While the Covid-19 pandemic ended millions of jobs, many Americans still saved toward retirement. Yet there's still a major retirement crisis in the United States today as half of Americans do not have enough savings to maintain their living standards once they retire. Here's a look at how Covid-19 has affected retirement plans.
Covid-19 Impact on Retirement Planning
Millions of workers were laid off or faced reduced hours and pay during the pandemic. Many of these people are now challenged to save up for retirement with no access to an employer benefit program. But even before the pandemic, many businesses were tightening their budgets as job opportunities dried up while countless Americans found themselves working more without necessarily earning enough income to comfortably beat the rising cost of living.
With costs going up year after year, saving for retirement is becoming very difficult for the average American. One thing the pandemic has not changed, though, is that half of Americans depend on Social Security checks for half their income. Those who rely on these checks as their primary income source typically face a lower standard of living than the working class.
Two main metrics are used to reflect the financial condition of Social Security, which is an integral part of retirement. One is an estimated duration before the trust fund is depleted. The other is the program's 75-year surplus to budget deficit ratio. The pandemic has not impacted either metric much, unlike the financial crash of 2008, which brought many years of financial struggle to more people by comparison. Furthermore, a survey by the Plan Sponsor Council of America found that nearly 95% of employers had made no changes to their retirement plans.
One way the pandemic did positively affect retirement planning was that the CARES Act made it easy for people impacted by Covid-19 to take an emergency withdrawal of up to $100,000 for an IRA or 401(k) for the 2020 tax year. The pandemic legislation discontinued the penalty on early withdrawals so that individuals had access to cash. A Vanguard study found that 73% of employers allowed employees to tap into their retirement funds, in which the median withdrawal was about $13,000.
Future of Retirement
Social Security continues to be a pay-as-you-go retirement strategy for every type of worker of any profession imaginable. Many people worry that it may run out by the time they retire, so there's a trend towards taking Social Security checks as soon as people can get them, which is age 62. Even though individuals can get higher benefits by waiting until they are 70, the trend continues to be taking the money sooner.
During the pandemic, despite opportunities given to employees to withdraw money early, the draining of retirement funds was minimal. Due to declining mortgage rates, seniors on fixed incomes were able to refinance their mortgages and reduce monthly payments more easily. Half of the individuals refinancing their mortgages in 2020 were 55 or older.
The future of retirement will greatly be affected by housing costs. According to the Bureau of Labor Statistics, the average senior household spent $17,500 per year on housing in 2019. This figure represented slightly over a third of their annual expenditures.
As far as retirees, 86% have indicated in a Principle Retirement Security Survey they are somewhat confident about their state of mind in the months ahead, compared with 71% of current workers. For those who are already retired, the question is maintaining a steady budget and sticking with it. Meanwhile, Americans who still plan on working for the next several years should already be thinking about some type of retirement plan. Taking proactive steps helps individuals gain more control of their future.