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Before the global health crisis, the lack of significant, sustained progress among workplace retirement savers signaled the need for a boost of some kind: The Employee Benefits Research Institute’s 2020 Retirement Confidence Survey revealed that only 30% of American workers have assets of $250,000 or more in savings or investments outside of their home. Among those with a retirement plan, 37% reported having $250,000 in savings or investments.
EBRI’s annual surveys have reflected a 10% uptick in the number of American workers with at least $250,000 in retirement savings. But among retirees, the percentage among this group has stalled in the same time period.
So, when the stock market tanked by more than 30% back in March of this year, U.S. employees were seemingly immobilized with new questions and unanticipated realities about everything from their personal health to what work, saving and even retirement may look like in the future.
According to a March MoneyRates survey, 37% of Americans did not track their investments during this turbulent period and 36.4% of Americans within 20 years of retirement said they would likely delay their retirement.
The Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, enacted in March, paved the way for qualified Americans to draw funds from their retirement accounts with expanded provisions for plan loans up to $100,000 and hardship withdrawals up to $100,000. In general, these expanded provisions apply to individuals who were diagnosed with the coronavirus disease, have a spouse or dependent diagnosed with the coronavirus disease or have experienced a financial hardship related to the global pandemic (e.g. furloughed, reduction in work hours, etc.).
By the end of July, T. Rowe Price found that more than one in five American workers in workplace plans with more than $25 million in assets have withdrawn the maximum allowable coronavirus-related distributions from their respective plans.
Let this figure have some soak time and think about five of your co-workers. It is entirely possible that one or more of them withdrew a large chunk of their retirement dollars this year.
After all, the CRDs are exempt from the 10% early-withdrawal penalty and also tax-free as long as the funds are paid back into the respective retirement accounts by 2022.
Perhaps all of the pandemic-related distributions were fully necessary, and that’s understandable, too.
On the flip side, though, the CRDs may result in some unintended consequences for American workers who, before the pandemic, already struggled with saving enough for their retirement. It’s simply too early to tell at this point.
But this is certainly a good time to reevaluate whether your retirement plan is on the right track. One practical way to determine whether you are on track is to ask yourself this question: “Is the projected monthly income from my workplace retirement account, combined with Social Security, enough to meet my expected needs in retirement?” If you have any concerns about whether the projected figure is enough, then, yes, it is time for a retirement reboot.
Incidentally, if you are a plan participant in a retirement plan that is governed by the U.S. Department of Labor, like a 401(k), you will begin to receive two recently-mandated income estimates from your plan provider on an annual basis, beginning as early as next year.
The retirement-income estimates will feature both single life and survivor illustrations. Many plan providers already offer online, interactive calculators to participants that can estimate retirement income based on a variety of scenarios.
The purpose of a retirement reboot is to affect a measurable, positive change in your overall financial health with one small, yet powerful, easy-to-implement activity. Think about how easy it is to reignite your computer when it stalls for no apparent reason. Here are three reboot strategies to consider:
Strategy 1: Make fewer decisions, not more, regarding your retirement account.
In his book, “The Power of Habit: Why We Do What We Do in Life and Business and Smarter Faster Better,” Charles Duhigg described how former NFL coach Tony Dungy elevated his players’ performance by training them to make fewer decisions in the game. Coach Dungy once remarked, “Champions don’t do extraordinary things. They do ordinary things, but they do them without thinking, too fast for the other team to react. They follow the habit they’ve learned.”
To pare back the choice architecture within your retirement account, authorize your plan provider to automate personal contributions increases by 1% or 2% and a portfolio rebalance on a specific date each year.
Strategy 2: Rebalance your retirement portfolio among broadly-diversified investments.
According to the Investment Company Institute, only 6.2% of workplace retirement plan participants changed their asset allocations during the tumultuous first quarter of this year. That’s a healthy sign of commitment, but if your overall strategy is to maintain a balanced portfolio of 60% in equities and 40% in fixed income, the recent market downturn may have left your portfolio, well, unbalanced.
New research from J.P. Morgan found that American workers who held broadly-diversified investments, including extended asset classes like emerging-market fixed income and international equities, boosted their chances of meeting their desired income goals by as much as 20%.
Strategy 3: Envision your future self and let the power of imagination take you somewhere.
Twenty years from now, what do you think you will look like? Where do you think you will live? How will you spend your time? Recent research conducted by UCLA’s Anderson School Management revealed that when we visualize ourselves in the future, we are more likely to embrace positive changes, like saving more for retirement. As Albert Einstein put it, “Imagination is more important than knowledge.”
How do you think your preparation for retirement could benefit in 2030 by implementing one of these strategies today? Much like the restart button on your computer, the power to reboot your retirement plan is within your grasp now.