Navigating Your Financial Planning During the Coronavirus Pandemic
The COVID-19 pandemic has had a devastating effect on people’s health and personal finances around the world. During times of crisis and uncertainty, the best way to navigate the stressful situation and ensure a successful financial future is to reassess your current finances and properly plan.
This is the time to look at your financial planning situation with a fresh set of eyes and re-evaluate what you're doing in all aspects of financial planning. Given the magnitude of the pandemic's economic impact, the action steps you take now could reverberate for decades on your financial planning.
Re-Evaluate Your Income Outlook.
We’ve seen an unprecedented number of layoffs, furloughs, and salary/wage cuts due to the COVID-19 sharp business contraction. Very few people in this economy are unaffected. As companies cut their budgets and revenue projections, even those that still have jobs would be keen to reevaluate their short-term and long-term income prospects and business opportunities. How protected are you from a potential loss or decrease in income in the short-term and medium-term? Over the long-term, are there possible systemic post-coronavirus changes to your industry, business, or profession that could put your income or business at risk? If so, what steps can you take, what skills can you develop, and/or what markets can you potentially pivot to in order to lower risk to your income?
Revisit Your Emergency Fund.
We long have recommended that people have an emergency fund to protect against economic disasters, medical emergencies, and other unforeseen circumstances. For most people, that’s three to six months of expenses in a liquid, conservatively invested safe place that you can easily access. Given the uncertainty around the duration of the pandemic, it may make sense to increase the size of your emergency fund if possible based on your personal income outlook.
Re-Evaluate Your Real Estate.
Most people’s biggest expense, whether they rent or own, is real estate. For those suffering financially, they should think through all their options to potentially lower their real estate expenses. Renters may want to consider asking their landlord for a rent deferment, a temporary reduction in rent, possibly applying the security deposit toward rent, or maybe getting out of their lease early to move to a less expensive place. For home owners that are impacted, you might want to reach out to your bank to get a deferment or to pay interest only.
Update Your Projections and Scenario Planning.
It’s time to go back to your financial advisor and ask them to update your long-term cash flow projections to see if you are on track to achieve your financial goals given that we’ve seen a sharp decrease in the stock and bond markets. Due to the pandemic, many people now have different long-term expectations on income and savings levels, at least in the short-term. As a result, it’s best to understand what the updated necessary monthly savings amounts, expense levels, and investment returns are to achieve your financial goals. Can you still afford to fully pay for both your children’s college education without putting a comfortable retirement at risk? What amount of monthly savings would it take to retire early? Your financial planner should be able to update your projections and perform a Monte Carlo simulation to determine the probability of success for questions like these.
Given the uncertainty around the pandemic, it may be necessary to run several different coronavirus scenarios for your cash flow projections. How will your long-term finances be impacted if this lasts for two months? Six months? Fourteen months?
Determine if You Are Eligible for Aid through the CARES Act.
Most Americans will benefit in some way or another through the recently passed $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. So it’s important to understand which sections of the law apply to your situation. Many Americans will receive a $1,200 Recovery Rebate and those collecting unemployment insurance will receive an extra $600 a month through the stimulus plan. Business owners have a myriad of potential support, including forgivable loans offered through the SBA, tax credits for maintaining employment levels, and relaxation on the rules around carrying back net operating losses (NOLs). The new 2020 provisions allow taking pre-59.5 401(k) or IRA distributions without a 10% penalty might be appealing to those suffering from financial strain during this time, but it may not make long-term sense for many. Here’s a more detailed summary on the financial planning aspects of the CARES Act.
Revisit Your “Why” and Cut Expenses.
As people go over their budgets and think about cutting expenses to deal with current or potential financial stress, we highly recommend going through an introspective reevaluation of their values and goals through a 4 step process:
1) Spend an hour by intentionally writing all the values that are important to them (family, education, health, social impact, etc.) on post-it notes. Whittle them down to the 20 most important values. Then to the top 10. Then to the top 5.
2) List your top 10 financial goals in order of importance (i.e. retiring early, leaving an inheritance, buying a home, etc.).
3) Create a monthly budget that categorizes all your historical monthly expenses.
4) Go line by line starting with the largest expenses first and determine, which of your expenses are not congruent with your values from Step 1 or your financial goals in Step 2. If the expense doesn’t align with your goals or values, cut it from your budget.
Execute a Tax Plan on your Investment Portfolio to Save Money.
Given the extreme volatility we’ve seen in the securities markets, you might want to consider tax-loss selling some of your investments to save money on taxes. This involves selling securities in your brokerage account (non-IRA) that are trading below the purchase price to lock-in the tax loss and simultaneously purchasing a similar security. Tax losses from the sale can be applied against tax gains, so your tax burden would be lower. The simultaneous purchase will keep you invested in the market to capture the gain when the market recovers.
Evaluate Concentrated Stock Strategies in Conjunction with Tax Loss Selling.
We see a lot of portfolios that have been highly exposed to one particular stock over the last few years, but have been hesitant to diversify those positions due to the large embedded capital gain. Those with concentrated stock positions with large capital gains may want to consider diversifying their concentrated position in conjunction with the tax-loss selling to minimize the overall tax burden.
After Considering Your Entire Financial Picture, Evaluate Additional Investments.
Historically, returns over the next several years have been above average after a bear market. Our view is that stocks are almost always more attractive when they are on sale, and current market levels could very well be an attractive long-term entry point. Given the scope of the financial effects of this pandemic, we highly recommend that people consider their overall financial picture before committing large cash reserves back into this market or dramatically increasing your 401(k) contributions. While the average bear market has lasted 9 months, this bear market could be much longer or shorter. We simply don’t know the market’s trajectory. It’s important to have a solid emergency fund, clear solid income prospects, and consider if your expenses are appropriate before taking on additional significant market risk.
These are just some considerations to help reduce the impact of COVID-19 on your current and future financial situation. Proper financial planning during a time of crisis is critical to ensure you stay on track towards your financial goals and that you ultimately limit stress for you and your family during this difficult time. If you need assistance navigating your financial plan during COVID-19, please reach out to dwilson@planningtowealth.com.
David Flores Wilson, CFP®, CFA, CEPA is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.