The Covid-19 pandemic has had far-reaching financial impacts. It is important to understand the pandemic’s effects to help mitigate additional financial consequences that may develop in the future. One big revelation is that the pandemic exacerbated the growing economic inequality our society experienced over many decades. The negative impact of the Covid-19 pandemic has been the greatest for those who were already challenged when it came to building retirement security. And recovery from the pandemic’s impact may take many years to complete.
The Society of Actuaries (SOA) recently released a study, “Financial Perspectives on Aging and Retirement Across the Generations,” which provides insights into how retirement fits into the financial priorities of Americans by generation. The study also provides insights into how the Covid-19 pandemic impacted perceptions about financial security and planning for retirement, and how priorities changed since the first iteration of the study was done in 2018. The key findings from this study can help us understand how to strengthen financial security moving forward.
COVID-19 Pandemic and the Context for Retirement Security
The Covid-19 pandemic did not change the need for the working age population to plan for retirement, but the economic and employment climate that resulted from the pandemic significantly increased challenges for those planning for the future. Employment changes in particular—whether from loss of employment, people leaving jobs to care for their families, staying home for their own safety or for the safety of their loved ones—are a major driver of pandemic-related changes that reduced retirement security. Unemployment in the U.S. is still rebounding, tracking at 6.1% in April 2021, up from 3.5% in February 2020 before the pandemic, but down from a staggering 14.8% in April 2020 during its height.
The challenges resulting from the Covid-19 pandemic were layered on top of existing challenges to retirement security. The backdrop for retirement security includes a mix of longer-term issues including lack of universal access to and use of retirement programs, significant amounts of individual financial fragility, growth in debt, low interest rates, gaps in financial literacy, an aging society and growing periods of retirement.
Equity markets have generally done very well but with substantial volatility. The stock market results benefited those Americans who held such assets. They were primarily people at the higher end of the economic scale, those who could tolerate the volatility, and those with longer-term employment which included defined contribution plans with larger account balances. Many middle-income American families have most of their assets in their homes and/or employee benefits, and it is very common in such families for their housing wealth to exceed their financial wealth when they reach retirement age.
Retirement Planning Findings and Concerns
Covid-19 Pandemic’s Impact on Future Retirements
The Covid-19 pandemic will likely have a very different impact on future retirements depending on whether households had an employment disruption, how secure their employment is going forward, and how their finances are affected. For some people, government assistance packages made up some of their financial losses, but others have different stories. The SOA’s research revealed that 41% of Millennials and 39% of Gen Xers report that the Covid-19 pandemic had a “somewhat or significant negative financial impact,” compared to Late Boomers (33%), Early Boomers (29%), and the Silent Generation (25%). Additionally, Millennials indicated they have shifted their priority to short-term financial goals, with nearly two-thirds (64%) of Millennials saying they tend to plan financially for less than one year in the future. It is expected that many of those individuals who reported a negative financial impact will find that this carries through to retirement savings, even if they have not yet focused on this connection.
While the pandemic does not seem to have caused a significant increase in level of concern around retirement risks in general, many survey respondents are worried about the impact the pandemic will have on their retirement savings. This concern is greatest for Millennials (57%) and Gen Xers (49%), who are very or somewhat concerned with how the pandemic will impact their retirement savings, especially around maintaining a reasonable standard of living and not having enough money to pay for adequate healthcare. This concern decreases for older generations (40% Late Boomers, 37% Early Boomers, 29% Silent Generation).
Expectations About Retirement Security
About 6 in 10 of all generations say they are on track in planning for a financially secure retirement. This is despite 47% being concerned about the impact of the Covid-19 pandemic on their retirement savings—with concern being highest among Millennials. Two-thirds of Early Boomers indicate they feel on track for a financially secure retirement. Almost 6 in 10 of the younger generations agree.
Retirement preparedness can be connected to general feelings about finances. Feelings around many of the respondents’ financial situation are mostly positive with 40% optimistic and 34% saying they are in control. This optimism generally increases with age.
In reviewing these findings, it should also be remembered that there are gaps in financial literacy. This research also shows that many individuals have short planning horizons. Other research from the SOA shows that people tend to overestimate their financial situation. Earlier research also shows many gaps in retirement planning, including a tendency by some people to focus on expected expenses primarily and to believe that events such as long-term care will not happen to them. While the survey provides a picture of perceptions, it does not provide any analysis of how well prepared the respondents are for retirement.
Expectations about Retirement Timing
The survey results indicated changes in retirement plans. Four in 10 Millennials and 3 in 10 Gen Xers and Late Boomers have changed or considered changing when they plan to retire—with about 60% of these individuals pushing retirement further back. Millennials, Gen Xers, and Late Boomers all indicate that they expect to retire at a median age of 65.
The Covid-19 pandemic has had a very mixed financial impact on Americans. Those people who had significant employment disruption will likely feel the impact on their retirement savings. Many others will not have any impact and some will have increases in savings. Regardless of your financial experience with the Covid-19 pandemic, this is a good reminder for everyone to take steps now to ensure your financial preparedness for retirement, and to minimize potential future financial hardships.