Does today’s pandemic-driven financial crisis mean you should change your retirement strategy—and if so, how? Because medical experts had never seen it before, SARS-CoV-2, the virus that causes COVID-19, is considered a “novel” coronavirus. Unfortunately, it’s just as novel in the challenges it poses for retirement planning. Here is some advice to weigh in terms of whether (and how) to change course.

Key Takeways

  • If you're still working, you should keep funding your retirement accounts and possibly add even more money to an IRA.
  • If you're out of work, preserving what you have in your retirement accounts should be a high priority.
  • Even though Congress has made it easier to take a 401(k) loan or a withdrawal, make sure you know the downsides before you do.

A Crisis Without Precedent 

While it’s often useful to draw on the lessons of the past, history sometimes has little to offer. Unlike the Great Recession of 2007-2009 or the Great Depression of the 1930s, for example, the current economic crisis isn’t driven by financial fundamentals but by society’s deliberate effort to control the spread of the virus by shutting down large parts of the economy. The closest parallel may be the so-called Spanish Influenza pandemic of 1918, although that played out at a time before Americans gave much thought to retirement and when life expectancy in the U.S. was significantly shorter.

If You Have a Job—or Not

So, what’s a conscientious retirement saver to do? That depends in large measure on your current work status.

If you’re still working

People who are lucky enough to still have an earned income—either through their own work or that of a significant other—may be in decent shape to ride out the crisis. No one knows how long it will last, of course, but having enough cash flow to pay the bills can protect you from needing to dip into your retirement savings. If you’re still saving for retirement through a 401(k) or similar plan, COVID-19 is no reason to stop your contributions, even if your employer, like many, has temporarily suspended its match.

In fact, if you’ve been working from home, you may actually have more cash available now because of reduced commuting expenses, less-frequent dining out, and so forth. That could be an opportunity to put even more money aside for retirement by contributing to an IRA. This year (2020), the maximum contribution is $6,000, or $7,000 if you're 50 or older. On the other hand, you might consider contributing at least some of that surplus to a food bank or other worthy cause.

If you’re out of work

People who have lost their jobs because of the pandemic are obviously in a different situation. Your goal should be to preserve your retirement savings to the extent possible. That means taking advantage of unemployment insurance and any other assistance you’re eligible for through existing programs or the recent CARES (Coronavirus Aid, Relief, and Economic Security) Act. You may also be able to negotiate with your creditors, such as mortgage lenders and credit card companies, to reduce, postpone, or spread out any payments you owe them.

If you have an emergency fund, as financial planners often recommend, you may want to tap it first; if this isn’t an emergency, what is?

While the CARES Act loosened the rules on 401(k) loans and early withdrawals (if the employer allows them), neither of those should be your first recourse if you need cash. A 401(k) loan will typically have to be repaid within five years—and sooner than that if you lose your job—while a withdrawal can trigger income taxes and also mean you'll have that much less money saved for retirement.

Whether you’ve been furloughed (and have a job to go back to) or laid off (with no guarantee you’ll be rehired), you also may want to prioritize your bills and cut some expenses for the time being. Ideally, this crisis won’t go on forever and any cutbacks you have to make will be temporary.

Whatever you do, don’t neglect your health insurance. A large, unexpected medical bill can be financially devastating and possibly lead to bankruptcy. Not seeking medical attention if you need it could lead to an even worse outcome. If you still have health insurance, your insurer may be willing to extend your payment deadlines if you ask. If you’ve lost your insurance, you could be eligible for a special enrollment period in the federal government’s Health Insurance Marketplace.

Finally, if the current crisis has cut into your retirement savings, or made it difficult for you to keep contributing, think about retiring a little later than you originally planned. Working a while longer allows you to save more, and delaying Social Security will mean bigger monthly benefits when you begin to collect them. 

If you're out of work and have to draw on your savings, as a general rule it’s best to start with nonretirement accounts and try to leave your tax-deferred retirement accounts alone for as long as possible.

If you’re retired

Those who have already left the workforce voluntarily are in yet another situation. If your retirement income—from Social Security, pensions, and systematic withdrawals from your IRAs and other retirement accounts—is sufficient to pay the bills, you may not need to do much of anything.

It could be difficult, however, if you have adult children who have seen their incomes evaporate as a result of the pandemic. The impulse to help your kids is an admirable one, but it can become a problem if it causes you to spend savings you’re depending on for retirement. Harsh as it may seem, it’s worth remembering that people who are still of working age have years ahead of them in which to catch up, while retirees have much less time or opportunity.

Once the Crisis Is Behind Us

When the COVID-19 crisis comes to an end—and it surely will—we all may want to take stock of our finances. Regardless of your situation, this could be a good time to:

Review your asset allocation

The COVID-19 pandemic and resulting financial crisis have caused some wild swings in the stock market, with the Dow Jones Industrial Average (DJIA) up hundreds of points one day and down hundreds of points the next. If you’re a risk taker with cash to spare, now might be your opportunity to scoop up some bargains in depressed stocks.

If you’re simply trying to safeguard what you have, you should at least make sure your money is allocated the way you want, among stocks, bonds, and cash. If the stock market’s recent volatility has given you the willies—or if you are coming up on retirement fairly soon—you might consider shifting into a somewhat more conservative portfolio and consider Investopedia's advice on how to achieve optimal asset allocation (including a range of model portfolios from conservative to very aggressive).

Build (or rebuild) an emergency fund

If you didn’t have an emergency fund pre-pandemic, you probably wished you did. And if you did have one, you may have drawn it down and need to replenish it. There are numerous rules of thumb about emergency funds. Some suggest saving at least three months of living expenses in a liquid account, while others recommend having six or more months’ worth. Achieving even that lower figure can be easier said than done when you're living paycheck to paycheck, of course, but it’s a goal worth building toward at any age.

If you’re about to enter retirement, or already there, you may want a substantially larger amount. An emergency fund of two or three years’ worth of expenses in, for example, a money-market or short-term bond fund could help you weather another crisis while leaving the rest of your retirement portfolio intact. It could save you from being forced to sell investments at the bottom of the market.

And if there is no crisis, all the better.