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Nicklaus: Americans' path to retirement was already rough, and the pandemic created new potholes

Nicklaus: Americans' path to retirement was already rough, and the pandemic created new potholes

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Americans weren’t all that well prepared for retirement before the coronavirus pandemic hit, and they’re even less ready now.

In a recent Federal Reserve survey, conducted in October, only 37% of working-age Americans thought their retirement savings were on track. One in four had no retirement savings at all.

Since then, these workers have been hit by a couple of shocks. The first, and most universal, was the big drop in financial markets in February and March. The Urban Institute estimates that $3.8 trillion in retirement assets evaporated during the first quarter of 2020.

The good news is that stocks are bouncing back, so workers who are patient and keep contributing to their 401(k)s should be OK.

The second shock will be harder to recover from. According to a followup Fed survey done in April, a quarter of workers had either lost jobs, been furloughed or had their hours cut. Some will have to tap their retirement accounts to pay rent or buy groceries, and many had little or no financial cushion to start with.

More than half of people who suffered a job disruption — and one-third of all workers — said they wouldn’t be able to cover a $400 emergency expense.

“This income loss is really going to shortchange long term goals such as retirement security,” said Lowell Ricketts, a policy analyst at the St. Louis Federal Reserve Bank, during a May 28 webinar sponsored by the National Institute on Retirement Security.

His St. Louis Fed colleague, Ray Boshara, said during the same webinar that this crisis would be a good time to rethink some of the nation’s incentives for retirement savings. For one thing, he said, tax policy encourages saving for college and retirement but does nothing to help families build a basic emergency fund.

Without that, they’re not likely to reach longer-term goals. “People don’t live their lives in silos, nor should our savings policy be put in silos,” Boshara said.

About half of Americans don’t have access to an employer-based retirement plan, so Boshara also likes the accounts that some states, including Illinois, have created to fill the gap. Eventually, he’d like to see retirement accounts that aren’t tied to employment at all.

“If we were to delink retirement security from the workplace we could go a long way to a more portable system,” he said.

For now, however, today’s workers are stuck with the current system. Many will have to delay retirement or accept a lower standard of living because of the shocks they suffered in 2020.

Larry Swedroe, chief research officer at Buckingham Strategic Wealth, wrote a book last year about retirement planning. He suggests that everyone should update his or her financial plan after suffering a shock to wealth or income.

Younger workers have the benefit of time. Once their furloughs are over, they can look for ways to cut expenses and increase their 401(k) contributions.

Older workers may have to make more dramatic adjustments. “It will not be a big surprise to me if you see a lot of people deciding to downsize from big houses,” Swedroe said. “You may see people moving to lower-cost areas, even if that takes them farther from their grandkids.”

Many retirees count on bonds for steady income, but their interest rates have fallen to record lows. As if the road to retirement wasn’t rough enough already, the pandemic has created plenty of new potholes.

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