An actuary provides counsel for those in various life stages
By Dennis HoDennis Ho is Co-Founder and Chief Executive of Saturday Insurance a licensed, independent insurance agency founded by Ho and COO Chris Cheng, based on their passionate belief that having the right insurance helps people live happier lives. Their mission is to make insurance simple, transparent and affordable for all. Visit www.saturdayinsurance.com.
As markets continue to plunge and uncertainty about the impact of COVID-19 remains, the health of our retirement funds is adding to the concerns many of us are facing. Rest assured there are actions most of us can take, even during these difficult times, to make sure our retirement plans remain on track.
Whether you’re just starting your career or recently retired, today’s urgent matters, like having enough food for the next few weeks or being able to cover basic living expenses, are top of mind. But we should all be cognizant that retirement planning remains just as important (if not more so) today as before this crisis started. Taking some time to review your retirement plan today will better position you to weather the current volatility and to benefit when markets eventually recover.
First, start by assessing your current status. I know it’s hard to do given how stock prices have performed in recent weeks. But you need to know where you stand today in order to make the right choices for the future. As an actuary for the last 20 years, my job was to help make decisions in the face of uncertainty. Whether it was pricing disability insurance policies or projecting investment returns, all my analysis started with data, and retirement planning is no different.
Look at all your assets to understand how much you have and how your asset allocation looks today. Another important thing focus is your cash flow over the next three months.
What do your income and expenses look like? How could this change if the stock market or economy get worse? Do you have any gaps where your expenses exceed your income? Once you have a handle on your assets and cash flow, you’ll be in good position to think about next steps.
If you are early in your career and single…
At this stage in life, the bulk of your net worth is likely in your expected future earnings and you may have little or nothing invested in the stock market. If that’s the case, the current environment represents a great opportunity to kick-start your retirement savings. In 2008, the stock market dropped 37% in a single year, but those who held onto their stocks earned an average of 9% per year from 2009 to 2019, which means a $50,000 investment grew to $142,070. If you don’t have any retirement savings, consider contributing to an IRA. If you have some retirement savings already, make sure to keep what you have invested and consider adding more. Because you have decades before retirement, you’ll be able to ride out the stock market volatility and be rewarded once the market eventually recovers.
If you are mid-career with a family…
As a 43-year-old husband and father of three, I know this is a challenging time for retirement planning. You likely have several people depending on you and multiple near-term priorities like a mortgage, child-related expenses and keeping food on the table. In my case, I also founder of a new company, Saturday Insurance, which adds to the ongoing cash flow needs. Because of your fixed costs and the people who depend on you, it makes sense to take a more conservative stance here and focus on having enough cash flow to handle these near-term priorities, even if it means pausing retirement contributions for a few months. It might sound counter-intuitive, but this strategy will help protect your retirement.
Why? Because it minimizes the chance that you’ll need to dip into your retirement funds and sell investments at depressed prices. Closely managing cash flow in the near-term is how insurance companies can survive volatile markets and make good on policyholder obligations decades into the future. Make sure you have an emergency fund to cover at least 6-months of expenses and try for even more if your job might be in jeopardy during an extended economic slump.
Also consider if there are non-essential expenses you can start cutting, so you can plow more cash flow into savings. Finally, if you don’t have disability insurance in place, now’s a good time to consider getting coverage. Once you have your financial safety net in place, you’ll be able to restart your retirement contributions again with the confidence that you’ll be investing for the long-run.
If you are close to or just starting retirement…
If you are close to or just starting retirement, it’s no doubt been a stressful time if you are invested in the markets. The most important thing to remember is not to panic. Because the average 65-year-old could live another 25 years or more, you have time for the markets to recover. In addition, because retirement could last several decades, it’s important to remain invested so your assets can continue to grow and support your future income needs. If you are a few years from retirement, consider recalibrating your budget over your remaining working years so you can contribute a bit more to your retirement accounts.
This will provide you with an extra buffer if the markets take longer to recover. If you are recently retired, then you’ll want to take a close look at your asset allocation. If have access to cash or assets that may not have experienced significant drops, such as short-term bonds, considering tapping those to fund living expenses instead of selling stocks. This will help you rebalance your portfolio and allow you to retain your stocks, so you have an opportunity to benefit from future recoveries.
Finally, if the recent market volatility has been more than you can handle, consider incorporating assets that can help buffer your portfolio in times of stress. A simple immediate annuity provides a monthly pension that remains steady no matter what happens in the markets, which can give you peace of mind and a better night’s sleep during the next market meltdown.