COVID-19 will force some into early retirement

More people have lost their jobs amid the COVID-19 crisis than any period in recent history, and for many people who are close to retirement, prospects for returning to work are bleak.

That could have disastrous consequences for their plans to retire, as savings could come up short. The idea of working, in some capacity, well past age 65 has become common, and many people have planned to do so in order to stay afloat financially.

“Recessions are bad for everyone who loses their job. The scars can last for a long time,” said Brad Hershbein, senior economist and director of information and communication services at the W.E. Upjohn Institute for Employment Research. “For older workers, it’s unlikely that they’ll ever see a recovery, if they get laid off.”

That varies by industry and job type, he noted.

“For workers who were in essential industries, and people who have managed to keep their jobs, their positions won’t change that much,” he said. But for older workers who have lost employment, particularly those in non-managerial roles, “it will be a very different story,” he said.

As of April 18, an average of nearly 5.8 million new unemployment claims were made every week for the past month, according to data from the Department of Labor. At the end of March, the national unemployment rate was 4.4%, an increase of 26% over the level at the end of February, figures from the Bureau of Labor Statistics show. Among people age 55 and over, 3.3% of people were unemployed at the end of March, up 27% over February’s rate of 2.6%.

There are several factors that put older workers at a higher risk. Some are losing jobs during their peak earning years, and finding other work with similar compensation is difficult, particularly in this economy.

“Their chances of going back into the labor market are pretty slim,” Hershbein said. “They’re going to be very hard-pressed in most cases to find a job that was paying what their previous job was paying.”

Studies in which identical resumes were sent out by applicants of different ages have shown that employers often discriminate, as older applicants were less likely to be contacted, he said.

Adviser Brandon Renfro is working with one Baby Boomer client who was recently laid off.

“Fortunately, this particular client had set aside a sizable cash savings for emergencies and can fund about four months of expenses,” Renfro said in an email. “We are still playing the long game to see how long this client goes unemployed but they are pretty optimistic. Because of their emergency savings, a Roth conversion is something we may explore later once we find out when and where they land.”

Meanwhile, spending down retirement assets should be avoided, if possible, he noted.

“Now is the time to be cautious, especially with a retirement plan that is still on track,” he said.

He anticipates more clients being affected by job losses this year, he said.

“Opening up the economy is good, as long as that doesn’t create a second spike in illnesses and shut us down again,” he said. “The more prolonged this is, the deeper it will go and the harder it will be to come back from.”

Self-employed workers at risk

Older workers are more likely than younger workers to be self-employed, according to a recent study published by the Upjohn Institute. Those workers, often in contractor arrangements with their prior employers, generally don’t have unemployment insurance or the opportunity to get severance pay, said Hershbein, who was an author of the study.

“Those workers – and there are a fair number of them – are likely to be in trouble,” he said.

Younger people are the least likely to be self-employed: about 20% of people age 18 to 49 work in that capacity, according to the Upjohn Institute study. By comparison, the rate of self-employment is more than 25% of people ages 55 to 59, 45.5% among people 65 to 69 and nearly 68% for people 75 to 79.

Among those who are self-employed, “independent contractor” is the most common arrangement, according to the paper. About a quarter of independent contractors who are over 50 work in that capacity for a former employer, the paper noted.

However, people who work as contractors past 65 are generally more highly educated and report that they are not motivated to keep working because of money, according to the paper.

Market losses add to retirement trouble

For Boomers who will end up retiring earlier than expected, the losses their portfolios have seen this year could affect their retirement security. And those who will need to dip into retirement savings or begin claiming Social Security earlier than expected could feel more pain.

More than half of older workers had said they plan to work past 65, professor Olivia Mitchell, executive director of the Pension Research Council, told InvestmentNews in March.

“A deep recession could induce many to file for early Social Security benefits, leading to a lifetime of lower income,” Mitchell said at the time.

A potential drop in home values would also affect retirement security, as some people lean on home equity for retirement income, she noted.

“My research has also shown that Boomers have been much less likely to repay their mortgages compared to prior generations, so this rise in housing debt at older ages may put them at greater risk of foreclosure than in the past.”