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%.