Here’s why the coronavirus may clobber your retirement plans

Americans nearing retirement are among the many casualties of the coronavirus, as fears around its global spread and resulting economic damage caused a steep selloff in the stock market last week that potentially upended the retirement outlook for many individuals.

The S&P 500, Dow Jones Industrial Average and Nasdaq Composite — which serve as barometers of the U.S. stock market — each fell by more than 10% last week, their biggest weekly declines since October 2008.

Those declines occurred as the number of coronavirus cases outside of China have increased sharply. More than 60 countries have confirmed cases.

The Dow market index, for example, plunged more than 3,500 points — its largest weekly point drop in history. It ended the week down roughly 12.3%. (The Dow was up more than 700 points as of 2 p.m. Eastern time on Monday.)

That means a near-retiree with all their money in a mutual fund tracking the Dow index would have lost more than 12% of what they had earmarked for retirement.

“For many people thinking of converting retirement wealth into a stream of income, a 3,000-point drop in the stock market will reduce their ability to do that today,” said Brigitte Madrian, dean of the Brigham Young University Marriott School of Business.

Fortunately, most near-retirees don’t have a portfolio that is fully allocated to stocks, meaning the financial carnage is likely more muted for them compared with younger investors.

Yet some stock exposure is necessary to increase the odds of not running out of money in retirement, which could last more than three decades, according to experts.

A good starting point to consider for those entering retirement is a 50% allocation to stocks and 50% to bonds, according to David Blanchett, head of retirement research for Morningstar Investment Management.

That means many near-retirees didn’t escape last week’s market rout unscathed. Unfortunately, there aren’t many things they can do to recover quickly now that the damage has been done.

“At some point it becomes too late to do anything after the fact,” said Wade Pfau, a professor of retirement income at the American College of Financial Services.

Delaying retirement and working longer, if possible, is one of the best things near-retirees can do from a financial standpoint, said Blanchett, who described the strategy as a “silver bullet.”

Working for even just one additional year — or even doing part-time work — may provide an additional year of building savings and delaying taking Social Security. Social Security checks increase 8% each year a retiree waits to claim benefits, up to age 70, and those benefits are locked in for life.

“For those in good health and who can keep their job, I think if you can ride it out for another couple years, you’ll be OK,” Madrian said.

That’s because the stock market has always rebounded beyond its previous levels after past downturns. The problem is, it’s impossible to say how quickly it will do so.

A stock market “correction” — defined as a 10% decline in one of the major U.S. stock indexes from its recent high — typically results in a 13% drop and takes about four months to recover, according to historical averages.

But those averages mask some dramatic variation, especially when it comes to “bear markets” (a 20% decline from recent highs). For example, the Great Recession saw the market plunge 57% over 17 months and took more than four years to recover to its prior levels.

“I think markets will go back up, but there’s no telling how long they will go down,” Blanchett said. “They could down for the next 10 years. No one knows.”

Absent working longer, near-retirees whose portfolios took a financial hit may have to increase the amount of money they’re saving now, or be prepared to reduce their spending in retirement if their portfolios haven’t recovered to an adequate level.

Americans should also avoid using stocks to fund their retirement in the current environment, Pfau said.

Selling out of stocks that are declining in value means investors will have a smaller stock footprint and will therefore make less money from that portion of their portfolio when the market eventually rebounds.

“Anything you can do to avoid selling assets for a loss will go a long way toward preserving your portfolio sustainability,” Pfau said.

Retirees can turn to other assets like cash and bonds as they wait for stocks to bounce back, he said.

They may also consider “buffer assets,” which provide a steady stream of monthly income that don’t fluctuate with the stock market, such as a reverse mortgage, Pfau said. There are certain risks associated with reverse mortgages that retirees should gauge beforehand.