Many people are obviously worried about the influence this pandemic will have on the world. Most people are brimming with panic to the point where they cannot stand thinking about anything, let alone their retirement. That is why it is pertinent that people know a lot of facts and advice so that they do not make retirement planning mistakes that they will regret in the future.
Potential mistake #1: withdrawal of 401(k)
Early on in the pandemic, President Donald Trump passed the CARES Act. This act was intended to help people during the pandemic financially. While people would instinctively want to take advantage of everything in this act now, there still are some details needed to determine how and whether you should use these benefits.
The CARES Act lets people take money out of their retirement funds. Under certain circumstances, anyone can take up to $100,000 from their 401(k) retirement account. A 401(k) usually has penalties if someone takes out funds before they are 59 years old. People can also repay what had withdrawn in three years, instead of the usual 60 days. This allows more flexibility in a retirement account, which is what most people need to pay back bills and other expenses during this time.
To be eligible you must have:
- Contracted COVID-19
- Care for someone who has contracted COVID-19
- Be in financial trouble due to being furloughed or being laid off their job
- A business that has suffered because of the virus
This sounds very beneficial, but there are some issues. Even though individuals can pay
back what you withdrew from their 401(k) account they still need to pay income taxes. The money withdrawn from a 401(k) counts as income and must be paid back. This does not diminish the benefit of this act to some but it still should be a detail that needs to be taken into account.
Potential mistake #2: retiring too early
It will take an enormous amount of time until we recover from the virus. According to The Back-to-Normal Index, created by CNN Business and Moody’s Analytics, the U.S. economy in September 2020 was operating at about 76% of where it was before the pandemic. This instability could last until 2023 according to Mark Zandi, the chief economist at Moody Analytics. This estimate assumes that the virus does not grow stronger.
This is a problem for anyone trying to retire because there is no way to be certain how the economy will react to this problem. According to The Center on Budget and Policy Priorities,15 million seniors would be in poverty without social security.
If people retire en masse during this time it would result in a huge dependence on social security, which could wreak complications in the coming years. That dependency is risky, especially if those retiring do not have enough money in savings. These are surprising times and anything could happen, leaving many in financial ruin.
Job opportunities are currently recovering but remain difficult. Unemployment in September 2020 stood at 7.9%, more than double the 3.5% unemployment recorded in September of 2019. Despite a tight job market, retiring early during the pandemic could prove to be a very poor choice if you are without a financial cushion. Even if you are not currently employed it might be in your best interest to continue seeking employment rather than retiring before ready.
Potential mistake #3: impulsive choices
While some people might believe that selling your stocks during this time is a good idea, the truth is that this idea is impulsive and could lead you to lose a lot of opportunities. Former Citigroup CFO Sallie Krawcheck and Professor Aswath Damodaran, who teaches finance at the Stern School of Business at NYU, recently told Business Insider that, while the economy is turbulent, there are still opportunities for investors.
Professor Damodaran suggested that it would be smart to cautiously buy stock from companies that are not doing well now but will most likely recover. He specified travel companies and oil companies as examples because they are easier to buy now than before the pandemic. He also stated that the companies benefiting from the pandemic would be a good choice if it was not for their rising stock value. These companies include educational services like Chegg and Zoom, also companies like Amazon, Apple, and Google which have not been affected by the virus.
On the other hand, Krawcheck suggested being diverse in your investment portfolio and not to make company bets. She advises that mature professions maintain fewer equities and more bonds.
Bonds, according to MarketWatch, are much more stable than equities because they protect against deflation. That protection is useful against economic distress with the only downside being that they are not affected by inflation, which could lower the worth of the bond over time.
While these suggestions are logical and smart, they are also not risk-free. This advice should only be followed if you have enough money to think of the long-term benefits. Someone who is currently suffering financially should not be placing bets with the scarce money they have.
“This is not the time to be playing games, ’cause if you survive, you will have time to build your nest egg back,” Professor Damodaran advised.
The point is to be smart with money that is available and recognize the situation instead of letting fear dominate.
Sebastian Pineda, an intern at Meadowlands Media and the Meadowlands Chamber, is a senior at Bergen County Technical High School in Teterboro where he majors in fashion. He can be contacted at firstname.lastname@example.org