Retirement at 65? Six months of living expenses in an
emergency fund? A 60/40 portfolio? For decades, Americans have lived by some of
these financial “rules.” But the coronavirus pandemic has upended many of them.
While new realities have emerged and a shift in approach may be needed, there
are still strategies you can follow to build financial security in today’s
environment.
Before we look ahead, it’s helpful to assess where we are
now—and how the pandemic has shifted expectations. Nearly a third of Americans
say their retirement plans have been affected by the economic impact of COVID,
with 20% planning to delay retirement beyond what they expected, according to a
study by Northwestern Mutual.
What’s interesting is that the financial obstacles to
retirement have also shifted. Before COVID-19 spread widely, 42% of Americans
cited lack of savings as the top obstacle. Now 49% cite the economy as their
biggest roadblock. The landscape may have changed for many Americans, but we
can still take this opportunity to align our goals and actions. (Northwestern
Mutual offers financial planning services to clients.)
Here are three strategies for action:
Retire at 65? Think again
Under the old adage, retirement began at 65. Baby boomers
now say they intend to retire at nearly 69, and many have complex retirement
planning needs. In the new reality, people need an integrated—and stress-tested—financial
plan.
Even before the pandemic, uncertainty was common. Nearly
half of Americans surveyed said they planned to continue working out of
necessity, with insufficient savings (60%) and concern about Social Security
(58%) being the two top reasons.
In the past, people could rely on things like defined
benefit pensions and didn’t have to support themselves for 25 or 30 years, as
well as face skyrocketing health care costs. While proactive saving is
critical, today people need a strategy for how to manage assets in retirement.
This strategy should be grounded in an integrated plan that has been
stress-tested against multiple scenarios to ensure it will last throughout
retirement.
Projected life span, market conditions, the impact of
inflation and taxes, the desire to leave a legacy, major unexpected
expenses—these factors all have an impact. Given the complexity of this type of
planning, pre-retirees and retirees should look to a financial professional for
guidance.
Even a small savings cushion can make a big difference
The old rule about having an emergency fund of three to six
months of expenses is sound advice, but it may not be possible for everyone in
the current environment. With the economic downturn and high unemployment
caused by the pandemic, many people have had to dig into their emergency
savings. Some have had to go a step further and pull from long-term savings
plans, which is likely to set people back in the years ahead.
While rebuilding those accounts may be challenging, saving
should still be a priority. Don’t get bogged down in numbers that may not feel
immediately achievable if you are still recovering from a financial shock, such
as saving 10% to 20% of your income. Small savings can add up over time, and
building a modest savings account can help you avoid debt if there’s an
unexpected event. Make saving easy by automating a fixed deduction every
paycheck or rethinking your budget.
If you have been able to build your savings through the
pandemic and have a comfortable emergency fund, don’t miss the opportunity to
invest that money in a smart way.
Rethinking the 60/40 rule
The classic portfolio in which assets are invested 60% in
equities and 40% in fixed income has long been a financial planning stalwart.
For some, a 60/40 portfolio may still be a good choice. But for many, an
investment portfolio customized to a person’s specific circumstances and goals
will better help them achieve financial stability and security—no matter what
happens in the often volatile financial markets.
Consider an approach that looks beyond 60/40 to an asset mix
that combines investments and permanent life insurance. Permanent life
insurance cash value is guaranteed to increase over time. With this approach,
people can invest in a more significant way to drive greater growth.
Your life, your rules
As we assess what’s next as individuals and a society, we
have a fresh opportunity to envision the future. After more than a year of
disruption and loss, it’s a great time to rewrite the rules to emerge stronger,
more resilient, and with greater financial security. With discipline and a
personalized, holistic plan, you can live well and thrive in our new reality.
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