• 6-Minute Article
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  • Sep 16, 2020

How to Weather 4 Common Financial Setbacks

Explore ways to help protect your savings when you’re a few years from your planned retirement age.

How to Weather Common Financial Setbacks

Created in collaboration with Kiplinger.

Questions this article can help you answer:
  • How can I keep my financial goals on track during an economic downturn?
  • How much do I need in my cash reserve as I age?
  • How can I recover from job loss if I’m nearing retirement?

Unforeseen financial challenges can happen at any time – but they call for more careful attention if they occur when retirement is approaching. Here are four common situations you could encounter in your 50s or 60s, along with some guidance on navigating them to help keep your retirement goals on track.


1. An Economic Downturn

During times of economic uncertainty, it may be tempting to read the news headlines and think you need to react quickly. But maintaining perspective during market swings can be the first step toward staying focused on your financial goals.

  • In your 50s. To achieve your retirement goals, committing to your long-term investment mix is an important way to help maximize growth potential. However, during periods of market volatility, the strategy of dollar-cost averaging (DCA) may prove beneficial. It’s a conservative tool that Christopher C. Giambrone, CFP®, AIF®, co-founder of a boutique wealth management firm based in New York, recommends to his clients in times of economic uncertainty. With DCA, you buy fewer shares when prices are high and more shares when prices are low.
  • In your 60s. The closer you get to retirement, the more strongly you may feel about protecting your portfolio. That’s because you’ll likely need the funds sooner. If market volatility is making you reconsider your risk tolerance, ask your financial professional if a less volatile mix of investments could still meet your overall investment and retirement goals. It’s important to have a “balanced allocation and be comfortable with your equity exposure in both up markets (ample exposure to capture targeted gains) and down markets (ample fixed income for tempered volatility),” says Giambrone. “It’s a delicate balancing act.”


2. Job Loss

If you’re facing a sudden loss of employment, there are ways to put yourself in a better possible position to achieve financial security again. To help inform your decisions, you and your financial professional can look to your retirement timeline and job prospects.

  • In your 50s. Regaining full-time employment may be the goal, but that doesn’t mean it’s your only option. While you’re seeking a new job position, consider consulting or other part-time opportunities. If you need a cash cushion until you find your next role, you may have more options if you’re at least age 59½. At that age, you can draw on your 401(k) and traditional IRAs without fees or penalties. Alternatively, your contributions to a Roth IRA can be withdrawn without penalty or taxes at any time.

Note: The recent CARES Act allows you to borrow from retirement accounts during 2020 without paying the 10% withdrawal penalty you would usually pay if you’re not yet 59½. It also gives you up to three years to pay taxes on the withdrawal or return part or all of it to your account.1

Household economic shocks account for about 20% of all retirement account withdrawals.

Source: New Evidence on the Effect of Economic Shocks on Retirement Plan Withdrawals.
The Journal of Retirement, Spring 2019.

  • In your 60s. Consider whether retiring early makes financial sense. You may have already started thinking about your next act, and with some planning you can make a passion pay off. Another option is to rethink at what age you should claim Social Security benefits. Keep in mind that although you can claim benefits as early as age 62, there are advantages to delaying them until your full retirement age. (The full retirement age is 66 for people born from 1943 to 1959, and age 67+ for people born in 1960 or later.) For each year beyond your full retirement age that you delay claiming Social Security, your benefit increases by 8% until age 70.2

Note: Seeking temporary hardship adjustments from your banks and lenders can also help you through an uncertain time. Ask your financial institution about any steps they can take to help you recover, such as waiving fees or deferring payments. Be aware that in response to current events, many banks are taking a variety of actions to assist customers who are facing challenges.

Unemployment or Underemployment After Age 45

Source: 2019 Risks and Process of Retirement Survey. Society of Actuaries, May 2020.

3. A Surprise Expense

Supplementing retirement savings with a dedicated emergency fund can provide a financial buffer to pay for unexpected expenses. With this fund, you can help protect your retirement savings from unforeseen costs like paying for major home repairs or providing financial help to adult children. Most financial professionals recommend keeping 3 to 6 months of income in an accessible account, such as a high-yield savings account.

Beyond an emergency fund, Giambrone suggests building a cash reserve – up to 12 months or more of income – that represents what he calls your “comfort number.” Giambrone describes a comfort number as a “highly subjective” and personalized amount of money that you would like to save. His conversations about this number with clients often bring up individual values and financial convictions. When building or rebuilding your emergency savings, it helps to consider your time horizon.

  • In your 50s. With retirement in the distance, the good news is you have more time to build cash reserves. Consider using tax refunds, bonuses if you’re still working, or extra money from a side gig. If you’re still in the workforce, consider addressing expensive projects before you retire, such as replacing a roof or a kitchen renovation.
  • In your 60s. Work with your financial professional to assess your current spending habits. It’s one of the first steps Giambrone considers with clients near retirement who need to build a cash reserve over a shorter period. If there’s not enough discretionary income to create a cash reserve, he recommends waiting until retirement arrives to take a “minor withdrawal” from retirement savings instead of decreasing retirement contributions to fund it.

Americans with Financial Plan More Likely to have Emergency Savings

Source: Market Sentiment Study. Fidelity® Investments, 2020.

4. A Reduction in Income

If you experience a prolonged decrease in income, think about assessing your new standard of living. You can start by identifying all of your income sources like take-home pay and investment income. Then, revisit your expenses. These costs can be fixed (mortgage, car payment), variable (groceries, utilities), or periodic (home repairs, vacation). With these valuable data points in mind, you can begin to rebuild your budget. Your financial professional can help you create and review your revised spending plan.

  • In your 50s. If you’re able, pay down debt to free up your cash flow to pay for other expenses or fund savings opportunities. Think about paying off high-interest rate debt first, such as credit cards or personal loans. You may also want to consider increasing mortgage payments now if a mortgage-free retirement is important to you. Talk with your financial professional to understand the impact of debt on your overall retirement planning strategy.
  • In your 60s. Your financial professional can help address questions about income sources in retirement and share important factors to consider when thinking about adding a guaranteed income source like an annuity to your retirement portfolio.

Top steps Americans are taking to address future financial goals

48% Cutting back on discretionary spending
44% Working to increase emergency savings
34% Rethinking how they manage their money
31% Talking more about money and finances with family and friends
20% Reviewing their existing financial plan more regularly
15% Investing new money into the stock market
11% Creating a new financial plan

Source: Market Sentiment Study. Fidelity® Investments, 2020.


Preparing for the Unexpected

Retirement planning should always factor in financial challenges and savings opportunities that may change your circumstances. Working with your financial professional early and often can help keep your retirement plans intact.

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