Heath Care and Medical Expenses Piggy Bank

For years now, financial experts have been predicting a market correction,

arguing that record gains over the last decade were too good to pay out in the long run.

But when the markets did come crashing down — accelerated by the arrival of the novel coronavirus on U.S. soil — it wasn’t just a slap on the wrist for Fortune 500 companies whose profits are so closely aligned with the markets.

The sudden losses were a gut punch to the little guy, too, especially those whose retirement assets are tied up in market-based investment plans. Pulling from limited pay to invest now also might be stomach-churning for early-career investors just beginning to save for a far-off future.

The economic downturn isn’t just on the verge of becoming a depression. It can actually feel depressing.

Still, local financial and investment professionals say there’s no need to panic. The overwhelming majority of individuals who save for retirement and stick to their long-term plans — or adjust their strategies and goals to capture potential earnings over the next couple of years — will be OK.

“Every crisis in the markets usually has some unique aspect to it,” says Chris Hershey, a certified financial planner with Manheim Township-based Rogers & Associates. “The one thing notable about (this downturn) was how quickly it happened. It’s a public health crisis, and the threat of shutting down the economy makes it different.”

Hershey notes most major indexes lost 30% to 40% of their value between mid-February and mid-March. The Great Recession that happened between late 2007 and 2009 had a longer, more significant loss of 50%.

LNP asked Hershey; Curt Stoltzfus, certified financial planner and senior financial strategist with Ambassador Advisors in Manheim Township; and Jamie T. Detweiler, certified financial planner with Everence Financial in Ephrata, for their thoughts on the current downturn, and for strategies that can help average investors protect their retirement assets and ensure they still reach their goals.

Largely, their advice hasn’t changed. Plan, review and be patient — regardless of age or how many more working years are expected before you can quit for good.

“Previous downturns have taught us that making rash decisions when the market is volatile is detrimental to an individual’s financial plan,” Stoltzfus says. “The key to financial success is to remain disciplined. Working with an adviser to establish a written financial plan and a portfolio asset allocation tailored to your risk tolerance and financial goals will help keep you on track.”

What Hershey calls “recency bias,” or the instinct to act on current happenings rather than historic performance, might tempt some to pull out cash — and undermine their goals.

“Are you reacting to others’ fears or has something fundamentally changed in your financial situation that requires a decision?” Detweiler asks his clients. “This experience is a good reminder that investing involves accepting risks, some known and many unknown. Stocks, in particular, are expected to be variable, especially over short periods of time. ... There is much research that has shown that investors who make decisions based on fear and get out of the market following significant declines very often miss some of the most significant recoveries in the market, as these recoveries — many times — come closely on the heels of the declines.”

Certainly, those who have lost jobs or taken pay cuts may need to pause their contributions, and Detweiler says it’s wise to reevaluate your budget to make sure expenses don’t exceed income. But if your income still allows, continue to buy now that prices are historically low.

But don’t think you have to watch those investments daily.

Stoltzfus says to avoid that kind of stress by reviewing your portfolio quarterly to make sure your asset allocation is still in line with personal goals.

Kelly Greene, senior director for TIAA — the nation’s leading retirement equities fund for academic, research, medical, cultural and governmental workers — has even more straightforward advice. The author of the Wall Street Journal Complete Retirement Guidebook is a big fan of letting it ride, regardless of where individuals are in their careers.

“Don’t touch your face, and don’t touch your stocks,” she wrote to investors as the crisis began. “It goes for retirement savings, too.”

How much do I realistically need to save for retirement?

While the exact dollar amount will differ for everyone, anyone creating a game plan — amid an economic crisis or not — needs to consider a few key factors.

“Gathering data (such as cash flow, assets and liabilities) on where a client is now and what their retirement goals (age and lifestyle need) are and entering them in to a comprehensive retirement analysis is the best way to come up with that number,” Stoltzfus says.

An investor’s changing lifestyle could require saving enough to fund 10 years’ worth of dream vacations, or having the cash required to gain entry and pay monthly fees associated with a retirement community or long-term care needs.

Greene points out that many Americans used to depend on a three-legged approach to retirement that would include Social Security, a pension and private investments.

But a 2018 Bureau of Labor study found just 17% of those in private industry had access to defined-benefit plans — and the majority of those also were expected to pay into employee-contribution plans to supplement pensions.

Most Americans will depend on money they’ve invested for retirement and any earnings that produces. Determining how much they should aim to save depends largely on what they need to live each month.

Hershey uses a 4% rule to help clients estimate how their invested savings will work for them.

His formula suggests investors:

1. Calculate total annual retirement expenses .

2. Subtract annual retirement income (Social Security, pension, annuities, etc.)

3. Take any remaining expenses not covered by income and divide that amount by .04, which represents a safe 4% annual distribution from an investment portfolio. The result is the value needed at the start of retirement.

For example, if a retiree has $80,000 in total annual expenses and $50,000 of income, they would divide $30,000 by .04, for a projected needed value of $750,000.

He also has a word of caution if you’re thinking about living lean in later life.

“We typically see expenses are about the same,”Hershey says. “People still find ways to spend money.”

If you’re nearing retirement and you’re not where you need to be, what can you do?

“First of all, don’t panic,” Detweiler says. “There is always something that can be done to improve your situation. While you may not be where you thought you should be at this point, it is never too late to improve your situation.”

He says to start by getting advice from a reputable source. Enter into a formal planning process to help maximize efficiency and identify strategies that will reap the most reward in a short amount of time. Then, find someone who will hold you accountable to your goals of preparing for retirement.

“Having someone in your life that will provide caring accountability is a key ingredient to achieving lasting change,” Detweiler says.

retirement table

You may also want to reconsider when you will retire, especially if you plan to depend on Social Security income, because your age at retirement affects your payout. For some, it will make sense to delay retirement and maximize distributions permanently.

Anyone can begin receiving payments at age 62, but those payments will be smaller and add up to less over an individual’s life span. For instance, a person born in 1960 or later will reach “full retirement age” at 67.

For each month they put off filing, they would increase their eventual benefit by two-thirds of 1%. (See chart for example.)

“If you delay Social Security income until 70, that pays huge dividends for later in retirement,” Hershey says.

AARP’s online Social Security Resource Center offers detailed explanations of the delayed retirement credits, as well a calculator that can help you determine your payments.

If you have more than a year — or better yet, closer to five — until retirement, now may be a great opportunity to invest. Historically, Hershey notes, a balanced portfolio that is 50% in equities will earn some money over a five-year period. One study found that for five-year periods, the best performance was a 21% return, while the worst performance netted investors 1%. That’s still better than stashing cash in savings, which had an average 0.1% annual percentage rate at press time.

Hershey says to resist the urge to go too conservative right now.

In any case, if you have the ability to invest, all advisers LNP spoke to say not to sit out right now. Inaction won’t move anyone toward their goals.

“The key is not to get discouraged and do nothing,” Stoltzfus says. “It is never too late to start saving for retirement.”

Besides setting a dollar amount goal, what else should I include in my retirement planning?

Stoltzfus says those approaching retirement should work with advisers to establish a legacy plan, or how to “most tax efficiently transition assets to loved ones and charities near and dear to them.” Along with the transfer of financial assets they should be thinking about what values they want to pass on to the next generations.

The current downturn may also prompt investors to make tax-related moves.

“If your income is low this year due to the impact of COVID-19, you may be in a lower-than-normal tax bracket. If this is the case, it may make sense to do Roth conversions (from traditional IRAs) to take advantage of the favorable tax rates and set yourself up for a more tax-efficient retirement,” Hershey says. “And with the markets being down, you have the added benefit of converting assets when they are low so that when the recovery occurs, you get it inside of a Roth account where you won’t have to pay taxes on any future growth.”

And if you experience losses in this year’s volatile market, there may be tax advantages in that, too.

“If you have losses in a taxable account, you may be able to realize losses when re-balancing your accounts,” Hershey says. “Losses in a taxable account can be used to offset future capital gains or to offset other income up to $3,000 a year. This can cause significant tax savings for many years to come.”

Another tax-related concern: Dipping into retirement accounts to keep you afloat financially typically carries tax penalties. Tap other reserves, such as emergency savings, first.