2020: Our Extraordinary Year

Can We Rebuild Financial Resiliency?

Measuring COVID-19’s impact in 2020 and beyond

by Dan Keady

Mr. Keady is chief financial planning strategist at TIAA. Visit www.tiaa.org

It has been a chaotic and unpredictable year for most Americans. In addition to the imminent health risks caused by COVID-19, and the subsequent forced shutdowns, layoffs, furloughs, pay reductions and other changes to employment that came with them, Americans have seen their financial security severely impacted across the nation.

The uncertainty and volatility of the current crisis has made managing debt and finances more difficult than ever. TIAA’s recent Financial Resiliency Survey, which polled Americans ages 25 to 70 with an annual household income of at least $40,000, found that 60 percent of these middle class Americans have experienced financial stress during the pandemic and one-third have experienced changes to their employment. As a result, 26 percent took on new debt and 18 percent have had to dip into an emergency fund.

While these results look grim, the study also showcased a renewed focus on financial well-being no matter what’s happening in the broader economy. Despite immediate financial challenges, 91 percent of working Americans say that saving for retirement is a current financial goal, with 64 percent identifying it as a major goal, followed by paying off debts and building an emergency fund.

Falling Behind On Retirement Saving

Yet, 60 percent of respondents report they are falling behind on retirement savings. Of those who do not feel on track with this goal, 30 percent say their progress has been directly affected by the pandemic. This may help to explain why Americans rank “how much is needed to save for retirement” as their number one financial concern (34 percent), followed closely by “today’s cost of living” and the “cost of health care and health insurance.”

The research shows that the pandemic has changed nearly 80 percent of Americans’ views about what is financially important. As a result, nearly two-thirds of respondents (66 percent) say they want to save more, 65 percent say they place more importance on emergency funds and 59 percent place more importance on having a source of guaranteed lifetime income once they have retired.

Despite the financial challenges brought about by the COVID-19 crisis, having the foundation of a secure financial plan can bring stability and peace of mind – even in the most turbulent of times. This has led to a moment of inflection and serves as an opportunity for American’s to consider their current financial status and future goals and adjust as necessary.
As we look ahead to 2021, we know our clients are facing unique challenges and circumstances, and it is important we support them accordingly. What can advisors do to help their clients get back on track toward their financial goals?

Resecuring Financial Resilience

According to our recent research, there are four main areas that we should focus on to help our clients secure financial resilience, and get through this unprecedented time:

Encourage Clients to Increase Retirement Savings: We know that while saving for retirement is a top contributor to financial resilience, many report feeling off-track. As clients continue to balance short-and long-term financial pressures, putting aside even a modest amount of money for their retirement is one of the best things they can do to have an immediate positive impact on their financial future.

Educate Clients on Ways to Generate Lifetime Income in Retirement: Guaranteed lifetime income in retirement is the second-greatest contributor to financial resiliency, yet 51 percent report not having a good source for that. By allocating a portion of their savings to investments, including fixed annuities, individuals can protect themselves against longevity risks like outliving their savings or spending their nest eggs too quickly. In this case, advisors may want to pay close attention to those getting ready for retirement, particularly as they get closer to needing paycheck replacement. Advisors need to focus on an income plan for these types of clients.

60 percent of respondents report they are falling behind on retirement savings. Of those who do not feel on track with this goal, 30 percent say their progress has been directly affected by the pandemic. This may help to explain why Americans rank “how much is needed to save for retirement” as their number one financial concern...

Stress the Importance of Building an Emergency Savings Fund: The pandemic has shown us that a financial crisis isn’t predictable, and we need to better prepare for the unexpected. While most Americans (77 percent) report having an emergency savings account, only 47 percent believe those funds would cover more than 6 months’ worth of expenses. For most people, fully funding an emergency fund takes time and it is essential our clients understand the importance of setting aside money to grow that fund now, even as they continue navigate financial setbacks presented by the current crisis.

Have a Plan to Pay Down Debt: More than 80 percent of Americans have some form of debt. While many (55 percent) find it manageable, the impact on long-term savings overall is immense. By prioritizing paying down bad debt, like credit card debt or higher-interest charges, clients can create more opportunities contribute to an emergency fund or increase retirement savings. This is also a worthwhile time to speak with your clients about how to prioritize competing financial priorities – like saving for retirement, putting aside money for emergencies, and saving down debt. Most likely, clients will find it hard to tackle all three goals at once, and during a time of financial pressure, education and support from a professional can be worthwhile.

COVID’s Impact On Healthcare Profitability

While Americans across industries have been impacted, advisors may want to be especially cognizant of the challenges facing the healthcare industry as we head into 2021. The American Hospital Association estimates that U.S. hospitals and healthcare systems will see at least $323.1 billion in losses this year. The impact of cancelled elective procedures, higher operational costs and lower patient volumes to bottom lines are significant. But the trickle down to healthcare workers finances are even more sobering.

The 2020 Healthcare Sector Financial Wellness Survey from the TIAA Institute highlights how the economic consequences of the COVID-19 pandemic have weakened various elements healthcare workers’ retirement readiness including savings amounts, investment allocations and expected retirement ages. Almost half (46 percent) of healthcare workers report their financial condition has become worse since the beginning of the pandemic and 27 percent expect it to continue to get worse. Almost 23 percent have also reported decreasing the amount they are saving, with 19 percent saying they’ve had to decrease the investment allocations of their retirement savings.

The adversity Americans have faced in 2020 is unprecedented. Yet, even though the crisis has increased financial stressors in every way, it has also provided an opportunity to prioritize long-term goals such as increased retirement savings and emergency funds. And the shifting views on the importance of personal finance and focus on resiliency is encouraging. The lessons learned this year will only put us in a stronger position to ensure 2021 is a strong financial year for all.
The road to recovery will take time and there will be dark days ahead, but if we maintain focus on the things we can help our clients control regarding their financial futures, there is no doubt we will emerge much more resilient.