 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.
Mistake #2: Making Unnecessary Withdrawals
Withdrawing from any retirement accounts early could mean big tax penalties and less income in retirement. While the CARES Act has temporarily waived the 10% penalty for early 401(k) withdrawals (up to $100,000), utilizing this option before considering other alternatives is unwise.
The money you withdraw from a traditional IRA now will be subject to income tax come 2021. And to avoid robbing your future retirement, you’ll want to develop a plan to replace that lost income in the coming years. If you’re struggling to cover your expenses amidst the pandemic, talk to your financial advisor about other options you may want to explore first. Look into what relief programs your state or local government offers, tap into your emergency fund if necessary, and reevaluate your budget.
Mistake #3: Making Emotionally-Driven Investment Decisions
It seems that we can’t go a day without hearing the word “coronavirus.” From social media posts to advertisements and news outlets, there’s no escaping the pandemic. COVID-19 aside, other big news stories are hard to avoid as well - the upcoming election, the staggering rates of unemployment claims, the stock market rising and falling, etc.
After absorbing info day in and day out, it’s nearly impossible not to let it affect your financial decisions. 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.
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, and now you enjoy a quiet evening at home. Your daily habits and what you spend money on have likely 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 your spending over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your retirement timeline, an extra couple of thousand in savings this year could grow significantly over the coming years.
Mistake #5: Ignoring CARES Act and 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% 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 acceptable
In addition, required minimum distributions (RMDs) have been waived for the remainder of 2020. If you don’t need this money to make ends meet, leave it in the bank to accrue more interest. Plus, your tax obligation will be lower without the additional income.
If the pandemic has created some cause for concern regarding your retirement, don’t hesitate to reach out to us! We work with retirees and pre-retirees to develop retirement strategies and determine if things need to be adjusted.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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