Back in March, a couple who had recently sold their business called me to express concerns about their decision to sell and retire. With Covid-19 raging, the stock market quickly dropped in value and their retirement savings were in decline. They asked a straightforward question: Did they need to worry or worse, consider going back to work?
To address their concerns, we conducted a financial “stress test.”
It’s a simulation of scenarios to evaluate if their financial plan and investments could withstand the chaos in the stock market. Even though their investments had declined more than 10%, the test assured them their portfolio was well positioned to withstand further volatility. With this information in hand, the couple quickly dropped any thought of returning to work.
While the impact of the coronavirus pandemic has stunned us all, it has also served as a needed wake-up call. For those on the cusp of retirement, the opportunity to re-evaluate their financial game plan is essential. In addition, new laws passed this year to help Americans endure Covid-19 can have favorable consequences for certain investors’ 2020 tax returns and their investments.
Here are three recommendations to consider during these remaining weeks of 2020.
Take the time to test to your retirement game plan. With Baby Boomers retiring for a variety of reasons, including early retirement due to job layoffs, now is a good time to examine your financial and retirement plan.
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Like the couple mentioned above, this assessment helps investors better understand how their portfolio and financial plan will respond to disruption in the economy. These tests simulate a wide range of financial outcomes.
And, if there is a problem, this analysis creates an opportunity to identify and address the issues early on. One common example is that retirement expenses start off higher than projected. Many investors incorrectly assume their lifestyle will slow down after retirement, but that’s often when the fun begins.
By running a recurring stress test, initial overspending can be analyzed and addressed before the problem compounds. And, for most investors, the stress test produces outcomes that are much better than the worst-case scenarios they have envisioned in their minds, providing peace and serenity at a critical time of transition.
It’s important to note that retirees may avoid paying some taxes in 2020. Because of changes to the rules surrounding distributions from 401(k) plans and other qualified retirement accounts, retirees have a unique opportunity to avoid certain income taxes for 2020.