Financial Planning During the COVID-19 Pandemic
We are living in an unprecedented time. Coronavirus (Covid-19) went from being virtually unheard of in the United States roughly four months ago to officially becoming a global pandemic. It has resulted in statewide mandates limiting mass gatherings, closing senior centers, canceling sporting events, and requesting extensive “social distancing.”
Since then, restrictions have become even more stringent as initial efforts proved inadequate in preventing the spread of infection or “flattening the curve.” The rapid escalation of this health crisis in our country (and all over the world) has created serious uncertainty in our financial markets as well. I should know. I’m married to a financial advisor.
My husband Michael works for Merrill Lynch here in Birmingham, and he has over 14 years of experience in the finance industry. He holds both the CPFA (Certified Plan Fiduciary Advisor) and CPWA (Certified Private Wealth Advisor) professional designations. When the markets began wavering, I had lots of questions. I’m sure you did, too. Michael has graciously agreed to sit down and answer some of the most common questions, specifically focusing on issues affecting parents.
The markets have gone down sharply very quickly. How does this event compare to other market downturns in history?
We’ve seen market downturns in historical pandemics, and each one has been different. The one thing that remains constant is that markets seem to solidly rebound afterward. It may seem scary to see the numbers on your statements dropping, but bear in mind the purpose of a retirement fund is long-term use.
If you are in your 40s or younger, you have plenty of time to regain losses sustained during this period. If you are nearing retirement age, your market exposure should reflect that, thus lowering your risk and potential losses. The losses incurred during the pandemic will rebound as the virus is contained and the economy begins moving again. This is true not only for the United States, but the world. We are a global economy and getting people healthy as quickly as possible benefits not only the health of the populous, but the economy as well. First Trust has an excellent resource regarding S&P market performance.
I am working on limited income right now. What can I do to continue to protect and grow my assets in order to keep my family protected?
The most important way to protect yourself is to stay healthy. Follow guidelines and orders to stay home, and practice social distancing if you must make essential trips out of your home. Your most important asset is you and your ability to earn income. Once that dissipates, having short-term and long-term disability insurance, mostly offered through your employer, is relatively inexpensive. It’s a means to continue your household income in the case of a sickness or leave of absence in the family.
The next most important asset is having three to six months’ living expenses in a savings account. While that may sound daunting–especially now–it’s never a bad time to save what you can whenever you’re able. In order to determine the dollar amount of your emergency fund, try multiple online budgeting tools offered to calculate your monthly budget. Mint and Nerdwallet are two that come to mind immediately.
Once you’ve achieved three to six months’ living expenses in a slush fund, consider looking at your current employer retirement options. Most employers offer a 401(k) or some sort of retirement plan that not only saves money in taxes, but allows you to save money (tax deferred) for retirement. If your employer does not offer a 401(k), there are other tools you can utilize to ensure you are able to save money for the future.
I am hearing on the news about bailouts and stimulus packages for large companies. How does this help me as an average person?
If you are a small business owner or have been laid off due to coronavirus, many resources have become available in the last week from the CARES Act legislation. You could qualify for a rebate of $1,200 ($2,400 married) plus an additional $500 per child for all U.S. residents with adjusted gross income up to $75,000 ($150,000 married).
In order to receive funds, you may not be a dependent of another taxpayer. You must also have a work eligible Social Security number. For the vast majority of Americans, no action will be required on their part in order to receive a rebate check. The IRS will use the taxpayer’s 2019 tax return if already filed, or in the alternative, their 2018 return.
Consistent with previous disaster-related relief, the provision waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts (e.g., 401(k)) for coronavirus-related purposes made on or after January 1, 2020. This money doesn’t have to be paid back, and it’s not taxable on your next filing. A full list of resources are available on the SBA website.
Tell me about penalty-free Coronavirus-Related Distribution (CRDs) withdrawals from IRAs and 401(k)s.
If you find yourself affected by coronavirus, tapping into your retirement plan for emergency funds is an option due to the recent CARES Act. Eligible individuals in an eligible employer plan or IRA are able to take distributions of up to $100,000 maximum across all eligible retirement accounts without incurring the usual 10% early withdrawal penalty. CRDs from eligible employer plans are not subject to mandatory 20% income tax withholding. For employer plans, this is an optional provision which will require a plan amendment by the end of the 2021 plan year. CRDs may be repaid to an eligible retirement plan within a three year period. Individuals who choose not to repay the CRD may spread the income tax due on the CRD evenly over three years.
What are your recommendations for a recovery process as things evolve over the next 12-18 months?
Don’t be afraid to reinvest while the market is low. The mantra of The Market is “buy low, sell high” for a reason. Stay the course and see this as an opportunity to dollar cost average into your retirement accounts and investments. Blackrock has other tips for navigating these unique times, which you can find here: Blackrock FAQ. If you find yourself without a Plan B right now, learn from it. Grow your financial knowledge for the future. There have been past market corrections and corrections to come. It’s the nature of the beast.
- Putting back savings as you are able (three to six months is ideal),
- Taking advantage of the recent market downturn,
- Participating in employer retirement plans, and
- Having well-defined long/short-term financial goals.