During economic crises, it can be instinctive to change course with your finances as uncertainty and perhaps even panic set in. However, it will benefit you financially to avoid making quick decisions about your money, particularly during a recession. Financial stability, especially during the COVID-19 pandemic, will reduce stress on your family and keep you moving toward your financial goals.
Here are some sound options for managing your finances during the pandemic.
Pad your emergency savings
While the pandemic has hurt many aspects of the American economy, personal savings rates have soared. CNBC recently reported that the US Bureau of Economic Analysis showed a personal savings rate (the percentage of disposable income that people save) of 33 percent in April, the highest it’s been since the 1960s, when the agency began keeping track. Nationwide stay-at-home orders have encouraged savings, as people have drastically reduced their spending on travel, shopping, and entertainment and eating out.
If you continue to have a steady income, this is an excellent time to build an emergency fund for situations ranging from job loss to an unexpected medical bill. Financial experts recommend saving between three and six months of living expenses to make sure that you can weather unforeseen hardships, including the pandemic if it stretches out.
A good place to start would be saving any lump sum of money you receive, such as a tax refund, work bonus, or a commission. You could also decrease the amount you contribute to your 401(k) temporarily and move the difference into your emergency fund.
Adjust your budget
Millions of Americans have been affected by COVID-19 shutdowns, whether they have been furloughed, laid off, or experiencing a reduction in wages. The economic fallout is far from over, so even those who have yet to be impacted by COVID-19 could as companies examine their long-term revenue and adjust their plans in the coming months.
Regardless of your job situation, this is a good time to make adjustments to protect yourself against job loss or wage reduction. You can think through your long-term income potential and job security and consider ways to insulate your family from income loss as the impact of COVID-19 unfolds over the coming months and years. You may also want to make your budget more conservative, increase your savings, and reduce non-essential spending.
Look at payment reduction options
While your income may seem stable now, that may not be true a few months down the road as the economic crisis stretches out. To be prepared for financial difficulties, familiarize yourself now with programs that allow for payment deferment or reduction on key debts.
Mortgage payments: If a time comes when you can’t make your mortgage payment, call your bank. Many states will allow property owners to take a “holiday” from mortgage payments if their cash flow has been impacted by COVID-19. Lending institutions may allow you to postpone payments without incurring late fees, extra interest, or a negative impact on your credit score.
Credit card payments: In the wake of COVID-19 financial hardship, many credit card companies are offering relief to their clients in the form of lower interest rates, reduced fees, and delayed monthly payments. Contact your credit card company for details about their COVID-19 relief plan.
Federal student loan payments: The US Department of Education currently has reduced the interest rates on federally-backed student loans to 0 percent for a minimum of 60 days, and graduates can also take a break from payments for at least two months if they call 1-800-4FED-AID and request it.
Reconsider your real estate
Your biggest monthly budget item is likely your rent or mortgage. Financial setbacks, such as a job loss, can become severe if you can’t pay it. If you’re a renter and you’re anticipating or experiencing a financial hardship, ask your landlord for a temporary reduction in your monthly payment or if you can apply your security deposit toward rent. In a more extreme scenario, you may need to get out of your lease early and move to a more affordable rental.
If you’re a homeowner, call your bank and ask for mortgage relief, such as deferred payments or temporarily paying interest only on your mortgage. With interest rates extremely low, this may be an ideal time to refinance your mortgage to decrease your payments or shorten your loan terms so that you can pay it off more quickly.
Is it time for more investments?
While your inclination may be to save right now, you may be missing out on excellent investment opportunities. Many stock prices are low, making it a good time to enter the long-term investment market or temporarily increase contributions to your 401(k). Bear markets have rebounded above average for several years, a historic trend that could play out again when the COVID-19 recovery begins.
As with any risk, however, caution is always advised. Before you step further into the market, make sure you have a generous emergency savings fund, stable expenses, and job security.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act—federal legislation that was passed in March to provide relief to Americans struggling economically due to the coronavirus pandemic—offers an enticing option for withdrawing money from employee retirement accounts.====
Here are two ways that 401(k) holders who can show that they have been impacted by the coronavirus outbreak can access these accounts due to the CARES Act:
- Account holders can withdraw as much as $100,000 from their 401(k) accounts through the end of 2020. While they will be not be assessed the 10 percent early withdrawal fee that is typically applied to account holders ages 59½ and younger, they will have to pay taxes on the withdrawal over the course of three years.
- Account holders can also borrow up to $100,000 (double the typical $50,000 allowance) from their 401(k) until September 22 with their employer’s consent.
Some Americans are taking the government up on this offer, as many live paycheck to paycheck and have felt pressure to dip into their savings. The CARES Act took effect in late March, and since then, more than 370,000 people have withdrawn money from their retirement accounts, according to Fidelity. The average withdrawal was $13,000, but as many as 8,500 have borrowed the full $100,000 from their 401(k)s.
While this may seem like an effective stopgap measure during a difficult economic time, withdrawing money from your 401(k) early is not a decision to take lightly because it could significantly impact your long-term retirement plans. Here are some issues to think through before pulling money out of your 401(k).
The Long-Term Impact
Even if you pay yourself back after your economic situation improves, taking money out of your 401(k) early, even temporarily, will negatively impact your long-term savings.
Boston College’s Center for Retirement Research has determined that withdrawing money early from your 401(k) can reduce your retirement wealth by as much as one-fourth, according to a report from MSNBC. The reality was borne out during the economic downturn in the late 2000s, when people also made early withdrawals from their 401(k)s. By 2019, people who had sold their stock in 2008 had an average balance of $275,000 in their 401(k)s, while those who had not sold stock averaged $360,000 in retirement savings, according to Fidelity.
MSNBC offered the following example: A 60-year-old who earns $60,000 annually has contributed 9 percent of her earnings to her 401(k) annually for 30 years with an annual return of 6.5 percent. When she retires, she will have a savings of $675,000.
However, if she had withdrawn $40,000 when she was 40 years old due to hardship, her savings would be reduced to $480,000 at retirement.
Additionally, 401(k) balances are down across the board due to market declines. That means withdrawing money now will lock in losses, never giving that initial investment time to recover when the market improves.
Impact on the Workplace
In a recent Forbes survey on how the pandemic is affecting retirement planning, 11 percent of respondents said that they were planning to work longer to offset financial shortfalls. The majority of these individuals were 45 to 54 years old, while respondents aged 18 to 24 were the least likely to say they planned to extend their working years.
In some cases, longer working years may be attributed to changes in how employers are contributing to their employees’ 401(k) accounts. About 4 percent of respondents said their employers had stopped matching contributions during the pandemic—a number that could grow as pandemic shutdowns continue.
A Way Forward
If possible, financial advisors recommend staying calm during a crisis and focusing on long-term savings goals. historically, the ups and downs of the market tend to balance out over time. For example, between 2007 and 2012, 401(k) account balances grew an average of 12 percent annually, according to the Employee Benefit Research Institute. Reacting to market downturns by selling investments, decreasing contributions, and making early withdrawals can result in lower balances at retirement.
It’s particularly risky to borrow from your 401(k) at times of high unemployment (currently, 40 million people are out of work) because you are much more likely to be able to repay a loan when you have a job than when you don’t.
However, if you need to borrow from your 401(k) to pay bills during the pandemic, you do get a break on repayment. The CARES Act gives some borrowers a year before they must begin repayment. However, if you don’t repay the loan in five years, it will be considered a withdrawal, complete with a 10 percent penalty plus tax.
If you can stay the course, keep making monthly contributions to your 401(k) and, if possible, make additional contributions. Since so many businesses and entertainment venues are closed, Americans are spending less and saving more, making this a great time to put some of that extra money into retirement savings.
Deciding how to divide your estate between your children is not always as clear-cut as it seems. An equal division would have you leave each of your children the same amount, but what if one has served as your caregiver for five years? What if one is extremely wealthy, while the other two are struggling financially? If you have four children, who gets the beloved family home or their great-grandmother’s wedding ring?
Experts say that however you decide to divide up your estate, harmony should be a guiding principle. An inequitable inheritance, especially when it comes as a surprise, can cause long-lasting conflict between siblings, and no one wants to leave behind a legacy of family discord.
Here are some ways to ensure that the distribution of your estate is equitable, minimizes conflicts, and follows your wishes.
Figure out what “fair” means
When you consider how your children should share your inheritance, certain situations may call for an equal division of assets. For example, if all your children are in similar economic and life circumstances and you haven’t already given any of them substantial gifts, equal financial distribution may be appropriate.
Alternatively, you may want to factor in the total amount of financial assistance you’ve given your children over their lifetime. In other words, you may want to adjust their inheritance to reflect what you’ve already given them. For example, you may have a child who you gave $50,000 to help pay off private college student loans, while your other children attended state colleges that were much cheaper. You could adjust your financial division to give one child $100,000 and the other two $150,000 each to make the inheritance equitable.
Sometimes people want to leave more money to one child as a reward or a necessity. For example, one child may have sacrificed greatly to provide in-home care for you, or you may have a child with a disability who will need money for care for the rest of their life. You may have created a blended family later in life and want to leave more to your biological children.
These situations can become sticky, but sometimes siblings will understand and even support another sibling receiving a larger share of the inheritance. In other cases, however, perceived inequities can lead to years of sibling disputes. If you’re not sure what will happen, consider making decisions that will create harmony, not conflict, between siblings.
Large family assets
It doesn’t always make sense to divide a large family asset such as a family home or business between multiple children. For example, if one of your children has settled in another state and one has stayed in your hometown, it may make more sense to leave the house to the child who lives locally and give the other child more of your assets to offset the value of the house.
A similar situation could arise with a family business. If one child has made a career in that business while another shows no interest, it could be detrimental to the business to split ownership between the children in the interest of being “equal.” In this case, you could leave the business to the child who works there and give the other child more cash.
Conveying your wishes
While you are of sound mind, clearly define your wishes. You can do this by writing a detailed letter that explains not only what your decisions are, but why you made them. This will eliminate any conjecture about your motivations that could lead to hurt.
Talk to your children. You may find that they are much more understanding than you’ve given them credit for. For example, you may find that a child who already is well-off is more interested in a sentimental family heirloom than an equal share of the assets. Discussions about your estate will help your children understand why you made the decisions you did and stave off potential conflict after you’ve gone. It will also give your family time to accept your wishes. Many times, it is the surprise bequests that create discord.
You also may want to ask your children how they feel about sharing assets. Are they all willing to put the time and money into keeping up the family vacation home? Would one child be willing to allow a sibling to inherit the family silver if they get the grand piano? Heading off potential conflicts through pre-emptive discussion can go a long way toward long-term harmony.
In some cases, you might not want your estate to be divided equitably—however you define that term—between your children. You may feel that one child doesn’t deserve it, or you may be estranged from a son or daughter. While these situations can be unpleasant, it’s worth considering whether an equitable division may be worthwhile to avoid emotional and financial conflict between siblings. An equitable division may also avoid the risk of the “slighted” child suing the estate—a situation where some of your assets could end up in a lawyer’s bank account.
Around the world, stay-at-home orders and travel bans have slowed transportation to a halt. Photos of empty roads during rush hour in major cities have circulated on social media, government orders have halted cruises, vacations, and other non-essential trips, and people are considering whether to postpone retirement.
The impact of a slowed-down world, along with an oil-price war between Saudi Arabia and Russia that flooded the international market with too much crude, has hit the oil industry hard. Crude oil prices fell to more than -$37 per barrel in April, and oil stocks have dropped almost 70 percent in 2020, which is a 20-year-low for Brent and West futures.
While the sector has made a slight recovery from its rapid freefall, stock prices are still low. The question remains whether this is a good time to invest in the oil and gas sector. Here’s what you need to know:
Crude oil prices reached new lows in April, but oil is still a significant part of the world economy. The renewable fuel market is gaining more of a foothold in the energy and transportation sectors. However, diesel, gasoline, and other oil-based fuels will continue to have a place in the markets for many years.
In addition, the crude oil market has not collapsed permanently. It has been put on hold as the need for commuting, traveling, and shipping have slowed down. Eventually the world will begin to reopen, as it already is in much of China, and the demand for fuel will rise. Whether fuel demand will return to pre-pandemic levels is unknown, but it is certain that some demand for oil will be restored, at least for the foreseeable future.
Should You Invest?
Is now the time to massively invest in a down market? The question is complicated, as oil companies likely will fare differently during the pandemic. Some will likely go out of business. An investment in a failing company will result in the loss of your investment. Investors considering an investment now in an oil company also will want to consider short- and long-term issues facing the industry.
Even though renewable fuels are eating into the crude oil market share, the industry will rebound in the short term. People will start driving again, and travel and shipping will resume as economies reopen and commerce ramps back up. Increased demand at any level will push oil prices—and stock values—up from their current prices.
If you choose to invest in oil companies now, the question will be which companies are on a firm financial footing. Investing in companies that are well-managed and capitalized could result in a short-term payoff when oil prices rise.
Long-term Outlook Is Grim
Whether to invest long-term in oil companies is a murkier question. Analysts say the market was already on an overall downward trend before the coronavirus shutdown reduced demand and led to historic declines. In addition, government and corporate actions regarding oil supplies have created a worldwide glut of oil.
Saudi Arabia, for example, has historically served as a stabilizer in the world oil market. In early April, it planned (along with the United Arab Emirates) to significantly increase oil production and use more natural gas as a country in an attempt to make more oil available on the market. In February, Saudi Arabia exported more than 43 percent more barrels of oil than the month before and had plans for even bigger exports in the months ahead.
Now, the oil market is so saturated with oil that the industry doesn’t know where to store it. For oil companies short on cash, this could be problematic because they can’t sell the oil they already have. As a result, some independent oil companies are struggling. Whiting Petroleum filed for Chapter 11 bankruptcy in April, and if the bankruptcy court approves, shareholders will keep only 3 percent of the company, losing 97 percent of their investment. Chesapeake Energy hired bankruptcy lawyers and began restructuring in March—before the market bottomed out.
Some analysts also warn that traditionally conservative oil investments, such as pipelines, may no longer be safe either, as production is disrupted and demand is low. This middleman industry could struggle as companies find themselves with pipelines filled with oil that no one wants to buy. Pipelines, especially those connected with weaker oil producers, could be in trouble.
Many analysts don’t see a bright side for the oil industry’s long-term prospects. Saudi Arabia traditionally has reduced production to help control the market. However, at this point the flooded market may be irreversible unless a majority of the world’s oil producers also decide to cut back.
With this in mind, investors should be wary of investing resources into any companies involved in oil production, drilling and fieldwork, pipelines, and selling components such as drilling pipes. Large, diversified companies such as Shell and Phillips 66 may survive. Unfortunately, even they may fall victim if the world makes a slow recovery from this economic crash.
The coronavirus has upended all aspects of people’s lives, from their jobs to their finances to their relationships. Despite the economic and social turmoil, there is some good news for people with the capacity to save for retirement right now. The federal government has pushed back deadlines for taxes and individual retirement accounts (IRAs) to help the economy and allow taxpayers to focus on other expenses.
In March, as much of the United States enacted stay-at-home orders and businesses began shutting down, the Trump administration announced that the tax deadline would be moved from April 15 to July 15. The date corresponds with a previous announcement that many tax payments also would be deferred to July 15.
Additionally, the IRS has waived minimum distributions and extended the deadline for contributing to your IRA to July 15.
What does this mean for your retirement? Most importantly, it gives Americans another three months to make a 2019 contribution to their IRA—no penalties will be assessed for contributions made during the extension. While contributions can now be made until the middle of 2020, they will be considered contributions toward the 2019 taxable year.
The new deadline automatically applies to all individual taxpayers and corporations—you don’t need to apply for a tax filing extension or fill out extra paperwork for a 2019 IRA contribution before July 15.
Contribution Limits and the New Deadline
The deadline has been moved, but the limits on how much an individual can contribute to their IRA account has not changed. For people younger than 50, the contribution limit for 2019 and 2020 is $6,000. For those age 50 and older, the limit is $7,000.
There are several reasons to take advantage of the extended deadline to contribute to your IRA.
If you were not able to save enough money to meet the limit by the April 15 deadline, you now have more time to save up for a larger contribution. Additionally, the recent market decline could make it a good time to invest, as your IRA will grow, tax-free, when the market rebounds.
If you do plan to make a contribution before the new deadline, in the interest of caution some financial advisors are recommending that you note “2019” on your check so that it’s clear what year the contribution should apply.
Other Ways to Take Advantage of the Extended Deadline
The new July 15 deadline also applies to health savings account (HSA) contributions. That means you can continue making tax-deductible contributions to your 2019 HSA through July 15. Money spent from your HSA on qualified medical costs also will not be taxed.
If you owe taxes, July 15 is also now the deadline for making tax payments that were due on April 15. On July 16, penalties and interest on unpaid balances will begin accruing.
Getting a Refund?
If you believe you’ll receive a tax refund, don’t put off filing. There’s no need to delay your receipt of that money in your account.
Special Rules for Required Minimum Distributions
For 2020, the federal government also has waived required minimum distributions (RMDs) for IRAs and 401(k)s and other qualifying employer retirement plans. This waiver applies to all RMDs due on April 1 and December 31 for retirement plans that you own or have inherited.
If you’ve already taken out RMDs in 2020, they are eligible for a 60-day indirect rollover. If you choose this option, the money will be deposited back in your IRA as if you’d never taken the distribution. The IRS also is offering an option under COVID-19 rules that could allow you up to three years to repay the distribution or report it as income.
Here are some ways to take advantage of these special rules.
If you don’t need cash, don’t take an RMD. This way, you can avoid paying taxes on the RMD and will keep the money in your retirement account, where it will continue to grow tax-free.
If you do need cash because you’ve been diagnosed with COVID-19 or you’ve been laid off due to the pandemic, you can take the withdrawal without penalty. The rules allow a withdrawal from a qualified IRA or 401(k) up to $100,000 without paying the 10% penalty charged to people age 59 ½ or younger.
Consider Switching to a Roth IRA
Here’s one more potential benefit of this unprecedented financial time.
Stock values have dropped dramatically, offering additional opportunities to increase your retirement savings over the long term. One option is to convert your traditional IRA to a Roth IRA. The money you move from the IRA to a Roth account will become taxable, but the (likely) lower value of the assets you shift will mean you’ll pay less in taxes than you will after the market rebounds. And after you keep the Roth IRA for five years and reach age 59 ½, you can make tax-free withdrawals from the account forever.