Financing retirement in the COVID era

Januaray 19, 2021

Many residents want to retire from their jobs as soon as they are financially able to do so. The ongoing COVID-19 pandemic has caused some older adults to reevaluate their finances and retire even earlier. 

“A lot of clients have done plans where they were supposed to retire in two, three, five years out,” said Joseph R. Topolski, managing partner at the Baltimore-based Fraser Financial Partners. “They are all trying to retire within the next six months. We are pretty busy with (those clients) right now.” 

With a shorter timeline, many financial planners are now having to restructure retirement plans to make sure clients have enough money to last the rest of their lives. These moves can be tricky given how the pandemic has made for a volatile stock market. As well as being in a bear market for fixed-income products like bonds, certificates of deposit and savings accounts, which are at historic lows for interest. 

“Usually fixed income is a big component we would use during a retirement,” Topolski said. “It is steady. It pays interest. It is predictable so that their income is predictable. That is how you get to retire. You know what is coming in, and you know what needs to go out.” 

Twenty years ago, if he had a client about to retire, they would put together a portfolio with 50% in stock-based investments and the other 50% in bonds, CDs and other fixed-income options. Today, financial advisers are seeing portfolios where clients are 70 to 80% in the stock market in some variation. 

“The way that a lot of advisers, including us, are trying to combat the lack of yield they call it on the fixed income or the bond markets is we are using insurance products,” such as annuities, he said. “The issue we are having now is most of those insurance companies are leveraged off of interest rates so all of the things that they were offering have all kind of been pulled away a little bit or what they are offering is nowhere near as robust.” 

Some of the money advisers would have suggested be put into a regular annuity where the individual would get a predictable income is now being placed into buffered annuities. “There is this buffer that says if the market goes down a certain percentage, the insurance company eats the loss and you are still good,” Topolski said. If the market goes up, the client is going to get a certain percentage of that market going up.

Topolski notes they usually keep money in buffered annuities for around three to five years to allow folks to still participate in the market but to have a safety net if something bad happens during this time. 

“It is not ideal,” he notes. “If you gave me 10 tools it would be the 10th option I would use, but it is the market we are finding ourselves in right now.”

Steven J. Sless, of the Owings Millsbased Steven J. Sless Group, notes reverse mortgages are an underutilized banking tool in retirement. 

A reverse mortgage is a loan that is designed to provide seniors access to some of the equity that they have built up in their home. This option provides seniors with flexible repayment options. They may either treat the loan like a regular mortgage or defer payments until the home is sold or they leave. In that case, the amount of money that gets paid back when they leave the home are the funds that were borrowed plus any interest that has accumulated during the life of the loan. 

“It provides seniors with increased liquidity, flexibility and accessibility,” Sless said. 

The option, he notes, is unique because it offers homeowners the opportunity to leverage what is in most cases their largest asset. They could take out a home equity loan, but that features a monthly payment and may derail their budget. A regular mortgage is another option, but those traditionally come with a 15- to 20-year term, which a senior might not want to take on. 

Sless notes reverse mortgages are a great option because they are federally insured, which means the funds can never be frozen or suspended. 

“They don’t have to make a monthly mortgage payment unless they chose to,” he said. 

One key way seniors can better manage their retirement finances is with the help of a professional. 

“I think it is important to have somebody working on your behalf that is not emotionally involved in your finances,” Sless said. “Emotions can trigger rash decisions, and you don’t really want to make a rash decision when it comes to something as important as retirement.” 

Topolski observes that many people just have 401(k)s or 403(b) plans through their employer. 

“Most folks do not work with an adviser,” he said. “Most of them are not investing correctly for their goals.” He encourages folks to find an adviser who does comprehensive planning. 

“I would say work with one that is more holistic where they sit down with you and they help you create a plan, they let you know from A to Z how everything is going to work out.” 

Sless said it is important to have a plan specifically for all the different risks in retirement, including long-term care and health care. Also, people must be ready to transition from wealth accumulation to wealth distribution where they understand how much they can safely take out and not outlive the money. 

“Getting educated on that wealth distribution, I think that is paramount for anybody to live a comfortable retirement,” he said.

This article featuring Steven J. Sless, CLTC® was originally published in Maryland The Daily Record.