- \ Gerard Gruber
- March 31, 2021
!covid 19 economic impact
It has been approximately one year since the COVID-19 pandemic upended life as we know it. From our daily living and working habits to new concerns for our health and safety, there is little (if...
It has been approximately one year since the COVID-19 pandemic upended life as we know it. From our daily living and working habits to new concerns for our health and safety, there is little (if anything) this virus hasn’t affected.
While these short-term impacts are what generally make headlines, the long-term effects are of concern for many Americans, as well. Notably, changes in the economy and how they have (or could) affect their retirement.
Governmental Relief Efforts Could Have Stalled Savings
As millions of Americans have found themselves out of work and businesses across the country have been forced to shut their doors for good, the government has responded with three relief efforts to help ease various financial burdens. The US Central Bank and Federal Reserve have also taken measures to help boost the economy.
Relief began with the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus bill in March of 2020, followed by the COVID Relief Bill in December of 2020, and finally The American Rescue Plan in March of 2021. Provisions of these acts included extended unemployment benefits, stimulus checks for individuals and families, as well as the Paycheck Protection Program (PPP) designed to help aid small businesses.
Albeit helpful in the near-term, there are some provisions that will have long-lasting negative impacts on many Americans’ retirement plans. The CARES Act is the prime example. Under this bipartisan act, individuals were permitted to withdraw up to $100,000 of their 401k savings without the usual 10% early withdraw penalty if they were financially affected by the pandemic. Those who took advantage of this will have three years to cover the tax burden.
According to Vanguard’s survey, How America Saves 2020, the median withdraw was only $10,000. While this may not seem like much, the lost compounding power from a $10,000 withdrawal could result in a roughly $43,000 deficit in retirement savings thirty years from now. While liquidating investments for immediate financial security may have been worth the peace of mind, it will make saving for retirement that much more difficult.
Layoffs and Buyouts
Layoffs, by far, have been the most detrimental to many retirement plans. While many employees originally feared the loss of their employer-sponsored retirement plans (or at least a reduced employer match), a larger problem was realized—permanent job loss. Cost-cutting measures for many companies resulted in either employee termination or early retirement buyouts.
Meanwhile, only 25% of Americans report having enough in their emergency funds to cover six months of living expenses. So not unsurprisingly, a Federal Reserve survey found that more than one-third of those who lost a job could not pay their bills in full in April 2020. More than 33% of Americans who lost their jobs or had their hours cut could not survive a single month, let alone save for retirement.
Of course, living expenses will be prioritized over retirement savings for those who experience a loss of income. Naturally, this makes sense. It becomes a matter of survival. But from a long-term perspective, this can be significantly injurious to retirement goals.
Loss of Confidence
Overall, Americans of all income levels have lost confidence in their ability to retire on time—or even at all—with the future state of the economy in question. Continued layoffs, market uncertainty, and inflation concerns are all among the top threats causing individuals to question, “Should I wait to retire? And how long will I have to wait?”
The silver lining here, though, is that Americans have re-prioritized financial security, and luckily, it is never too late to make or change a retirement plan. Measures can be taken to accelerate your savings and mitigate your taxes (now and in retirement) to position yourself for a long and fruitful retirement.
If you are ready to jumpstart your retirement, the advisors at Harbor West can help. We specialize in helping individuals and families make the most of their resources through smart investment management and tax mitigation. Schedule a call with us today or subscribe to our newsletter for monthly tips and helpful planning resources.