The Covid-19 pandemic has taken a financial toll on many households. For example, a recent Fidelity study found that a quarter of U.S. adults are less confident than they were before the pandemic that they will eventually be able to retire how and when they want.

Among those, younger generations are understandably more confident about being able to get back on track within a year or two. On the other end of the age spectrum, among Baby Boomers, fully 46% either are unsure as to when they’ll be able to get back on track (39%) or believe they won’t ever be able to (7%).

And now, of course, inflation is raging. With the CPI at a 40-year high of 8.5%, it’s no surprise that 71% of U.S. adults are very concerned about its impact on their retirement preparedness, according to Fidelity. Some 31% aren’t sure how to keep up with rising prices.

Productive steps

As with so many aspects of life, during difficult and uncertain financial times, it’s crucial to distinguish between what we cannot control and what we can. We can’t control what the stock market will do or how high inflation will go. But we can control:

  • Whether we use a budget. According to the Fidelity study, the pandemic has prompted 17% of U.S. adults to revise or established a budget for the first time. I couldn’t imagine managing our household without the use of a budget, or as I prefer to call it, a cash flow plan. Knowing how much is coming in each month and intentionally allocating portions of that income to giving, saving, investing, essential spending categories, and then discretionary spending categories, provides clarity and a sense of control.

    If income declines, changes can be made, and in our household we’ve made quite a few this year. Along with everyone else, we’re having to allocate more to groceries and gasoline. That means reducing discretionary spending. It isn’t pleasant, but knowing how income was allocated before prices started rising provides the information needed to make necessary changes.

    Because inflation was under control for so long, I grew accustomed to revising our budget once a year. This year, I’m making changes monthly.
  • Whether to continue investing. For those who lost their jobs during the pandemic, it’s understandable that they would have to pause their retirement investments until they get a new job. However, a significant number of employed people, especially among younger generations, seem to have stopped investing because of market conditions. Fidelity found that 45% of youngest workers “don’t see a point in saving until things return to normal.” That’s too bad because, of course, young people have time on their side. And besides, what’s “normal” anyway?
  • Whether to develop an investment/retirement plan. Here, Generation X, those ages 42-57, appears to need the most help. According to Fidelity, this group was the least likely to have “given any thought to when they want to retire” or to “know how much money they need to retire.” If you don’t have an investment/retirement plan, now would be a good time to develop one.

    As we’ve written before, a good plan should include specific investment goals (retire by what year with what amount of money?), an assumed rate of return (is it realistic?), how much is being invested each month, what strategy or strategies are being employed to get there and why, and what actions will be taken (or not taken) during market downturns. Some of these factors are well within our control, such as how much we add to our investment accounts each month. MoneyGuide can be a big help. And times like this provide a good reminder that this type of planning is not a once-and-done type of activity. If you have a plan, now would likely be a good time to revisit it and see if it needs revising.
  • Whether to fill in some knowledge gaps. One finding from the Fidelity study that really stood out was that one in five respondents thought a financial professional would recommend a withdrawal rate of 10% to 15% of retirement savings each year. That’s far higher than the more widely accepted rate of 4% to 5%. Have any money management knowledge gaps been revealed to you through the pandemic? What do you need to better understand in order to invest with more clarity and peace of mind, or perhaps more realistically?

Changes that last

Prior to 2020's pandemic, the most calamitous financial event in recent memory was arguably the Great Recession, which stretched from late-2007 until early-2009. Later in 2009, after the economic clouds had started to clear, Citibank conducted a national survey in which 63% of U.S. adults said the recession had “forever changed” the way they spend and save. It seemed like a positive — that people were intent on saving more and spending a bit more frugally. But then Citigroup ran the same survey a year later, and the percentage of people who said the recession had forever changed the way they spend and save fell to 52%.

When you’re hungering for a return to normalcy and some semblance of normalcy does, in fact, return, it can be tempting to let your guard down too much or too soon. And it can be easy to miss the opportunity to identify changes that would be beneficial to make permanent.

How has the pandemic impacted your financial habits and practices? Are there any changes you’ve made in terms of how much you are setting aside in savings, or how you’re saving? What about cash flow? Have you made changes in how much you spend on discretionary categories such as entertainment or vacations? Have you re-thought any planned purchases? And if you have made changes, do you envision any of them becoming permanent?