By Steve Vernon

Despite the fact that their retirements are most likely a few decades away, many Gen Xers and Millennials still might be understandably nervous about the economic impact of the coronavirus on their 401(k) balances and other retirement savings. That’s not surprising: Their retirement security really depends on whether the economy and stock market can bounce back from the current crisis. In turn, this will depend on how soon the health threat of the virus is reduced significantly through public health measures and the development of vaccines and medical treatments.

To alleviate their concerns, it might help for Gen Xers and Millennials to keep in mind a long-term perspective about their retirement prospects. To do this, they should consider that the most important factors that will influence their financial security in retirement are the ability to:

  • maximize their Social Security benefits,
  • continue to work at an employer that sponsors a retirement savings plan, and
  • continue to contribute to their savings plan and/or accounts while making investment decisions with a long-term perspective.

Let’s examine each of these factors to consider the impact of the COVID crisis on each.

Maximize Social Security benefits
For most middle-income workers and retirees, Social Security income will deliver two-thirds to three-quarters or more of their total retirement income. That’s important because Social Security provides the most protection against common retirement risks compared to any other retirement income generator, including these three critical risks:

  • Longevity risk, since it’s paid no matter how long a retiree lives
  • Investment risk, since Social Security benefits won’t decrease if the stock market crashes
  • Inflation risk, since benefits receive an annual cost-of-living adjustment

Research from the Stanford Center on Longevity (SCL) shows that most workers can maximize the Social Security income they’ll receive over their lifetimes through a careful strategy to delay the start of benefits, but not beyond age 70. By optimizing Social Security benefits, Gen Xers and Millennials can significantly mitigate any damage that might be inflicted by economic events, such as the current crisis.

This reliance on Social Security highlights the importance of shoring up Social Security’s finances. SCL will be publishing a report in early April that examines the viability of several proposals to meet that goal and improve the retirement security of American workers.

Continue to work for an employer that sponsors a retirement savings plan
The retirement security of Gen Xers and Millennials also depends on their ability to work at an employer that sponsors a retirement savings plan, such as a 401(k) or 403(b) plan. That can be a concern for workers who are being laid off today or whose income might be reduced during the current crisis. The hope is that any pause in the ability to contribute to retirement savings will only be temporary, since missing a few months of retirement contributions shouldn’t cause a serious setback in the amount of retirement savings that Gen Xers and Millennials will eventually accumulate.

Research conducted by SCL and other reputable institutions highlights the challenge that only about half of American workers currently work for an employer that sponsors a retirement savings plan. The SCL report mentioned previously also examines the viability of several proposals to increase the availability of retirement savings plans to virtually all workers.

Continue to contribute and invest in retirement savings
Research on savings behavior during the Great Recession shows that workers who continued saving and investing during the downturn had significantly higher balances in the years following that crisis compared to workers who stopped saving and/or reduced their allocation to investment in stocks. Similarly, SCL research demonstrates that in most historical periods, retirees would have received much more retirement income throughout their lives by investing in stocks compared to bonds, even considering the temporary setbacks that were inflicted by stock market declines and crashes.

The recent stimulus package passed by Congress allows workers to withdraw from their retirement savings to meet current needs, without early payment penalties. Hopefully tapping retirement savings to meet a personal financial setback will be an absolutely last resort.

In Closing
Consider this thought: What is the likelihood that in five years, the U.S. economy and the stock market will recover? Even if recovery takes 10 years, that’s still enough time to make up stock losses for the retirement of Gen Xers and Millennials.

For more details on these ideas, including the analyses that support the conclusions, please see the following resources:

  1. Seeing Our Way to Financial Security in the Age of Increased Longevity. Stanford Center on Longevity, October 2018.
  2. Viability of the Spend Safely in Retirement Strategy, by Wade Pfau, Ph.D., Joe Tomlinson, FSA, and Steve Vernon, FSA. Society of Actuaries, May 2019.
  3. Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A Framework for Evaluating Retirement Income Decisions, by Wade Pfau, Ph.D., Joe Tomlinson, FSA, and Steve Vernon, FSA. Society of Actuaries, November 2017.
  4. Lessons Learned 10 Years After the Global Financial Crisis Serve as Powerful Reminders for Investors. Fidelity Investments, October 26, 2017.

Steve Vernon, FSA., is a research scholar in financial security at the Stanford Center on Longevity.