The pandemic has changed the way we budget. Here are four financial tips to help you get your future finances in order.
It’s been roughly one year since the coronavirus outbreak sent shockwaves through the U.S. economy. The pandemic has taken a tremendous toll on the American workforce, causing millions of job losses and a surge in forced and early retirements. A recent survey by the Pew Research Center found that 36% of Americans who save regularly are saving less because of the pandemic, and one-third have had to dip into their retirement savings to make ends meet. As a result, one of the long-term consequences of the pandemic could be a drop in retirement security for millions of Americans.
The good news is that many of us have the power to do something to protect our retirement finances for the future. If there’s one thing we’ve learned from 2020, it’s that the future is never certain, so there’s no time like the present to reset, plan and prepare. Here are four helpful tips to set you up for success in 2021.
- Take stock of 2020: To properly plan for the future, it is important to reflect on the past, consider your current financial position, weigh what you really need versus want, and determine what’s necessary to maintain and achieve your financial goals for retirement. Make a list of everything you own (money in bank accounts, financial investments, equity in real estate, and any other assets), everything you owe (credit card debt, auto loans, student loans, mortgages and any other obligations), and, going into 2021, be realistic about the things you have to spend on versus things you would like to spend on. By evaluating your assets and cash flow in 2020, you can identify what your most pressing needs are and set clear and achievable financial goals for the future.
- Plan for the worst-case scenario: According to a 2019 Employee Benefit Research Institute survey, nearly half of retirees left the workforce before their target retirement age, and Covid-19 is accelerating this trend. Make sure you have an emergency fund in place, preferably of up to one year's worth of your essential monthly expenses, in cash or highly liquid investments. Workers in their 50s and 60s should also start making contingency retirement plans so they are financially ready in the event of an early and unplanned retirement. If you’re forced to retire early, figure out where your income will come from to cover those monthly expenses.
- Manage your debt: The best time to pay off debt is while you’re still working. Prioritize eliminating high interest credit card balances, education debt, car loans and other costly borrowing. Experts often advise paying off debt with the highest interest rates first because this will save you the most money as you decrease those balances. However, if you have a hard time staying motivated, consider the debt-snowball method and pay off your debts from smallest to largest. There is nothing more freeing than going into retirement not owing money to anyone.
- Understand your retirement options: You can start collecting your Social Security benefits at age 62. But unless you absolutely need to, should you? You are most likely to benefit from waiting and earning a substantially increased benefit. For some, protected income from an annuity may be a better option – either to create an income “bridge” that allows you to wait and claim your maximum Social Security benefit or even generate a reliable stream of income for as long as you live. While retirement planning can seem daunting, confusing and overwhelming, it is necessary, valuable and important. It’s best to team up with a financial professional who understands the nuances of these choices and can work with you to achieve your retirement goals.
For more on this topic, see the Your Money Map conversation with Jean Chatzky featuring Sharon Epperson on the Alliance for Lifetime Income Facebook page.