The "new normal" is a difficult set of circumstances if you are close to retirement. Plenty of unknowns could derail your retirement plans, especially if there are extended lock downs or a 2nd wave of COVID. There are 3 big mistakes to avoid during this mess to make sure you keep your retirement plan firmly on the rails. The last thing any of us want is to work longer than necessary because of mistakes we could avoid.
Mistake number 1: Not paying attention to your investments!!!
I met with several people in late 2019 and early 2020 after one our benefits workshops that were planning to retire in 2020. Part of their retirement plan involved supplementing income from the funds in their TSP. Once the news of COVID hit, the stock market fell like a lead balloon. One person in particular lost over 35% during the downturn, which made it virtually impossible to retire at the desired time. Once you are nearing retirement, it's a great idea to visit your risk allocation to make sure a market crash doesn't push your retirement date out another couple years. I'm not saying anyone should completely abandon riskier investments, but make sure your risk allocation matches your intended retirement date.
Mistake number 2: Retiring before you are financially prepared!!
Working for a government entity has a lot of upsides when it comes to retirement perks. However, there are some things to think about before finally deciding to leave for good. Many government employees will see some sort of reduced income upon retiring. Many pensions/annuities will only pay a percentage of what an employee is currently making. Now, this may not be the end of the world but it is definitely something to plan for.
Knowing exactly what your pension/annuity will provide is a good first step. Then combine that with other sources of income such as Social Security, spousal income, rental income and distributions from retirement savings to figure your monthly income. Compare that to your monthly budget/expenditures and you are can start to create the beginnings of a plan. One of the pitfalls of retiring during volatile economic times having to rely to heavily on your investments. A market crash could mean a reduction in income or having to work longer.
Mistake number 3: Not continuing to save for retirement!!!
I often hear potential clients wanting to reduce their retirement contributions because they are so close to retirement. This could be a huge mistake. Let's do some quick math (don't worry...I'm going to do it for you).
Most people nearing retirement are making more money than years prior. This means a person potentially can save more than in the beginning years. If you are maxing out your TPS/457/403b/401k at $26,000 per year, you could miss out on the ability to maximize the highest earning years by discontinuing those contributions. Think about it, missing out on just 2 years of contributions means missing out on $52,000 of savings, plus whatever match you are getting.
I sometimes hear people say they want to stop contributing to their defined plans to pay off debt. There is definitely a conversation there because debt in retirement is not ideal. However, careful analysis should be done to see if there are other ways to pay that debt off instead of paying it off at the expense of your retirement funds. Even if it means working a little while longer to make sure your financial house is in order.
Have a safe 4th of July...
Matt
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