Financial Planning Actions Amidst Coronavirus Uncertainty
I hope you’re all staying healthy (and sane) in close quarters with loved ones as we all try to flatten the curve through social distancing. I’m sure you’re well informed of recent updates with the coronavirus and its impact on the global economy. I’ll admit, it’s scary stuff.
Obviously, our health and safety come first, but this too shall pass, and financial decisions you make now can have a lasting impact far beyond the turmoil that exists today. When it comes to investing, sometimes doing nothing is the best course of action, while other scenarios call for action to put you in a better position financially. Below are a few things you’ll be thankful that you did after the world returns to normal.
Maintain A Cash Reserve
A cash reserve is foundational to any financial plan. Having an easily-accessible account you can draw on during an emergency means not having to pull from retirement or investment accounts, or worse, take on debt, during times of crisis. For many, the coronavirus pandemic is certainly a time of crisis, especially for those who have lost or are at risk of losing their jobs.
The general rule of thumb is to have between three and six months of living expenses saved in a cash reserve. So, if your housing, car, groceries, etc. set you back $4,000 per month, you should have between $12,000 and $24,000 set aside in a checking/savings account that you can easily access in an emergency. Every situation is different, but during our current and uncertain times, I would recommend sticking to the higher end of that range. Of course, your cash reserve needs will change over time, so it’s important to reassess if you are over or underfunded periodically. Check out Cash is King: Building A Cash Reserve for more details.
Update Beneficiaries
I know… It sounds dire. If you haven’t updated your beneficiary designations for a few years, or if you don’t have anyone named at all, now is a good time to review them - if for no other reason than you now have the free time to do it! Adding beneficiaries to your bank accounts, investment accounts and insurance policies ensures that your assets will pass directly to the person(s)/organization(s) of your choosing while avoiding a lengthy and often costly probate process.
Keep in mind, you can name multiple individuals or even designate charities, schools or other organizations as beneficiary. I encourage you to name both primary and secondary beneficiaries. If something happens to your primary beneficiaries, your secondary beneficiaries or “backups” will receive your assets upon your death. Nobody likes thinking about end-of-life, and updating your beneficiaries requires just that. It’s important, however, that your hard-earned assets go to the people and organizations you love while saving them the headache involved with probate.
Review Estate Plan
Even more dire! Like with updating beneficiaries, it’s easy to put estate planning on the “back burner.” Again, take the opportunity to review your estate planning documents while you have some free time at home. Start by reviewing and updating your will. Your will is a legal document that outlines your wishes regarding the distribution of your property and the care of any minor children.
While you’re at it, consider drafting a power of attorney (POA) along with your will. A POA is a legal document that gives someone the power to act for you and is most commonly used after disability or incapacitation. There are several variations of POAs, and they generally allow someone to act on your behalf with financial and/or medical decisions. Make sure you identify someone you absolutely trust as your “agent” who will look out for your best interest.
If you do not already work with an estate planning attorney, a great place to start with these documents is through legal services provided by your group benefits at work. Many group plans allow employees to opt into a legal services benefit during open enrollment which typically provides access to attorneys who can help draft your estate planning documents for a much lower cost than seeking out an attorney independently. If you think your estate plan is fairly straightforward, you can also draft these documents on your own online.
Timing Your 2019 Tax Filing
The government extended the federal tax filing deadline 90 days (from April 15 to July 15, 2020). Depending on where you live, you may need to file your state tax return by the original deadline of April 15. If you live in Wisconsin, your state return is also extended to July 15. Depending on your situation, you may benefit from filing asap or waiting until the extended deadline.
If you expect to receive a refund, you’re probably better off filing now. You can use that money to cover immediate expenses, fund your cash reserve or invest in the down market. If you expect that you’ll owe money, it may be best to wait to file your return until closer to the extended deadline. That way, you’ll have extra cash on hand during these tumultuous times. Consider speaking with your tax professional about the best course of action based on your circumstances.
Rebalance Your Portfolio
Your investment portfolio should always align with your goals, time horizon, risk tolerance, etc. This alignment starts with your “asset allocation” or your mix of stocks vs. bonds. Stocks are the riskier growth drivers in the portfolio while bonds provide conservative ballast. The longer your time horizon, the higher weighting you will likely have in stocks. If you have a shorter time horizon or if you are currently in retirement, you will likely have a higher weighting in bonds. As the market fluctuates, so too will your asset allocation.
For example, if you had a 50/50 portfolio (50% stocks and 50% bonds), you may have a higher weight to bonds now that the stock market has dropped significantly (you might now have a 40/60 mix). It’s important to reassess in this example that a 50/50 portfolio still aligns with your needs. It most likely will, as fluctuations with the stock market should not impact your long-term goals. Consider rebalancing your portfolio to get back to your optimal 50/50 mix of stocks and bonds so you can take advantage of the stock market recovery in the most efficient way based on your goals.
You should also consider tax loss harvesting your portfolio to save money on your tax bill. This refers to selling investments at a loss to offset investment gains. If the market recovers and your portfolio grows in the coming years, you can offset the taxes you would owe with losses you’ve realized this year. Read The Power of Tax Loss Harvesting for more details.
Stay Invested
Legendary investor Warren Buffett once said, “The stock market is designed to transfer money from the active to the patience.”
I get it. The coronavirus is fierce, and uncertainty remains as to how many more people will be infected, how much longer the spread will continue, how governments and central banks will react, and how we can get our global economy back on track. All that being said, perspective is important. This is not the first virus the globe has ever seen, and it won’t be the last. The reality is, our society has figured out how to overcome past epidemics and the markets have done the same.
If your portfolio aligns with your objectives, time horizon, risk tolerance, etc., your best bet is to tune out the noise and stay invested. If you have been sitting on cash in the last several months or years, and you have a long investment time horizon, now is a good time to consider getting back into the market. Of course, first make sure you have an adequate cash reserve in case an emergency arises. Ironically, the stock market is the only place where prices fall and shoppers run for the doors! When you are invested appropriately, you’ll be thankful you put the blinders on and stayed the course!
Do you want to talk about ways you can take positive action amidst coronavirus uncertainty? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.