6 Financial Planning Tips: COVID-19 Portfolio Recovery
Eligible Aid from the CARES Act
The COVID-19 pandemic has impacted every aspect of our lives. From employment to our investment strategy, we are today living through unprecedented times. At Cinergy Financial, the Financial Advisors not only help you with financial planning, we also offer you the latest information on the various government resources that are available to you as a result of COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress. Some of the benefits included a $1,200 direct payment to adults whose income was less than $99,000 (or $198,000 for joint filers) and $500 per child under the age of 17- or up to $3,400 for a family of four.1
The CARES Act also offered a weekly $600 unemployment benefit for the millions of people who became unemployed as a result of COVID-19. These benefits were on top of the weekly benefits you receive from your state’s unemployment program. The $600 weekly benefits ended on July 31, 2020 and Congress has yet to come to an agreement on a new aid package.2 The CARES Act also included up to $659 billion for the Paycheck Protection Program (PPP), whose aim is to help the millions of Americans employed by small businesses. The PPP is designed to help small business, nonprofit organizations, veteran organizations, as well as those who are self-employed or independent contractors.3
In addition to the stimulus checks and unemployment help, the CARES Act also allows people who are under 59 ½ to withdraw up to $100,000 from their 401(k) without incurring the normal 10% penalty. While tapping your 401(k) can be costly because you might not benefit from the compound interest your money could earn, at least you will not incur a penalty if you qualify for the exemption. Keep in mind that although the 10% penalty is waived for early withdrawal, you will be still be taxed at your normal tax rate. One of the benefits of the CARES Act is that you can repay the taxes on your 401(k) withdrawal over three years. To qualify for the penalty free exemption, you need to meet the criteria outlined in the law and the distribution is made from an eligible retirement plan to a qualified individual from January 1, 2020 to December 30, 2020. Please consult your tax professional prior to taking a distribution to ensure you can utilize the exemption.
Other protections offered by the CARES Act include mortgage forbearance and protections for renters. Homeowners now have the right to pause mortgage payments for a period of time without incurring penalties or your credit being affected. Forbearance does not mean your payments are forgiven. You will need to repay the paused payments. Contact your mortgage servicer for details. Under the CARES Act there is also a moratorium on foreclosure. Under federal law, a servicer cannot start the foreclosure process until your loan is more than 120 days past due. Renters are also protected from eviction and late fees due to non-payment of rent. Please be aware that the mortgage and renter protection programs expired on July 24, 2020. Congress is now working on another round of aid. Call Cinergy Financial for the latest update.
Revisit Your Emergency Fund
If there is one thing COVID-19 revealed is that Americans were not prepared for a national emergency. Although this pandemic is unprecedented in our lifetime, many Americans found themselves woefully unprepared. According to a Federal reserve survey, prior to the pandemic 40% of Americans were not able to cover a $400 emergency with cash, savings, or a credit card charge. About 27% of those surveyed needed to borrow the money or sell something to cover the $400, and an additional 12% could not cover it at all.4
At Cinergy Financial, our Advisors can help you develop an emergency fund plan in case you lose your job. It is more urgent today to protect yourself with an emergency fund given the uncertainty of this pandemic. Although the government has come through with a stimulus package in March of 2020, there is no guarantee the benefits will continue as before. This is why you need to protect yourself with an emergency fund.
Set Up a Budget and Reduce Expenses
In ordinary times, it is important to set a budget in order to keep track of you expenses. The COVID-19 pandemic has created a sense of urgency to track our expenses and downsize wherever we can. In some respect, the coronavirus is helping us budget our expenses. Many of us are driving less, which means we fill up our tanks less often. Some auto insurers are refunding premiums. One thing you can do is set up a budget to keep track of money coming in. Begin with your home mortgage or rent, then utilities and food expenses. You may want to consider taking advantage of the benefits offered by the CARES Act to lower your monthly expenses. For example, you may pause your mortgage payment without incurring any penalty or your credit being impacted. Contact your mortgage servicer for details.
If you are like millions of Americans, the largest budgetary expense is your mortgage or rent payment. The good news for homeowners is that interest rates are now at historic lows. This could be an ideal time to refinance and save thousands of dollars over the life of your loan. Please contact your mortgage professional to see if this makes sense for you. Renters have options as well. Although there have been moratoriums protecting renters from eviction, you may now be able to renegotiate you rent. Come up with a firm plan of action and present it to your landlord. You may want to include how much you can afford to pay per month, where your source of money is coming from, and your desire to stay for the long term.
It is now more urgent than ever before to request a portfolio recovery analysis.
Consider Reviewing Your Risk Tolerance and Asset Allocation
Prior to COVID-19 we at Cinergy Financial have emphasized the importance of reallocating and rebalancing your portfolio. During this pandemic, it may be more timely now than ever before to request a portfolio recovery analysis. Our philosophy is it may not be prudent to rely on a strategy of just stocks and bonds. The COVID-19 pandemic has created unprecedented volatility in the stock market.5 Bonds, which are usually used as an income investment since they typically pay interest, have generally been yielding less as interest rates have declined. At Cinergy Financial, we offer an innovative and forward looking multi-asset model that can potentially offer you better returns while managing risk. Like any other investment process, our model is not free of risk; as no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. We believe transparency is important so you should know there is no guarantee that our investment processes will be profitable.
Consider that prior to COVID-19, financial experts from Bank of America, Morgan Stanley, and JPMorgan have concluded the 60/40 strategy is dead.6 The 60/40 portfolio may no longer be reliable given that stocks and bonds may no longer consistently move in the opposite direction. The very purpose of investing 60% in stocks and 40% in bonds was protection. If stocks went down, bonds would move up and vice versa. Today, stocks and bonds may move in the same direction, thus defeating their purpose. At Cinergy Financial, our REALM® model offers you five asset classes instead of two. During this pandemic it may be critical to reevaluate your portfolio by considering a diversification strategy. Call us for your a complimentary portfolio recovery analysis. Like any other investment process, our strategy is not free of risk; as no strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Update Your Retirement Goals
Given the unprecedented nature of the COVID-19 pandemic, you may want to reevaluate your retirement goals. That may mean asking the important questions such as how much do I need to retire? What is a safe withdrawal rate to sustain me over the long run? While these questions are important under normal circumstances, they take on a sense of urgency today. If you are working, you may want to keep funding your retirement accounts, including your IRA. If you are out of work, you may want to think about preserving your retirement account. Although Congress has made it easier to withdraw from your 401(k) plan, you need to make sure you understand the tax implications before you do so.
As you update your retirement goals, you might not have thought about the unique opportunities to lower your debt. The pandemic environment is forcing many companies to settle debt at a fraction of the original amount. Please seek out professional advice prior to settling debt(s) with a creditor as it may have consequences you have not anticipated such as a lower credit score or disclosure you may have to make to your employer or a regulator. Some may consider reducing their debt because of a general rule of thumb that you’ll need 80% of the amount you currently spend going into retirement.7 This 80% rule assumes that certain expenses will go down in retirement, such as commuting costs and retirement plan contributions. Other expenses, of course, might go up. For example, you may want to take that vacation you always dreamed of.
Another important reason to update your retirement goals is the withdrawal rate. Conventional wisdom has recommended a 4% withdrawal rate, which may no longer be enough in today’s economy. The 4% rule was based on the traditional 60/40 portfolio, which is potentially broken. If you are like most Americans, you have two broad retirement goals: to have enough income to live comfortably and to make your money last. Let’s remember that many of us are living longer today. One of the fears Americans have about retirement today is outliving their money.8 If your investment is currently in a 60/40 portfolio, you may want to consider a multi-asset class approach, which may offer you a higher withdrawal rate over a longer time horizon. At Cinergy Financial, Our Financial Advisors can evaluate your current portfolio and help you plan out your retirement goals.
Review Your Life and Long Term Care Insurance
Some of the services we offer at Cinergy, which is part of our overall retirement wellness approach to financial planning, include life insurance, long-term care insurance, Medicare, and umbrella policies. Although most people understand that life insurance is designed to protect our loved ones, they may not be aware of the risk management benefits as well. A life insurance policy can help you accumulate cash within the policy, which may contribute to your financial freedom during your retirement. Life insurance may also guarantee coverage in case of disability or estate planning.
You should not ignore the need for long term care insurance (LTC). If you are today 65 or older, you have almost a 70% chance of needing some type of long-term care services.9 The COVID-19 pandemic has exposed some of the dangers of nursing homes, which is why it is important to think about long-term care insurance. Many people are not aware that Medicare does not cover long-term care in many situations, rather only short-term stays in nursing homes for rehab. Also, many employer-based health insurance does not cover extended care services. Things to consider when considering long-term care insurance include your age and health, your income, and your support system. Policies cost less when you purchase long-term care insurance at a younger age and generally in good health. If your income is low, you may qualify for Medicaid, which does pay for nursing home care or, in some cases, limited at-home care.
Estate Planning Documents
Part of the planning for your financial wellbeing can include living trusts/wills, a health care directive, and power of attorney. The first step of estate planning is determining your net worth, which is something we offer here at Cinergy Financial. We help you understand the difference between a living will and a living trust. But we are not attorneys so we suggest you discuss your legal matters with your legal professional. A health care directive is a legal document that allows you to make your wishes clear regarding the medical procedures you want performed or don’t want performed should you become unable to voice your wishes. Another type of advance directive is the “do not resuscitate,” or DNR, directive that instructs health care professionals not to take life-saving measures. Another type of medical directive is a medical Power of Attorney (POA), where you name an agent who will decide treatment options and resuscitation for you in the event you cannot make these decisions yourself.
Another important component of estate planning is a living trust, which is a legal document that you create where a designated person, the trustee, is given responsibility for managing your assets. A living trust allows for the easy transfer of the trust by bypassing the often complex and expensive legal process of probate. A living trust grants a trustee legal authority over assets and property that flow into the trust. Examples of things that can go into a living trust include real estate, bank and savings accounts, vehicles, fine art and jewelry, as well as “virtual’ valuable items like mining rights and intellectual property.10 We here at Cinergy Financial can help arrange for you to learn about estate planning, as these matters should be discussed with legal professionals.
1. U.S. Department of the Treasury, “The CARES Act Provides Assistance to Workers and their Families,” home.treasury.gov, Retrieved August 6, 2020. https://home.treasury.gov/policy-issues/cares/assistance-for-american-workers-and-families.
2. Oscar Gonzales, “Extra $600 Unemployment Benefit: Update on Where Things Stand,” CNET.com, August 5, 2020. https://www.cnet.com/personal-finance/extra-600-dollar-unemployment-benefit-not-extended-update-on-where-things-stand/.
3. Jim Probasco, “Paycheck Protection Program (PPP): What is it and How to Apply,” Investopedia, July 7, 2020. https://www.investopedia.com/your-guide-to-the-paycheck-protection-program-ppp-and-how-to-apply-4802195.
4. Soo Youn, “40% of Americans Don’t have $400 in the Bank for Emergency Expenses: Federal Reserve,” Abcnews.com, May 24, 2019. https://abcnews.go.com/US/10-americans-struggle-cover-400-emergency-expense-federal/story?id=63253846.
5. Congressional Research Service, “COVID-19 and Stock Market Stress,” crsreports.congress.gov, April 3, 2020. https://crsreports.congress.gov/product/pdf/IN/IN11309.
6. Bernice Napach, “Wirehouses warn: 60/40 Asset Allocation is Dead,” ThinkAdvisor, November 12, 2019. https://www.thinkadvisor.com/2019/11/12/wirehouses-warn-6040-asset-allocation-is-dead/.
7. Jean Folger, “Will Your Retirement Income be Enough?” Investopedia, Jan 16, 2020. https://www.investopedia.com/retirement/retirement-income-planning/.
8. Kathleen Coxwell, “3 Biggest Retirement Fears and How to Beat Them,” Newretirement.com, June 29, 2020. https://www.newretirement.com/retirement/the-3-greatest-retirement-fears-and-how-to-feel-more-confident-about-them/.
9. Long Term Care, “How Much Care Will You Need?” longtermcare.acl.gov, Retrieved August 7, 2020. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html.
10. Dave Ramsey, “What is a Living Trust and How Does it Work?” daveramsey.com, Retrieved August 7, 2020. https://www.daveramsey.com/blog/what-is-a-living-trust.