COVID-19 has had an effect on nearly all aspects of our lives, including our finances. Mary Lucas, SVP, director of financial planning at UMB Bank, shares her answers to some of the most common questions she’s been fielding about saving for retirement during the pandemic.
We’ve seen that there’s been a rush to cash—meaning people are moving their assets out of the stock market and into cash they can have on hand. How prevalent has this been, especially for those who are retired or approaching retirement?
“COVID-19 has been a significant event, and while its impacts are unprecedented, there have been other world events in the past that have affected the market. In my experience, clients take a closer look at what they’re invested in during uncertain times, and you’ll have a handful of people who want to go all cash. A person’s risk tolerance is truly defined during times like this and you learn a lot about your clients based on how they react. If they go all cash, they’re not as risk averse as they originally thought.
At UMB, we haven’t seen many clients having a knee-jerk reaction and moving to all cash. When the pandemic began, we held more meetings with our clients and conducted reviews that took a harder look at how they were invested and the long-term impact of their portfolio. These conversations naturally were a bit different when we talked with people in their 40s as opposed to people in their 60s. Our younger clients understand they have a longer time horizon to stay invested so aren’t as concerned, while those approaching retirement are much more focused on how they’re invested.”
What changes are being made to retirement accounts during the pandemic?
“For the most part, our team at UMB recommends against making changes. UMB works to allocate client portfolios to counteract these types of market situations. Once a vaccine or better treatment is available, volatility related to COVID-19 will likely pass. We also have an election approaching as well as other world developments—but our clients’ portfolios have been built to accommodate market fluctuations caused by these types of events.
Our approach is to make proactive and responsible choices from the outset—a world event isn’t necessarily a reason to change your strategy. We advise our clients to stay the course, stay focused and remember their long-term strategy. In some instances, clients may choose to increase their cash holding. (A world event might push them to keep good portion invested but maybe move from 10 percent cash to 25 percent cash to feel more comfortable.) But generally, allocation decisions are made with a long-term focus and we encourage our clients to ride the wave.”
What are the impacts of early retirement withdrawal?
“Depending upon an investor’s unique financial situation, typically our recommendation is to avoid early retirement withdrawal. Although the CARES Act has made some exceptions, in general, if someone withdraws from their retirement account early, they will be subject to penalty, plus fees and taxes associated with that choice, which could significantly damage their long-term strategy. Retirement accounts should be last place to turn to for cash during difficult times—ideally, a client should have cash already built up in non-retirement emergency savings account to use for unexpected expenses.”
How has the pandemic has changed where retirees save for retirement and those who are nearing retirement?
“When we design investment strategy for new clients, we take a gradual dollar-cost averaging approach, and are noticing that people are wanting to keep more of their assets in cash. For clients who are still working, most of their investments still go into retirement savings accounts—they’re just being more conservative. For those nearing retirement, they’re more cautious even when the markets are good, as they have a shorter time horizon. So, for this group, when you pair the natural caution with the volatile markets, it doubles their conservatism.”
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