Impact of COVID-19 on Retirees

Quick Answer: Written at the height of the COVID-19 pandemic in May 2020, this article examines how the crisis financially affected retirees and those nearing retirement — from forced early Social Security claims to market volatility and Roth conversion opportunities. The core lessons about economic shocks and retirement security remain relevant today.

The novel coronavirus pandemic has impacted all of us in some way. Almost overnight, the U.S. was hit hard with record unemployment.

Many household incomes have been abruptly shut off. Several industries have slowed down to a crawl or else been shut off.

Millions of former workers have been forced to dip into their savings accounts in order to pay their monthly bills. Some have even been forced to take distributions from their retirement savings in order to make ends meet.

Of course, there is no question that better days would be ahead at some point. The U.S. economy is resilient, and we did emerge from it, though the path was longer for some.

Even so, those without the benefit of continuing income from full-time employment or those with a shorter window before retirement may want to take stock of the situation — seeing what steps they can take to protect themselves from the next disruption, whenever it comes.

How did this black-swan event affect seniors and baby boomers nearing retirement? In an April 2020 column of the Retirement Income Journal, a former International Monetary Fund official laid out some of the medium-term and long-term possibilities.

The Impact on Retiree Financial Wellness

George A. Mackenzie wrote that the finances of older Americans would depend on a few factors. Those include the sector of the economy they work in, the amount of unemployment insurance they receive, and how quickly unemployment benefits are distributed by their respective states.

According to Mackenzie, the average age of an employee in the U.S. economy is 42. The service sectors are what were hit the hardest.

What Happened to Employment of Mature Workers?

The service sectors cover hospitality, retail, and leisure. These sectors were forced to shut down almost entirely during the height of the crisis.

Older Americans tend not to be concentrated in these industries, but many of them do have public-sector jobs. Hence their employment status was less likely to be affected. Or they may have seen job furlough if their employing government's finances were stretched tight.

Many Americans within the retirement red zone (ages 55–64) depend primarily on the job market for their income.

Historically, according to Bureau of Labor Statistics research, labor force participation tends to decline heavily among workers aged 65 and up. And of course, this is the trend in normal times.

Pre-crisis, unemployment among the pre-retirement crowd was already low. But those who lost jobs found it difficult to find new employment.

Some were able to reclaim their old jobs when conditions normalized. But many were left out in the cold — a pattern that contributed to what later became known as the "Great Resignation."

The Big Unemployment Question

As Mackenzie pointed out, here was the big question: Would mature-aged workers continue to look for new employment after job loss? Or would they permanently exit the workforce?

That mass-exit did in fact materialize for a significant share, putting increased strain on Social Security and other retirement benefits programs. Mackenzie recognized that a long period of unemployment might prompt some Americans who turned 62 to claim Social Security early.

However, this means they receive diminished benefits for the rest of their lives. This can often be disadvantageous for many retirees who would be able to delay taking Social Security until they reach their full retirement age or even age 70, when they can collect the maximum possible benefit.

Mackenzie encouraged working-age Americans to wait it out and let their benefits accrue before claiming, if they can. The payout is that much bigger on the back end with delayed claims.

Older workers who are willing and able to work for another five years or so can increase their retirement savings while reducing the amount of time that they have to cover with those savings.

Both of these factors, combined with delaying Social Security, can have a huge impact on retirees' quality of life in the long run.

What About Those Market Swings?

It's also apparent that most American households don't hold a ton of wealth directly in the stock market. Mackenzie addressed this issue in his column:

"According to the Federal Reserve's Survey of Consumer Finances, even the top 10% of households by income with a head aged 55 to 64 held on average just nine percent of their total assets — which include a household's principal residence and other real property — in directly and indirectly held stocks in 2016. For the 65–74 age group, the share in stocks was twelve percent."

(Note: this cites 2016 Federal Reserve data; the 2022 Survey of Consumer Finances shows somewhat higher equity allocations among this age group.)

He recognized that the temptation was to liquidate shares, but recommended holding off — with the recognition that "the key question investors need to ask is whether they could survive financially if the stock market did not recover strongly."

During the COVID crisis, market swings of 500 points to 1,000 points — swings that historically took months or years — were happening in just days during the crisis.

History suggested strongly the market would recover. And it did. But the horizon that retirees had for recovery — and how much portfolio risk they could afford to carry — was what mattered most.

Retirees' Homes Were Less Affected

For many near-retired and retired households, a major asset they may own is their home. Mortgages were likely to be paid down more. Depending on their respective community of residence, they may also qualify for property tax relief, assuming they own a home.

However, it was hard to say what might happen to housing market values if mortgage payments were affected economy-wide. There were concerns about potential "spillover" effects for homeowners — though the housing market ultimately held up well through the pandemic period.

A Silver Lining for Tax Planning

There may be a silver lining that retirees and workers can use to capitalize on market turbulence. Taxes might go up in the future, and during periods when markets are down significantly, it can be a good time for tax planning.

This can be an ideal time to do a Roth conversion, especially during periods when the markets are down. If a retiree's stock portfolio has dropped in value by over 20%, there may rarely be a better time to do a conversion.

That can especially be true if the retiree is able to pay the tax on the conversion out of pocket instead of from the retirement account. Your financial professional can guide you on this.

Plotting the Course Going Forward

The COVID-19 crisis brought significant change and uncertainty, particularly for those retired or approaching retirement. Much of the uncertainty centered on retirement income — and how to protect it from a disruption no one saw coming.

The lessons from that period haven't faded. Understanding how to navigate a forced retirement, plan your longevity, and ensure your income is protected regardless of market conditions remains as relevant today as it was in 2020.

Consulting with a financial advisor about current or future sources of retirement income — and how to navigate these possibilities — can make all the difference for peace of mind. Ask your financial professional about what steps you can take for now and the future.

Frequently Asked Questions

How did COVID-19 financially affect retirees?

The pandemic created a cascade of financial pressures for retirees and near-retirees. Record unemployment forced many to dip into savings, and some claimed Social Security early to cover expenses — permanently reducing their lifetime benefit. Those most affected were workers in service industries and in the "retirement red zone" (ages 55–64) who found it difficult to re-enter the workforce after job loss.

Is it worth claiming Social Security early during an economic crisis?

Generally, claiming Social Security early should be a last resort. Early claiming reduces your monthly benefit permanently — by as much as 30% compared to waiting until full retirement age. Delaying to age 70 increases your benefit by roughly 8% per year beyond full retirement age. If you can avoid it during a crisis, your long-term income security will be significantly stronger. Review your options with a licensed financial advisor before making this decision.

Is a market downturn a good time to do a Roth conversion?

Market downturns can create genuine Roth conversion opportunities. When portfolio values are lower, you convert fewer dollars of taxable value — meaning the tax bill is smaller. If you can pay the conversion tax out of pocket rather than from the retirement account itself, you preserve more tax-free growth. Use a retirement income calculator to model the long-term impact before converting.

What safe money alternatives can protect retirement savings during economic shocks?

Fixed annuities and fixed indexed annuities provide contractually guaranteed income that is not subject to stock market volatility. Unlike market portfolios, a fixed annuity cannot lose principal due to a market downturn — making it a stable foundation for retirement income during periods of economic uncertainty. A SafeMoney advisor can help you evaluate whether a guaranteed income product fits your retirement plan. Find an advisor near you.