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Market Perspective

Retirement Planning During a Pandemic: Will COVID-19 Impact Your Strategy?

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Thrivent's Chief Investment Strategist shares unique retirement investment opportunities and insights to consider during COVID-19

Are you concerned the markets are messing with your retirement plans? To say 2020 has been an unusual year for retirement planning would be an understatement. With 80% of economists surveyed by NABE (National Association for Business Economics) agreeing there's a 1-in-4 chance of a double dip recession, future economic challenges seem inevitable.1  

But the markets tell a completely different story. In August 2020, the S&P 500 gained 7% while Nasdaq Composite gained 9.6%. Even the Dow Industrial Average, which hasn't had a great year, rose 7.6% in August.2 "We have this cognitive dissonance right now, where what the economy is doing and what the market is doing don't match," says Mark Simenstad, Chief Investment Strategist at Thrivent.

We spoke with Simenstad about the unique retirement investing opportunities in 2020, and what you can do to stay on track with your retirement goals. "This recession is like none we've ever seen before," says Simenstad. With COVID forcing economic shutdown, halting what has become the longest bull market in history,3 we've also seen dramatic ups and downs.

"With everything that happened this year, a recession wasn't necessarily a surprise. The unexpected has been the response of the market – and both the economy and the market have an impact on retirement strategies," says Simenstad. "If you told me everything that would happen in 2020, and then say that Nasdaq would be up by over 20% year to date and the S&P 500 would be approaching new records, I would have said you're crazy."

How the 2020 economy impacts retirement strategies

This year's economy and market could impact your retirement strategy in a couple different ways:  

  • Obstacles to growing retirement funds. "One of the biggest impacts has been the dramatic decline in bond yields, which has really changed the dynamic for what opportunities are out there for investors," says Simenstad. "When you start with such extraordinarily low rates, it's harder to work toward building retirement wealth."
  • Potential inflation resulting from COVID relief packages could diminish your savings' power. "Longer-term, the risk of inflation is increasing due to the government responses both fiscally and monetarily … we're throwing so much money at this problem," notes Simenstad.
  • Changes to your 401(k). Many companies are suspending their 401(k) contribution matches, even major companies.4 Additionally, the government is allowing Coronavirus Related Distribution (CRD) withdrawals from 401(k)s, but while it's easier to withdraw from your retirement funds, it may not be the smartest decision – especially if you're nearing retirement.5

Your retirement strategy: How to keep moving forward

According to Simenstad, "Now's the time to make sure you have a plan that includes savings, proper diversification and risk management. Those are the tried and true tenets of any investment portfolio, particularly retirement planning."

As you evaluate your retirement strategy, keep these seven tips in mind:

1. Keep your eye on the long-term

As the markets fluctuate, you could be experiencing dramatic short-term wins and losses – or tempted to participate in those short-term gains. But when emotions take over, look to the numbers: The S&P 500 has endured 13 bear markets since the end of World War II – all of which fully recovered in an average of 26 months with the index even exceeding its peak by an average of 68%.

The most important thing you can do is focus on long-term goals and avoid the temptation to trade your way back to an ideal account balance. "Unless you're exceptionally good at trading, your best strategy for achieving your long-term goals will be through saving, sticking to a long-term investment plan and keeping your costs down – those are the keys," says Simenstad. "You can do trading to make money on the side, but it may not be smart to have your entire retirement plan devoted to trading."

2. Assess your risk tolerance

Understanding your risk tolerance is an essential step for protecting against market volatility while evolving your retirement plan over time – which is why it's recommended to assess your risk tolerance annually.

"When you're young and you don't have kids, you can have a really long-term investment horizon," says Simenstad. "Though as you get older and you hopefully acquire more wealth, income and assets, that can change, then the risk of some problem coming up is much greater for you."

Understanding your risk tolerance is a key step to rebalancing your portfolio and addressing where you stand regularly. You can assess your risk tolerance quickly with our risk tolerance quiz.

3. Diversify your portfolio

As you may well know, asset diversification is among the most important strategies for buffering against market volatility. The key to proper asset diversification is paying attention to where you may have relied too heavily on one profitable or reliable asset class and, as a result, neglected the need for diversification. An often-overlooked sign you're lacking diversification is aligning your portfolio with your line of work. "I know someone who worked for a tech company in the Bay Area a few years back, and his whole retirement asset was in this company because the stocks were great at the time, and then it crashed. And he didn't diversify," says Simenstad. Make sure you're allocating your assets across four or more asset classes – like equities, fixed income and real estate – with varying risk in your portfolio.

4. Buy stocks and funds responsibly

If you're tempted to time the market, try dollar cost averaging (DCA) instead. DCA, also known as the constant dollar process, is a strategy to buffer against volatility by dividing up your fund purchases equally and paying them on a regular schedule – which balances out your purchase price over time. "For most people, particularly younger investors who have time on their side, dollar cost averaging is great," notes Simenstad "If you're 70, you may want to rethink that strategy."

5. Stay committed to your savings

Savings are the undisputable pillar of any financial plan, but with many people experiencing income uncertainty, even the government is loosening guidelines on retirement fund withdrawals. Simenstad's advice: Continue saving. "I always cringe when I hear about easier access to the savings you've built up," he says. "While in extreme circumstances accessing those funds can be helpful, I would be very careful about tapping those assets. They're hard to get back."

If savings is proving difficult right now, Simenstad urges us to look at our expenses before turning to our retirement funds: "Examine your lifestyle. There's probably a lot you could do without and still be happy."

Fortunately, according to a recent pulse survey by the U.S. Census Bureau, most people are using their stimulus checks responsibly.6 Those who don't need stimulus checks to cover expenses are using that money to pay off debt or stashing it into savings. "Unfortunately, if you've lost your income, saving is much more difficult now, but I'm encouraged by how many people are saving stimulus money," says Simenstad. More than 13% of survey respondents intend to pay off debt with their checks, while nearly 12% of those surveyed have saved or would likely save their stimulus check.

6. Give back, if you can

If you're willing and able to give right now, your generosity is welcome. The IRS has given $1,200 to people who make up to a $75,000 annual salary, while half of respondents in a 2020 Bankrate survey claimed the stimulus money would be critical to their current financial well-being. "To the extent you can, give. I know a Thrivent client who is a nurse, and when she received her stimulus check, she knew she didn't need it, so she gave it to a few different charities in her city," Simenstad recalls. "And I thought that was pretty cool."  

7. Review your retirement strategy with financial strength on your side

For more than 100 years, Thrivent has supported people in their long-term financial goals, in times of economic growth and strain. "This isn't our first rodeo but it's the first time we've seen this horse," Simenstad laughs. "We've always focused on having great financial strength, which we do even more today. For individuals, if you have a strong balance sheet you can weather these storms and turn them to your advantage."

Ready to reassess your retirement strategy? Connect with a financial professional near you to get personalized advice for your goals.