Thursday, May 28, 2020

COVID-19 Financial Planning Insights

Every American has been impacted by COVID-19 in some way. On Monday, March 16, America started to shut down en masse. As we complete week 11 of COVID-19 related school, business, and organization closures, I continue to collect information, recommendations, and insights regarding various financial planning implications of the pandemic.

Some of these strategies are about finding resources for economic survival. Others are prudent planning strategies to consider in light of recent economic events. Below are ten suggestions gleaned from newspapers, webinars, and podcasts:

¨       Find Allies with Clout- Contact a state assemblyman and/or senator if you have not been able to access state unemployment benefits online or by phone after multiple attempts. It may be helpful to have someone with contacts and authority break the logjam (note: doing this can also work with late income tax refunds). Another strategy that has reportedly worked for some people is to get the attention of state Department of Labor officials using posts on Twitter.

¨       Become a First Timer- Take advantage of income-based public benefits that you may not have ever qualified for before. For example, many people are applying for unemployment benefits for the first time ever in their lives. A reduction in income may also have made you eligible to claim the earned income tax credit (EITC) and/or Saver’s credit on your 2020 tax return next year.

¨       Create Asset Buckets- Divide your portfolio into different “buckets” of money. Especially for retirees, a large cash bucket equal to three to five years of expenses that are not covered by guaranteed income streams (e.g., a pension and Social Security) is advisable. Doing this provides peace of mind to hold stocks and ride out market downturns. The stock market hates uncertainty, which drives volatility. It is also forward-looking and reflects what investors think will happen.

¨       Expect Volatility- Accept the fact that the value of your investments will rise and fall. This is part of having an “investor’s mindset.” Build a portfolio that is well-diversified by asset class (e.g., stocks, bonds, cash equivalent assets) and securities within each asset class. Many financial planners have been calming clients who have done this by saying: “this [a market shock, in this case the COVID-19 pandemic] is what we planned for. Your portfolio was built for this.”

¨       Consider a Roth Conversion- Act now to convert a traditional IRA balance to a Roth IRA if COVID-19 has reduced your 2020 income and you are in a lower marginal tax bracket. Federal income taxes on the converted amount are due, along with tax on other income sources, in the year of the conversion (i.e., 2020 taxes that are due in April 2021).

¨       Know the Deadlines- Plan to make first and second quarter 2020 estimated tax payments and file 2019 income tax returns by July 15, 2020. Previous deadlines were postponed due to COVID-19. An extension of time to file a tax return is available until October 15. Extensions are available through the Free File platform or by filing paper Form 4868.

¨       Know the Rules- Automatically withhold or set aside at least 10% of your unemployment benefit for income taxes. This includes both “normal” state benefits and the extra $600 per week of federal government aid under the CARES Act through July 31. Stimulus payments, however, do not have to be included in taxable income for 2020.

¨       Plan Around Uncertainty- Act now to hedge the strong possibility of higher future federal and state tax rates to pay for COVID-19 recovery measures such as the Paycheck Protection Program, stimulus checks, and expanded unemployment benefits. Another possibility is a future reduction in the estate tax exemption (currently $11.58 million). Strategies to consider include moving to a more tax-friendly location and making gifts to people and/or charities to lower estate value.

¨       Be Careful with Bonds- Stick with the highest quality (AAA and AA rated) municipal bonds or bond funds if you are investing in bonds to dampen the risk of stock in your investment portfolio. Many state and municipal budgets are stressed and it is possible that those with the worst balance sheets could default on their debt. Now is not a good time to “reach for yield” on either municipal or corporate bonds that are below the top two grades for credit quality.

¨       Shop Around for Banking Services- Look for an FDIC-insured bank that is paying a high annual percentage yield (APY) on savings and money market accounts. With the Federal Reserve making several emergency interest rate cuts in March to mitigate the COVID-19 economic slowdown, banks also cut interest rates on their accounts, which are subject to change without notice. The best savings account rates for May 2020 from online banks range from 1.25% to 1.5%.  Rates offered by many “brick and mortar” commercial banks are much lower and closer to the national average of 0.06%.

Thursday, May 21, 2020

COVID19 “Overwhelm”: Strategies to Move Forward

The country locked down 10 weeks ago and, for many people, mental and physical fatigue are palpable. Sheltering in place at home is “getting (real) old” and weeks with a reduced (or no) income have thrown the finances of millions of households into a tailspin. June will here in 10 days and is the third month that many households will have difficulty paying all their bills. Prolonged paycheck to paycheck” living can sap mental bandwidth and stress mental health to the point that people are simply not fully functioning.

Then throw in the fact that the duration and lethality of COVID-19 are still unknown. Further, add the consensus from numerous observers, including the venerable Peggy Noonan, that “the ground on which we stand has shifted.” Expect that many things in life will be different (Noonan says “plainer”), at least until we get to the “other side” (whenever that is) and, perhaps, much longer. Examples include: more work at home, new travel procedures, crowd controls, and fewer people making advance plans that require big deposits.

What to do? The only thing that we can do. Create some semblance of a routine and focus on things we can control. Below are seven specific ways to fight back against COVID-19 “overwhelm” and to navigate change, loss, and uncertainty in this turbulent time:

¨       Marshall Resources- Look for sources of monetary support and human services in your community, if needed. For information about local resources, call 211 or visit or your local office of social services.

¨       Create a Spending Plan (Budget)- Make your best estimate of current income and expenses and consider various ways to close the gap. For example, money saved by getting free food at a food pantry preserves scarce income for utility payments.

¨       Develop a Daily Schedule- Plan out your days to avoid feeling “unmoored” from normal routines. Include some type of physical activity every day. The Center for Financial Social Work has a useful e-book with helpful scheduling worksheets.

¨       Increase Your Financial Literacy-Set a goal to learn one new thing about personal finance every day. Financial knowledge can help build financial preparedness, which helps increase resilience in tough times like we have now. The COVID-19 website from the Global Financial Literacy Excellence Center (GFLEC) has lots of helpful information about managing money in a time of crisis.

¨       Seize Control of Controllable Things- Make a table with three columns: Control, Adapt, and Monitor. Then list events and actions you have control over in column 1, followed by those you can adapt to and those you should pay attention to in columns 2 and 3. “Controllable” items include scheduling daily routines, self-care activities, home organization tasks, and new spending patterns.

¨       Be Helpful, Grateful, and Creative- Find ways to acknowledge and support others. It will make you feel good too. List five things each day that you are grateful for and be creative. Closet organization, baking, poetry, art work, Zoom parties, COVID-19 themed bitmojis and videos, and drive-by graduations and Memorial Day parades are just a few examples.

¨       Take Deep Breaths- Acknowledge you may be feeling confused and overwhelmed right now. Big parts of your life have been turned upside down. Many people are not balancing work and family. They are balancing work with family. You are not alone. Many others are feeling the same way. Health experts often recommend deep breathing as a way to lower stress. Try it and see if it helps.

Thursday, May 14, 2020

More COVID-19 “Flipped Switches”

In late March, I described my new book called, Flipping a Switch, which will be now be out in June due to COVID-19 delays. The book describes 35 “flipped switches (i.e., transitions) that people experience in later life. At the end of each chapter is a section called “How to Flip This Switch” with suggested action steps for each transition. I wrote in my earlier post that some of the “switches” that older adults face are the same issues Americans are facing right now with the pandemic.

I noted seven weeks ago that it is almost like socially distancing workers have been forced into “retirement.” I then provided six examples of flipped switches: creating a paycheck, adjusting to a changed (often reduced) income, becoming “fraud bait” with new COVID-19 scams, too much “togetherness” at home, keeping busy, and staying socially connected. Blogger Gary Weiner @Super Saving Tips, had the same idea and recently asked “Is the Pandemic a Retirement Dress Rehearsal?”

Below are five more “flipped switches” that older adults leaving long careers and quarantined Americans have in common:

¨       Tax Adjustments- Retirees often have to make withholding adjustments for new streams of income instead of a paycheck. For example, taxable pensions and required minimum distributions (RMDs) from tax-deferred retirement savings accounts. Similarly, laid off or furloughed workers, or workers with a change in income, should make tax withholding adjustments. Also, arrange for withholding or estimated taxes for unemployment benefits. Workers with a reduced income may also qualify for the earned income tax credit (EITC) for 2020 income taxes due in 2021.

¨       Prioritizing Estate Planning- According to a 2017 survey less than half (42%) of 1,003 adults had wills. People are more likely to do estate planning at an older age closer to their life expectancy. Older adults also realize more viscerally that “you can’t take it with you.” COVID-19 had shown us that people of any age can be sickened by the virus and almost 90,000 Americans to date have died. COVID-19 is a wake-up call to contact an attorney and prepare a will, living will, and durable power of attorney. If 58% of, say, 85,000 adult victims lacked wills, that is almost 50,000 people who died intestate.

¨       Financial Organization and Simplification- My book urges readers to list key financial data in one document including bank and brokerage accounts, insurance policies, credit card numbers, loans, names of financial advisors, and the location of key documents. A good template financial inventory form was developed by the Vanguard investment company. COVID-19 has provided the gift of more free time to many people. Take the time to get your financial affairs in order.

¨       Answering the “What Do You Do? Question- Older adults often need a new answer to this question, whether it is an encore career, hobby, volunteer work, or even something humorous like “whatever I want” or “as little as possible.” Many laid off workers will also need a new answer for a new act. Make a list of your top work-related skills and create an action plan to become re-employed (e.g., networking, LinkedIn profile, and training or certification programs).

¨       Getting Help When Needed- In Flipping a Switch, I discuss how older adults may need help with household activities. Examples include complex financial decisions, asset management, house cleaning and maintenance, yard work, bill-paying, and transportation services when someone is unwilling (e.g., night driving) or unable to drive. Similarly, many people today need help, often with basic needs like food and paying essential household expenses. A good resource for local government and non-profit human services is the phone number 211 or

Thursday, May 7, 2020

How to Handle a Furlough: Part 2

Two weeks ago, I wrote a post about furloughs. Since that time, I have researched this topic some more and prepared slides for a webinar about furloughs sponsored by the Association for Financial Counseling and Planning Education (AFCPE). 

Below are six additional things to know about furloughs that were not included in my previous post:

¨       Benefits May Continue- Look for guidance from your employer about what benefits (e.g., health insurance, life and disability insurance, and retirement plan contributions) will continue and for how long. Employer decisions will vary based on factors such as group insurance plan language, union contracts, and the financial stability of employers.

¨       Conditions Can Change- Realize that furloughs are an “act of hope” that a business will survive. Not all do. In addition, many employers are predicted to be working at a reduced capacity well into 2021. A furlough today could switch to a permanent layoff later. Many furloughs are being done now (vs. layoffs) so employers do not have to onboard new workers when economic conditions improve and so workers can access temporarily expanded unemployment benefits.

¨       Where You Work Matters- Contact the unemployment office in the state where you work if it is in a different state from where you live. Your employer pays taxes to the state where you work to cover its workers’ unemployment claims.

¨       Health Insurance Options Exist- Take advantage of employer insurance continuation for as long as it lasts. After that, three options for coverage are Medicaid (if eligible), COBRA through the employer, and Marketplace coverage under the Affordable Care Act. ACA options are usually cheaper, especially if you qualify for subsidies with a reduced income.

¨       Tax Liability Will Change- Complete a new Form W-4 (for a reduced income) and take advantage of income-based tax credits (e.g., earned income tax credit) for 2020 and set aside (or have withheld) taxes on unemployment benefits.

¨       “Upskilling” is Highly Recommended- Use new found free time to prepare yourself for re-employment with your current employer or elsewhere. Focus on gaps in your skill set and making yourself as marketable as possible.

Looking Ahead to Your 2024 Tax Return

  With the 2023 tax filing deadline in the rear view mirror, now is a good time to look ahead to 2024 taxes that you will owe in April 2025....