The Highs and Lows of Pandemic Finances

By Shannon Rowan

Nearly every aspect of life has been affected since the onset of the worldwide pandemic in early 2020, and few people anticipated the resulting impact to their finances. Despite a powerful bull market and persistent low interest rates, the specter of inflation looms. One welcome outcome of this recent uptick in the price of goods and services is that social security beneficiaries will receive a cost of living increase of nearly 6% in 2022, the largest in 40 years.

Of course, not all of the changes to the economy have been positive. The next couple of months provide a good opportunity to assess the consequences of these changes on your financial situation along with adjustments you might consider.

There are many indications that millions of Americans have elected to retire early as a result of the pandemic, and an analysis recently conducted by the St. Louis Fed supports this view. Many of these decisions were likely bolstered by soaring 401(k) values as well as the opportunity to monetize home equity that has been magnified by pandemic-fueled real estate prices, according to the report. While the acceleration of retirement may be an unforeseen opportunity, there are several issues worthy of consideration and planning.

Anyone who endured the last few major stock market declines knows that values can plummet fast and far. Additionally, if a similar market disruption occurs at the beginning of this spending phase – a phenomenon known as “sequence of returns risk” – the long-term consequences could be devastating. The effect of a significant decline at the beginning of retirement is often not contemplated by retirees, and even skilled and experienced advisors can inadequately address this hazard.

During retirement, the necessity for current income likely will be at odds with the growth that is required to stay ahead of inflation and to generate income in the future. Retirees who seek to avoid losing money by eliminating market risk actually increase exposure to longevity risk whereby they may run out of money.

Ideally, your investment plan can achieve the balance required between risk and return to provide both current income and portfolio stability along with the growth needed to fulfill future obligations. Establishing an appropriate investment and distribution strategy can help ensure greater confidence in retirement.

Even if retirement is not imminent, you should review your asset allocation to maintain alignment with your risk tolerance, time horizon and return expectations. In addition to assessing your investment portfolio, the approach of a new year is an excellent time to evaluate other aspects of your financial situation.

For example, do you have variable-rate debt? While the onset of higher inflation may offer cost of living increases to benefit plan payments, it can wreak havoc on cash flow, especially when loan payments adjust to changes in the rate of inflation or rising interest rates. While there have been notable increases from the pandemic, rates remain at historically low levels. Therefore, you should get a clear picture of your debt and review the options available for protecting, or possibly improving, your cash flow.

There are a number of resources available to conduct these analyses. However, issues like the sequence of returns risk can be daunting, and when combined with related considerations such as health care, taxes and social security, the process may be overwhelming.

A financial planner can help you amalgamate your financial information and decision-making into an organized and thoughtful strategy and keep your plan on track with periodic reviews.

The writer is executive vice president and director of wealth services at Burke and Herbert Bank.