Personal Finance

Here's why the coronavirus may clobber your retirement plans

Key Points
  • Fear surrounding the global spread of the coronavirus, and its resulting economic impact, led to the worst week for U.S. stocks since the 2008 financial crisis.
  • Near-retirees with their savings in a mutual fund tracking the S&P 500, Dow Jones or Nasdaq market indexes saw their retirement wealth decrease by more than 10% over the past two weeks. 
  • Working longer is a "silver bullet" for those worried about the market's impact on their well-being in retirement.
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Americans nearing retirement are among the many to feel the market effects of the coronavirus, as fears around its global spread and resulting economic damage caused a steep selloff over the past few weeks that potentially upended the retirement outlook for many individuals.

The S&P 500, Dow Jones Industrial Average and Nasdaq Composite — which serve as barometers of the U.S. stock market — have each fallen by more than 10% over the past two weeks, and are approaching bear-market territory. The S&P 500 shed another 7% in early trading Monday, triggering a 15-minute halt in trading. 

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Those declines occurred as the number of coronavirus cases outside of China have increased sharply. At least 97 countries have confirmed cases, which now total more than 109,000 globally. The situation is worsening in the U.S., with New York, California and Oregon declaring states of emergency

The Dow market index, for example, plunged more than 3,500 points the week of Feb. 24 — its largest weekly point drop in history.  

The index has cratered around 4,300 points since the beginning of the year, as of around 10:30 a.m. ET on Mar. 9 — representing a loss of more than 15%.

That means a near-retiree with all their money in a mutual fund tracking the Dow index would have lost more than 15% of what they had earmarked for retirement.

"For many people thinking of converting retirement wealth into a stream of income, a [4,000-point] drop in the stock market will reduce their ability to do that today," said Brigitte Madrian, dean of the Brigham Young University Marriott School of Business.

'Too late to do anything'

Fortunately, most near-retirees don't have a portfolio that is fully allocated to stocks, meaning the financial carnage is likely more muted for them compared with younger investors.

Yet some stock exposure is necessary to increase the odds of not running out of money in retirement, which could last more than three decades, according to experts.

A good starting point to consider for those entering retirement is a 50% allocation to stocks and 50% to bonds, according to David Blanchett, head of retirement research for Morningstar Investment Management.

I think markets will go back up, but there's no telling how long they will go down. They could down for the next 10 years. No one knows.
David Blanchett
head of retirement research for Morningstar Investment Management

That means many near-retirees didn't escape last week's market rout unscathed. Unfortunately, there aren't many things they can do to recover quickly now that the damage has been done.

"At some point it becomes too late to do anything after the fact," said Wade Pfau, a professor of retirement income at the American College of Financial Services.

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Working longer is 'silver bullet'

Delaying retirement and working longer, if possible, is one of the best things near-retirees can do from a financial standpoint, said Blanchett, who described the strategy as a "silver bullet."

Working for even just one additional year — or even doing part-time work — may provide an additional year of building savings and delaying taking Social Security. Social Security checks increase 8% each year a retiree waits to claim benefits, up to age 70, and those benefits are locked in for life.

"For those in good health and who can keep their job, I think if you can ride it out for another couple years, you'll be OK," Madrian said.

That's because the stock market has always rebounded beyond its previous levels after past downturns. The problem is, it's impossible to say how quickly it will do so.

A stock market "correction" — defined as a 10% decline in one of the major U.S. stock indexes from its recent high — typically results in a 13% drop and takes about four months to recover, according to historical averages.

But those averages mask some dramatic variation, especially when it comes to "bear markets" (a 20% decline from recent highs). For example, the Great Recession saw the market plunge 57% over 17 months and took more than four years to recover to its prior levels.

"I think markets will go back up, but there's no telling how long they will go down," Blanchett said. "They could go down for the next 10 years. No one knows."

Absent working longer, near-retirees whose portfolios took a financial hit may have to increase the amount of money they're saving now, or be prepared to reduce their spending in retirement if their portfolios haven't recovered to an adequate level.

Americans should also avoid using stocks to fund their retirement in the current environment, Pfau said.

Selling out of stocks that are declining in value means investors will have a smaller stock footprint and will therefore make less money from that portion of their portfolio when the market eventually rebounds.

"Anything you can do to avoid selling assets for a loss will go a long way toward preserving your portfolio sustainability," Pfau said.

Retirees can turn to other assets like cash and bonds as they wait for stocks to bounce back, he said.

They may also consider "buffer assets," which provide a steady stream of monthly income that don't fluctuate with the stock market, such as a reverse mortgage, Pfau said. There are certain risks associated with reverse mortgages that retirees should gauge beforehand. 

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