More people are retiring early, which may be due in part to the effects of the pandemic.
“They want to get busy living their retirement,” said Rick Dhabalt, co-owner of DC Retirement Strategies. “There’s been so much disruption in their world, and [many are] working from home. I think we’ll see that trend continue in 2022.”
Conditions are ideal to take the leap.
“As a result of the COVID pandemic, individuals who were close to retirement and financially prepared to retire decided to leave the workforce a year or two earlier than planned,” said Barbara Rizvi, director of wealth and investments at FNBO. “A strong stock market in 2021 allowed them to enjoy their early retirement without regret.”
Dhabalt said many retirees use a combination of investment products.
“Many of them are looking for what we define as reliable income in retirement such as Social Security and pensions,” he said. “[That is] static income they can count on to meet their needs. Some of these products have been around for a while, but I see more and more people using annuity solutions because they can give a reliable lifetime stream of income to complement their Social Security and pensions. Then, of course, there are your typical IRAs, mutual funds, managed solutions for other assets that are more liquid but also variable when it comes to how they react to the market.”
Retiring in 2022
Dhabalt recommended that those who plan to retire in 2022 meet with their financial advisers sooner rather than later. They should determine their risks for retirement, what their income needs will be, and what the tax implications of withdrawals from their retirement products will be.
“The main thing is, what’s a sustainable withdrawal rate from those assets in retirement,” Dhabalt said. “Be proactive in getting prepared to sign up for Social Security and Medicare benefits.”
Remember that if you’re younger than 59 and a half, the IRS will impose a 10% penalty on early withdrawals. After age 59 and a half, that penalty doesn’t apply.
“They need to know what types of products they have and make sure they’re not going to have a negative tax situation,” Dhabalt said. “That’s where an adviser comes in, to know what all the money types are, where to draw money first and where to draw money last because there are a lot of great solutions such as traditional IRAs and Roth IRAs, and they’re all taxed differently.”
Those looking to retire still need to be on their toes.
“We remain in uncertain times, so if you plan to retire in 2022, don’t assume your investments will appreciate as strongly as they did in 2021,” Rizvi said. “Make sure you have adequate cash reserves in a bank account to ride out a year or two of a bear market. If stocks stumble, this will allow you to maintain your standard of living without needing to liquidate investments during a down market.”
Planning Early
Dhabalt tells young professionals who are years away from retirement to start saving early and save as much as possible. Create a plan, review it periodically, and stick to the plan.
“When in doubt, check the plan because that has everything they talked about — the products, the taxes, all those implications,” Dhabalt said. “Review the plan annually at a minimum. When different milestones occur — things like a change of job, an inheritance, or tax law changes — review the plan more frequently.”
“If you haven’t been saving or feel like you need to be saving more, the new year is a great time to start,” Rizvi said. “If you receive an annual pay increase or bonus, start with saving that. The best way to know if you are saving enough to support your desired lifestyle, both during your working years and during retirement, is to work with a financial planner.”
Best Value
Competition among record keepers to lower fees and increase service is continuing, according to Matthew Munyon, retirement plan administrator at Swartzbaugh-Farber & Associates.
“Benchmarking the plan every three to five years is very important to ensure you are receiving the best value and newest features,” he said.
Auto-enroll/escalation is very big, and Munyon expects it to continue to grow and make a large impact within retirement plans.
“I believe that features such as automatic enrollment and auto-escalation, where all participants are enrolled unless they make an affirmative election not to be enrolled, and then have that deferral percentage increase by 1% per year up to 10% are going to increase in popularity,” Munyon said. “It is much harder to opt-out than it is to opt-in, and we are seeing our retirement plan sponsors have higher participation levels when they use these features.”
Swartzbaugh-Farber is continuing to see increased usage of target date funds, which goes hand-in-hand with the auto-enroll.
“For the participants who are not comfortable making an investment decision, this is a great option for them to have an automatically adjusting, set-it and forget-it type of approach, based off of their expected retirement date,” Munyon said.
Investing Trends for Early Retirement
Environmental, Social, and Corporate Governance (ESG) investing is gaining in popularity. Assets in ESG have grown from $22.8 trillion in 2018 to more than $35 trillion last year and are on track to hit $50 trillion in 2025, according to the Global Sustainable Investment Alliance based in Washington D.C.
“I think we will continue to see states mandate that all full-time employees, and some eligible part-time employees, have access to a retirement plan through work, or provide information on how to save through a state program for private employers who don’t have a retirement plan,” Munyon said. “They do not require employers to offer a plan, or make a matching contribution, but they do require that employers make sure that their employees are able to save for their retirement via a Roth or Traditional IRA by notifying them of the state option.”
Be Smart
Munyon advised soon-to-be-retirees to analyze their spending truthfully. Determine how much income they have coming in from investments, annuities, Social Security and other sources to see if they have a shortfall or if they have more than they need.
“Be sure to factor in increasing health care costs and a reasonable rate of return from your investments,” Munyon said. “With all of the uncertainty of COVID-19 that remains, the stock market returns of the last decade are not safe assumptions to make. Be smart. If you can live off of your money when you are expecting a 4 to 5% rate of return, you’ll be happy when the returns are higher.”
Young professionals can stay on track by using the auto-increase feature of 401(k)s, if available in their plan.
“As you get pay increases and advance in your career, you are automatically saving more each year, up to the max deferral percentage allowed by your plan, typically 10 to15%,” Munyon said. “If you work for a company with a 401(k) plan, utilize the calculators and the ‘what-if’ scenarios that are included by your plan’s recordkeeper. They may not be perfect, but they will help you determine a target amount of savings you need to live the retirement you want. You can make assumptions off of future pay raises, investment returns, inflation [and other factors] to help you arrive at a target amount.”
The power of compounding interest is impressive, and will make a difference at retirement. Take full advantage of your company’s matching contribution if you are able; do not leave money on the table.
“I am also a believer in Roth contributions to a 401(k), or a Roth IRA,” Munyon said. “With a Roth you defer money after-tax, but if you keep the money in the Roth for five years, and until you’re older than 59.5 years, the original contribution, and all of the growth, will be tax-free to you as you withdraw it. Over 10, 20, 30 years, that could be a large amount of growth that you take, tax-free.”
Retirement Living
Ovation Heartwood Preserve modified some of the design within its facility, particularly assisted living, in response to the COVID-19 pandemic.
“We redesigned what we call our ‘Discovery Room’ for families to visit should we ever wind up in a full lock-down,” General Manager Stephanie Grade said. “That [room] has an exterior door and has a custom wall that can be put up so everyone can visit in a beautiful setting and can be close to one another but still be safe. That will go into effect if we ever have those lock-down situations.”
Ovation also examined its policies overall for ways to improve how it supports the spiritual and mental health of the residents.
“We’ve been very lucky in that we haven’t been open during this time, but we’re revising how we will respond should that time arrive,” Grade said.
Retirement living is moving away from an ‘institutional feel’ to more of a ‘residential’ feel. Ovation has options for independent living, assisted living, and memory care.
“We have been lucky so far to be able to find really great people to fill our positions, but finding staffers is a challenge for everyone,” Grade said. “Supply chain issues are a great challenge for us as we look to open because a lot of what we do is moving technology forward, and the supply chain has some glitches in that sector.”
Grade expects Ovation to re-open between January and March. The firm is currently taking reservations and applications.
In the past year, Heritage Communities — which has 15 senior living communities in Nebraska, Iowa, and Arizona — added independent living and memory support to its Heritage at Fox Run Community in Council Bluffs, and about a year ago the firm added the Heritage at Fountain Point in Norfolk, Nebraska, Chief Operating Officer Amy Birkel said.
“We’re seeing that even though we’re all living with COVID, we’ve figured out how to have good safety protocols and infection control practices while still having a community living setting,” she said.
The staffing shortage has pushed the firm to be more innovative to attract employees by offering different career path opportunities, benefits, and educational opportunities.
“We’ve increased our tuition reimbursement program,” Birkel said.
In addition to Nebraska’s low unemployment rate, the pandemic is a driver of the worker shortage.
“I think people are shying away from health care,” Birkel said. “We have to take a few more safety precautions regarding personal protective equipment. Potentially people who have a fear of COVID might be a challenge for us, but it’s easy to educate and combat that when our applicants can see our environment, can see that our residents are living and happy and that our associates are able to enjoy a rewarding and fun environment to work in.
“Caring for others is a rewarding career path. If someone wants to have influence and work in an environment where they really can make a difference, health care, and senior living in particular, is a great environment where they can get that started.”
