Managing risk in retirement: Lessons from COVID-19

As Americans grapple with the consequences of the coronavirus, protecting their own health and that of their loved ones is rightfully at the top of their priority list. But for the many boomers turning 65 every day, retirement is not far behind. Here are three retirement planning lessons advisers can learn from COVID-19:

1. Many pre-retirees will delay retirement, but perhaps not wholly because of the coronavirus. According to Gallup, the number of people who plan to retire after 65 has increased threefold since 1995, and the percentage wanting to retire before age 60 has dropped by more than half. Currently, the only age group with a growing labor participation rate is those 55 and older.

There are several factors influencing the decision to delay retirement, including the financial benefits of continuing to work and receive an income through the current market volatility, in addition to the positive psychological and health benefits of remaining in the workforce. According to a recent study, 85% of Americans are satisfied with their jobs, citing pay, recognition and autonomy as some of the contributing factors. There is also growing evidence supporting the connection between working past retirement age with improved health and longevity. Financially, delaying retirement by just three to six months has the same impact on one’s retirement standard of living as saving an additional 1% of earnings for 30 years.

Of course, this picture may change for Americans facing furloughs and unemployment, and advisers will play an important role in helping investors evolve their retirement savings strategies. This brings us to our next lesson.

2. Guaranteed income can help mitigate retirement risks. Regardless of when (or why) someone ultimately leaves the workforce, there is an array of financial risks in retirement to plan for, including longevity risk, sequence-of-returns risk and inflation — all of which can be mitigated by creating guaranteed sources of income. For example:

• Guaranteed income from an immediate fixed annuity can be used to mitigate longevity risk by covering basic living expenses like food, utilities and prescription drugs. With those costs accounted for, retirees can treat their other assets differently and potentially invest with more confidence. Investor should be aware guarantees are based on the claims-paying ability of the issuer.

• One current and ongoing concern for investors is sequence-of-returns risk. With this risk, significant losses or depletions to savings early in retirement could derail retirement plans by diminishing a retiree’s nest egg. And because any possible future gains would now accrue from a smaller base, a retiree may not have the time to benefit from a market recovery, particularly if they need to make additional withdrawals from their portfolio.

• Inflation risk is of concern to those in later life who are likely to have streams of income that are often not adjusted for inflation. Good retirement planning requires that the effect of inflation be considered, even for those putting off retirement.

3. Market exposure is still important. While many investors will shift to defensive investing strategies or opt to convert to cash, history has shown the market to be cyclical. Although there is no assurance market trends will continue in the future, there will likely be an opportunity to take advantage of the upside in the future. For those nearing retirement, recent market losses will likely mean their portfolios are under pressure (there’s that sequence-of-returns risk again) and they will need to minimize risk in the near term while continuing to generate adequate income to cover expenses.

For those already in retirement, generating enough income may become more challenging given the historically low interest-rate environment. In a low-rate environment like the one we are experiencing, fixed annuities can be valuable  given that the payout consists of three pieces (interest, principal and mortality credits). Investors in this situation also might consider a variable annuity with the purchase of an optional accumulation benefit rider, which can provide principal protection on the initial investment and equity exposure for when the market recovers.

Of course, investors should consider fees, guidelines and risks with variable annuities and riders.

Variable annuities are subject to market risk, and withdrawals or surrenders may be subject to a surrender charge, ordinary income taxes and, if made prior to age 59½, may be subject to a 10% IRS penalty. And your clients should consider the investment objectives, risks, charges, and expenses of the investment carefully before investing. Remind them to carefully read the prospectuses, which contain the information about the products and underlying investment options.

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Although the coronavirus is throwing a wrench in many Americans’ financial plans, advisers have an opportunity to help investors keep retirement savings strategies on track. By understanding today’s retirement landscape, investors’ increasing uncertainty over the state of the market and the retirement income products available, you can have meaningful conversations that may help investors secure their financial future in retirement — whenever it might begin.

[More: Lessons for those ‘graduating’ to retirement]

Phil Caminiti is a vice president with New York Life Insurance Co. and is registered with an affiliate, NYLIFE Distributors.