Closing Thoughts

Answering Covid’s Wake-Up Call

A year later: How the pandemic has impacted the retirement planning landscape

by Kelly LaVigne

Mr. LaVigne is vice president of Consumer Insights, Allianz Life. Visit www.allianzlife.com.

The COVID-19 pandemic has been front and center for over a year now, and while the full scope of its economic, health and social impacts won’t be known for some time, it’s clear that many people’s finances and retirements have been severely compromised – perhaps even more so than from the Great Recession in 2007-2009. In fact, nearly seven in 10 (69%) Americans (age 21+ in 2007) believe the COVID-19 pandemic will have a greater overall economic impact than the Great Recession. This is according to the 2021 Retirement Risk Readiness Study from Allianz Life.

What’s more, nearly half (49%) of all respondents said they couldn’t even think about saving for retirement because they are just trying to get by day-to-day. And concern about the pandemic’s long-term financial consequences is impacting other areas as well. The study found that Americans are also feeling greater anxiety about other financial matters, including their daily finances, retirement savings, spending, managing market risk, and their professional careers.

As these fears and others come to light, it’s crucial to use lessons learned to develop strategies to not only mitigate those fears but help lessen the impact that any future unexpected events could bring to retirement planning.

A Pandemic Wake-Up Call

If we look at the pandemic from a glass-half-full approach, the silver lining is that it’s encouraged people to become more focused on money matters. When comparing how they were feeling about finances back in 2007-2009, the study found that 61% of people say they now pay more attention to what they are saving and spending, and nearly six-in-10 (58%) have cut back on their spending. And the more mindful clients are about how they spend, save and invest, the better.

With 2020 in the rearview mirror, now is an excellent time to take stock of the financial lessons we’ve learned this past year and apply them toward building a more stable future. The pandemic has motivated those nearest to retirement to review their current retirement planning activity compared to pre-pandemic life.

Black swan events like this global pandemic are often the trigger that convinces people they need to take a more proactive approach to managing risks that may come in retirement. According to the study, those within 10 years of retirement are more active in pursuing a variety of retirement strategies, including saving enough in a retirement account, diversifying their retirement savings, researching expenses and risks associated with retirement, and making a formal plan with a financial professional.

Retiring earlier than originally planned impacts a financial strategy in so many different ways, from claiming Social Security earlier, to having less money saved for retirement and drawing down retirement assets early...

When it comes to retirement planning, it’s important to remind clients that it’s an ongoing process. And while major events like a recession or pandemic can be triggers for revamping strategies and adding in risk management solutions, they also require continuous attention and refining before, during and after events unfold.

Uptick in Unexpected Retirements

Despite all the good news on the retirement savings front, many risks remain. Even with government support from programs like the Paycheck Protection Program, many businesses have filed for bankruptcy or announced significant layoffs. In addition to confirming the substantial financial strain caused by the pandemic, the 2021 study reinforced findings from 2020 that revealed most Americans are unprepared for the risk of an earlier-than-expected retirement.

More than two-thirds of respondents (68%) said they retired earlier than expected, up significantly from the 50% who acknowledged earlier-than-expected retirement in last year’s study. Similar to 2020, the majority said they had to retire for reasons outside of their control, including healthcare issues (33%, up from 25% in 2020) and unexpected job loss (22%, down from 34% in 2020). Early retirement may put them at greater risk given that more than four in 10 (43%) Americans said they are unable to put away anything for retirement right now (up from 37% in 2020), and a similar amount (42%) feel that they are too far behind on their retirement goals to catch up (up from 31% in 2020).

Retiring earlier than originally planned impacts a financial strategy in so many different ways, from claiming Social Security earlier, to having less money saved for retirement and drawing down retirement assets early. If a client decides they need to retire early, especially if they are doing so for reasons outside of their control, it’s important to look at what their retirement income will be, identify any gaps that may exist, and potentially explore financial solutions – like annuities – that can help fill those gaps.

Navigating The Next Steps

The pandemic has brought its share of challenges, and while the impacts are likely to be felt for some time, there are steps you can take with clients now to help manage retirement risks both today and in the future. Whether they are coming out of the pandemic unscathed, or have been negatively impacted in multiple ways, the time is right for using the economic fallout as a catalyst to review and potentially mitigate risks to a retirement strategy.

While the financial impacts of this pandemic can be challenging, financial professionals are there to help, especially when it comes to educating people about the dangers of making rash emotional decisions and raiding their retirement funds. The best thing a financial professional can do right now is to help ensure their clients are protected as much as possible, keep them focused on future goals, and remain positioned to assist clients through these uncharted waters.

 

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