As the end of 2020 approaches, the COVID-19 pandemic continues to heavily impact the world as it has since it began earlier in the year. Nearly everyone has experienced significant changes to their finances, and if you're at or near retirement age, there has likely been doubt thrown on your certainty of retirement. You may be tempted to make changes to ensure your retirement, but haste can be dangerous. It's important to remain rational and avoid these five big retirement mistakes.
Mistake #1: Neglecting Your Emergency Fund
2020 has been a year to throw surprise after surprise, some positive, but also some negative. People have lost jobs, changed careers, dealt with medical bills, or otherwise had an upheaval in their previously steady income. 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 currently be struggling to make ends meet. But adding to your emergency fund is an important thing to continue. Setting aside a little at a time now can help you stay on your feet when another surprise is thrown your way, be it a health emergency or car repairs. Let your emergency fund live up to its name.
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 percent penalty for early 401(k) withdrawals (up to $100,000), utilizing this option before considering other alternatives is unwise.1
Your biggest step to maintain your future is to have a discussion with your financial advisor. The money you withdraw from a traditional IRA will still be subject to income tax come 2021. You'll need to develop a plan for replacing lost income so that it doesn't affect your retirement. If you are struggling to cover your expenses amidst the pandemic, your financial advisor may suggest finding local relief programs, reevaluating your budget and, if necessary, tapping into your emergency fund.
Mistake #3: Making Emotionally-Driven Investment Decisions
Nobody can 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 this kind of information day in and day out, it’s nearly impossible to not let it affect your decisions about money. 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
More than likely, your life today looks drastically different than the last time you created 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, now you enjoy a quiet evening at home. To some extent, your daily habits and, by extension, your daily spending, have 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, etc. Now is the time to re-examine your monthly spending over the past several months and determine if there are any extra opportunities to put more toward your retirement savings. Depending on your timeline towards retirement, an extra couple of thousands in savings this year could have a major effect in the next few years.
Mistake #5: Ignoring CARES Act & 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 percent 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 acceptable1
In addition, required minimum distributions (RMDs) have been waived for the remainder of 2020.1 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 this additional income.
If the pandemic has created some cause for concern when it comes to your retirement, don’t hesitate to reach out to us!. We work with retirees and pre-retirees to develop retirement strategies and determine the best financial adjustments for your future.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.