Thursday, June 25, 2020
Even before the COVID-19 pandemic took hold, many Americans were struggling financially. According to the Federal Reserve Report on the Economic Well-Being of U.S. Households in 2019, only 63% of adults could cover an unexpected $400 emergency expense with available cash. The remaining 37% said they would have difficulty paying this expense without using a loan or credit card, borrowing money from others, or selling something.
COVID-19 exposed the financial fragility of many U.S. households in a way no government report could have. For months on television, we have seen reports about long food bank lines, unpaid household bills, and other indicators of distress amidst record high unemployment rates. Many experts predict things could get worse in August when the $600 per week federal unemployment benefits go away and unemployed workers receive only state payments, which are a fraction of their pre-coronavirus earnings.
Many Americans are (or will soon be) trying to make ends meet in crisis mode. Below are eight tips to manage money during tough economic times shared by the Community Service Society of NYC on a recent webinar:
¨ Create a Spending Plan (Budget)- Use software or a paper and pencil worksheet to list anticipated income and expenses. Also complete a bill payment calendar to include the dates of upcoming income, bills, auto-payments, and annual or semi-annual payments for occasional expenses such as insurance premiums.
¨ Assess Household Resources- Calculate your net worth (assets minus debts) to get a “snapshot” of your finances. Pay particular attention to cash on hand, emergency fund savings, and cash value life insurance and retirement savings plan assets that could be borrowed against, if necessary.
¨ Access Community Resources- Reach out for financial assistance or services that can preserve limited funds for other household expenses. Examples include state unemployment benefits, food banks, health care clinics, and volunteer tax preparation from VITA. Call 211 or visit www.211.org to learn about local human services.
¨ Build Your Emergency Fund- Set aside unemployment insurance above your typical weekly income during the next five weeks while the extra $600 a week benefit is available. Other sources of emergency cash include a tax refund and cash saved as a result of unemployment or social distancing measures (e.g., child care, commuting costs, and entertainment). Also remember that bills temporarily halted by a forbearance or moratorium (e.g., rent and utility bills) must still be paid in full in the future so set money aside for this also.
¨ Cut Discretionary Spending- Avoid spending that increases household debt and non-emergency savings (until your finances stabilize). Other ways to spend less are eliminating auto-payments for non-essential items (e.g., gym memberships when gyms are closed) and switching to cash for most purchases.
¨ Prioritize Bill Payment- Make three lists of expenses: Needs (e.g., rent, utilities, food, medication copays, transportation, phone, internet, and health insurance), Obligations (e.g., debts such as credit cards and student loans, child support, taxes, and dues), and Wants (expenses that are not required for survival or you have no obligation to pay). Next, starting with needs, put your expenses in priority order and pay bills until money runs out. Consider the consequences of non-payment for each expense, e.g., food is always the highest priority need.
¨ Prioritize Personal and Financial Obligations- Consider the following hierarchy for payment of financial obligations: court fines and fees, child support, auto insurance, money judgments, secured debt, taxes and tax debt (contact the IRS for a payment plan if you are in arrears), student loans, unsecured debt, property/liability/life insurance, retirement plan savings, and interpersonal debt and social obligations.
¨ Protect Your Credit- Contact your creditors before you are late with a payment and discuss options for leniency and a payment plan. Confirm all agreements with creditors in writing with a follow-up letter or e-mail. On-time payment is the number one factor in credit scoring so make sure your credit history is not damaged. Under the CARES Act, Americans can now receive a free credit report weekly to keep tabs on their credit.
Thursday, June 18, 2020
As regular readers of the Money Talk blog know, my new book, Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life, is in the home stretch and due out soon, pending any printing delays associated with COVID-19. In addition, June 19 marks exactly six months from the final day (December 19, 2019) that I set foot in my former office in New Jersey as a long-time employee at Rutgers University.
With these milestones in mind, I thought some “Barbservations” about life after leaving a long-time employer might be useful to others planning their own life transitions (a.k.a, “flipped switches”). After six months (including three months under pandemic restrictions) of living the content of my book and not having an employer anymore, below are eight insights and recommendations gained by literally “walking my talk.”
Define Your “Third Third”- Do not let your later years be defined by others. They are a journey- not a “one stop fits all” destination. When people ask me “how’s retirement?,” I gently pivot and state that I simply left Rutgers, am not retired, and am now a financial education entreprenueur. In other words, I changed my practice setting but am as passionate as ever about remaining a player and a voice in the financial education field. As I advise in Flipping a Switch, develop your own unique answer to the “What do you do?” question.
Plan to Succeed- Do not expect opportunities to just fall into your lap after you leave a long-time career. Work ahead to make plans and lay “groundwork,” whether it is making contacts for continued work experiences, marketing yourself as a freelancer, choosing Twitter handles, arranging volunteer experiences, joining organizations, or moving to a new location. Those who fail to plan, often plan to fail. Fritz Gillbert, author of Keys to a Successful Retirement, states “preparation is, perhaps, the single biggest key to success” in later life.
Create Daily Routines- Add structure to every day, preferably a big chunk of time (6-7 hours) for purposeful activities such as work, volunteering, and/or socialization. Like “big rocks” in a jar, if activities take, say, seven hours, sleep-eight hours, physical activity-one hour, and cooking/eating/chores-two hours, this leaves about the same amount of “gravel” (free time) to fill in a jar (day) as someone had with a full-time job. Bottom line: human beings need structure, growth, and purpose to stay happy and avoid feeling “washed up” and useless.
Be Relevant and Useful- Figure out how you want to live a purpose-filled life and contribute to the greater good. For me, that path is via self-employment. Every day, for six months, I have included activities related to one of my 2020 goals: Stay active in the financial education field via Money Talk (my company) work projects, blogging, and social media. People only stay relevant by choosing to do so.
Stay Informed- Follow advice in the book Make Retirement Work! to read a (print or online) newspaper daily. I devour The Wall Street Journal for coverage of world news, personal finance, and- more recently- issues related to COVID-19. I found that keeping abreast of current news helps keep conversations going with people when you do not have a job in common. It makes you interested and interesting.
Stay Connected- Reach out to others to develop and maintain relationships. As a positive result of COVID-19, I have used my Zoom Pro plan extensively as a tool to connect with clients and for regular social interactions with my cousins and former colleagues. I have also listened to dozens of podcasts and webinars (that I previously would not have had time for), that feed my passion to learn new things.
Plan to Combat Ageism- Control how others perceive you. While you cannot control wrinkles on your body, you can push back against ageism in the following ways: keeping current networks alive, remaining technologically savvy (e.g., social media), actively engaging with others and “working out loud” (i.e., posting achievements) on Twitter and LinkedIn, reading trade journals and, yes, even hair dye.
Stay Healthy- Take advantage of the approximately 2,500 hours a year that people gain when they step away from a full-time career. Build in at least an hour a day for physical activity with the goal of living the highest quality life for as long as possible. I love the fact that I can exercise now in the early morning and afternoon instead of the late evening previously, which sleep experts do not recommend.
Wednesday, June 10, 2020
Events related to the COVID-19 pandemic have recently brought increased attention to the concept of resilience.
I recently presented a 90-minute webinar for financial education professionals about building financial resilience. In everyday language, resilience is the ability to “bounce back” from and cope with life events, both negative (e.g., unemployment) and positive (e.g., birth of a child). It is developing an ability to cope before challenges happen. Financial resilience is the ability to handle life events that impact household cash flow (income and expenses) and net worth (assets and debts).
Some stressful events, such as health issues and divorce, affect people individually. Others, such as a plant closing and COVID-19, affect large groups or society as a whole. Resilience varies from person to person according to the situation at hand and personal resiliency resources. Two people can experience exactly the same situation but handle it very differently.
On my webinar, I presented a variety of resilience teaching materials for financial educators. Participants took a 20-question quiz as a self-assessment of their resiliency resources and added up their scores to see how they were doing. Three categories of resiliency resources are included on the quiz that the participants took: financial, social/community, and personal:
Financial Resiliency Resources- These include an emergency fund of at least three months expenses, low-interest sources of credit, a low consumer debt-to-income ratio, various types of insurance (e.g., disability, health, life), human capital (job skills), estate planning documents, and accumulated savings and investments for retirement and other goals.
Social/Community Resources- These include having at least five close friends or family members to help you out in the event of an emergency or crisis, government or non-profit agencies to assist you, and regular medical check-ups and screening exams to uncover “underlying health issues” before they get worse.
Personal Resources- These include individual characteristics such as information searching skills, optimism, organizational skills, focus and concentration, good health status, stress management skills, and literacy skills.
I encourage you to visit the website for the webinar and supporting materials. Take the Personal Resiliency Resources Assessment Quiz and review the scoring grid at the end. Next, use the Resiliency Resources Action Plan Worksheet to develop an action plan to strengthen your resilience for the next challenging event that comes along.
Thursday, June 4, 2020
There are several key “milestone” ages in later life. At age 50, you can make catch-up contributions to individual retirement accounts and tax-deferred retirement savings plans, like 401(k)s. At age 62, you can start receiving Social Security (but with a lower benefit than waiting until full retirement age or FRA) and, between ages 66 and 67, current workers will reach FRA and claim full benefits. A final age-related milestone is taking required minimum distributions or RMDs at age 72.
RMD rues have changed twice within the last five months, including a change made in response to COVID-19 related investment volatility . Below is a description of RMD basics and the two recent rule changes:
¨ Definition- RMDs are a requirement to withdraw a certain percentage of money (based on age) from tax-deferred retirement savings accounts. Minimum withdrawals are based on the previous year’s ending values of those accounts and the IRS uniform distribution table. There are specific RMD rules for surviving spouses and children of account owners.
¨ Taxation- Withdrawals from pre-tax-dollar savings plans (i.e., accounts where taxes are not paid on the contributed amount) are taxed as current (a.k.a., ordinary) income. Examples of pre-tax plans are traditional IRAs, SEP-IRAs, 401(k)s, 403(b)s, and the Thrift Savings Plan or TSP.
¨ Tax Penalty- The penalty for failing to withdraw the correct RMD amount by the deadline is 50% of the amount that should have been taken out but was not. For example, a $1,000 penalty if you were supposed to withdraw $2,000.
¨ Calculation- To determine the RMD amount, divide the tax-deferred account balance on December 31 of the previous year by the distribution period divisor corresponding to your age. For example, the multiple at age 72 is 25.6. Someone age 72 who has $500,000 in a 401(k), for example, would need to take an RMD of at least $19,532 ($500,000 ÷ 25.6).
¨ Traditional IRAs- If you have multiple accounts, determine a separate RMD for each IRA, total the RMD amounts, and take a withdrawal from any one or more accounts. You cannot aggregate RMDs, however, for employer-sponsored plans.
¨ Rule Change #1 (SECURE Act)- The age to start taking mandatory RMD withdrawals was changed from age 70½ to age 72 beginning in 2020. The required beginning date for the first RMD is April 1 of the year after the year that people turn 72 (note: delaying will result in taking an age 72 RMD and age 73 RMD in one year, which can impact income taxes and Medicare Part B and D premiums). For all subsequent years, RMDs must be made before December 31.
¨ Rule Change #2 (CARES Act)- Due to extreme stock market volatility related to COVID-19, which could have forced retirees to withdraw assets during a downturn, RMDs were suspended for 2020. This includes RMDs that were pushed back from 2019 to April 1, 2020. Voluntary account withdrawals are allowed, however, as well as qualified charitable distributions (QCDs) that can be transferred directly from a traditional IRA to a qualified charity at age 70½ or older.
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