November 26, 2021

How does Fed policy because of COVID-19 affect retirement planning?

The United States is mired in its worst unemployment since the The Great Depression of 90 years ago. Indeed, COVID-19 has stunted the once-robust economy in many ways.

But at the same time, there is this curious occurrence: Equity valuations in the S&P 500 and Nasdaq have hit an all-time high. How does that happen with some of the worst economic conditions in our nation’s history?

One of the main reasons is much of the money dispensed by the Federal Reserve during the pandemic isn’t trickling down to consumers and labor markets, but rather, it’s being reinvested in financial assets, inflating their value. This fresh injection of capital into the money supply can often lead to hyper-inflation for healthcare, housing, and other essential goods that are needed to sustain life. As an example, a recent report from the Employee Benefit Research Institute (EBRI) found a senior couple could need as much $325,000 to have a 90% chance of covering their out-of-pocket costs including Medicare premiums and prescription drugs.

The horrific economic effects of the pandemic have pushed the Federal Reserve to spend trillions of dollars since April in many different ways. It also used the playbook from the Great Financial Crisis and Great Recession of 2008 – low/zero interest rates in the corporate credit market – hoping that these rates would stimulate corporate spending, and in turn spark employment.

But the forbidding economic environment in which people are living renders that approach ineffective. Why? Given the precipitous drop in consumer demand during the pandemic, why would corporations spend to produce goods and services if most customers are more likely to stay home?

So regardless of the amount of money the government prints to subsidize corporate credit markets, little if any corporate spending is on new employment. Instead, many businesses are stashing cash accumulated from government-subsidized bond offerings. This in turn paints a long road back to full employment, essential for the growth of GDP.

What does all of this mean for individuals planning for retirement in the midst of this uncertain times? It means they need to know how to minimize COVID-19’s impact on their retirement savings.

Given these factors, it’s all the more important for those near retirement or in retirement to consider these steps:

• Update return expectations for bonds. The Federal Reserve has made it clear they will support credit markets with zero interest rate policies to 2022 and beyond.  Most investors in retirement have don’t have all of their assets in stocks, but say 50% stocks and 50% bonds.  If half of the portfolio has a lower return expectation, the total return of the portfolio may not be enough to keep up with inflation and the cost of living. Since many retirees are living well into their 80s and 90s, it’s important to revisit the stock-to-bond ratio to ensure you are giving yourself the best chance to keep up with the ever rising costs of life over your retirement.

• Diversify your stock portfolio. Adding new stocks to your portfolio for companies that haven’t been hurt by COVID-19 could help you adjust to market changes. The work-from-home movement was already underway, COVID 19 just accelerated it and there are many companies that are positioned well to take advantage.

• Plan for higher taxes. With the trillions of dollars of national debt issued this year and moving forward to help stabilize the economy, most tax planners are preparing for higher tax rates in the future. It is critical to take advantage of the low tax rates now to reduce your taxes in the future.  While we can’t control the return of our investments, we can control the taxes.  Perhaps a small tax bill now will keep you from a large tax bill later.

• Stay invested. Many portfolios got hammered in the first couple of months of the pandemic. But despite the uncertainty and volatility of these times, it’s advisable for pre-retirees to stay invested in equities. Staying invested is usually wise, because history shows equity investments will recover in time, however it is more important now than ever to know what you own.

• Review and re-evaluate. Current circumstances necessitate reviewing your entire retirement plan. Work with your financial advisor to adjust where needed. A job loss or other reasons for less income means you’ll fall behind on the savings rate you expected, and that could mean possibly delaying retirement. Spending less or working longer can help you recover some of the pandemic-related losses. As circumstances change, revisit your plan.

The pandemic may affect or push back the retirement plans you made several years ago, but take comfort in the money you’ve saved and know that you can regain some control of your plan with patience, careful thought, and wise action.