Financial Planning Post-Covid

The Covid-19 pandemic has flipped many people's retirement plan on its head. It’s time to rethink what our financial goals can and should look like

Christine Benz 19 October, 2020 | 11:00AM

Constellation

Just a few months after its abrupt slide into bear market territory at the outset of the coronavirus pandemic, stock market indices had regained their lost ground and begun to scale new highs by late August 2020.

But the market’s speedy recovery is dissonant with a still-struggling economy. In addition to wreaking havoc on the economy at large, the pandemic has had sudden and significant repercussions for how individuals conduct their financial planning—specifically, how they approach spending and saving goals.

Many households have experienced income shocks as a result of Covid-19 and may have burned through their cash reserves. The pandemic’s economic side effects also have significant implications for when and how older adults plan for their retirement. Not only have older workers experienced some of the highest rates of job loss of any age band, but in previous recessions, it has also taken older unemployed workers a much longer time to become re-employed than younger ones. That, plus the fact that a recovering stock market has lifted retirement account balances, has no doubt prompted some to ponder early retirement. Yet low interest rates—while a boon to borrowers—are a headwind for people nearing or in retirement.

All of these trends have implications for the way households—and the financial advisers who assist them—manage their finances. While the Covid-19 crisis has brought these topics to the forefront, their importance is likely to persist post-pandemic as well.

Emergency

Chapter 1: How the Pandemic Has Impacted Financial Planning for Emergencies

The economic shock related to the pandemic illustrates, yet again, the importance of emergency reserves as part of a financial plan and the difficulties that many individuals and households face in amassing these “rainy-day funds".

It’s a wise practice to have an emergency fund separate from your long-term assets. Withdrawing from retirement accounts is suboptimal because those withdrawn funds can’t benefit from market appreciation—imagine, for example, the worker who liquidated stocks from a retirement account in late March 2020, only to miss the subsequent recovery.

Plus, an emergency fund can boost peace of mind and financial confidence in long-term goals. In a report conducted by AARP, people with emergency funds felt 2.5 times more confident in their ability to achieve their financial goals than those who did not. Financial advisors can play a role in helping clients set a savings goal for these emergency funds based on factors like their employment status (contract or permanent), variability of earnings, number of earners in the family, and so on.

  • Gig economy and contract workers are naturally at risk for more frequent and longer work interruptions than permanent workers and therefore should prioritise building emergency funds larger than the standard benchmark of three to six months’ worth of living expenses.
  • Higher-income workers and those with more specialised career paths should also target larger emergency funds, because such positions typically take longer to replace than lower-income, less specialised jobs.
  • Dual-income households arguably need less of an emergency reserve than single-earner households, because the probability of both earners facing job loss at once is less than it is for single earners.


Retire

Chapter 2: How Older Workers can Approach Financial Planning for Potential Early Retirement

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies