Retirement at 65? Six months of living expenses in an emergency fund? A 60/40 portfolio? For decades, Americans have lived by some of these financial “rules.” But the coronavirus pandemic has upended many of them. While new realities have emerged and a shift in approach may be needed, there are still strategies you can follow to build financial security in today’s environment.
Before we look ahead, it’s helpful to assess where we are now—and how the pandemic has shifted expectations. Nearly a third of Americans say their retirement plans have been affected by the economic impact of COVID, with 20% planning to delay retirement beyond what they expected, according to a study by Northwestern Mutual.
What’s interesting is that the financial obstacles to retirement have also shifted. Before COVID-19 spread widely, 42% of Americans cited lack of savings as the top obstacle. Now 49% cite the economy as their biggest roadblock. The landscape may have changed for many Americans, but we can still take this opportunity to align our goals and actions. (Northwestern Mutual offers financial planning services to clients.)
Here are three strategies for action:
Retire at 65? Think again
Under the old adage, retirement began at 65. Baby boomers now say they intend to retire at nearly 69, and many have complex retirement planning needs. In the new reality, people need an integrated—and stress-tested—financial plan.
Even before the pandemic, uncertainty was common. Nearly half of Americans surveyed said they planned to continue working out of necessity, with insufficient savings (60%) and concern about Social Security (58%) being the two top reasons.
In the past, people could rely on things like defined benefit pensions and didn’t have to support themselves for 25 or 30 years, as well as face skyrocketing health care costs. While proactive saving is critical, today people need a strategy for how to manage assets in retirement. This strategy should be grounded in an integrated plan that has been stress-tested against multiple scenarios to ensure it will last throughout retirement.
Projected life span, market conditions, the impact of inflation and taxes, the desire to leave a legacy, major unexpected expenses—these factors all have an impact. Given the complexity of this type of planning, pre-retirees and retirees should look to a financial professional for guidance.
Even a small savings cushion can make a big difference
The old rule about having an emergency fund of three to six months of expenses is sound advice, but it may not be possible for everyone in the current environment. With the economic downturn and high unemployment caused by the pandemic, many people have had to dig into their emergency savings. Some have had to go a step further and pull from long-term savings plans, which is likely to set people back in the years ahead.
While rebuilding those accounts may be challenging, saving should still be a priority. Don’t get bogged down in numbers that may not feel immediately achievable if you are still recovering from a financial shock, such as saving 10% to 20% of your income. Small savings can add up over time, and building a modest savings account can help you avoid debt if there’s an unexpected event. Make saving easy by automating a fixed deduction every paycheck or rethinking your budget.
If you have been able to build your savings through the pandemic and have a comfortable emergency fund, don’t miss the opportunity to invest that money in a smart way.
Rethinking the 60/40 rule
The classic portfolio in which assets are invested 60% in equities and 40% in fixed income has long been a financial planning stalwart. For some, a 60/40 portfolio may still be a good choice. But for many, an investment portfolio customized to a person’s specific circumstances and goals will better help them achieve financial stability and security—no matter what happens in the often volatile financial markets.
Consider an approach that looks beyond 60/40 to an asset mix that combines investments and permanent life insurance. Permanent life insurance cash value is guaranteed to increase over time. With this approach, people can invest in a more significant way to drive greater growth.
Your life, your rules
As we assess what’s next as individuals and a society, we have a fresh opportunity to envision the future. After more than a year of disruption and loss, it’s a great time to rewrite the rules to emerge stronger, more resilient, and with greater financial security. With discipline and a personalized, holistic plan, you can live well and thrive in our new reality.
John Schlifske is chairman, president, and CEO of Northwestern Mutual and a member of the company’s board of trustees.
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