Goldstone Financial Group's Blog
A new year is a natural time for a fresh start and a new resolve, so there’s no better time to consider new ways to approach your finances in 2021—especially in light of the unusual circumstances that 2020 wrought on our finances and lives. Instead of setting out complicated resolutions that could be hard to stick with, consider adopting some of these more straightforward approaches that still can help you create a stronger, stabler financial position.
Save More Money
This resolution is the complement of the common resolve to spend less, and experts say it’s easier to follow. Rather than solely focusing on how you budget your money, try turning your attention to saving. You’ll be surprised at how much this shift can impact your finances.
First, decide now how much of your income you’d like to save every month based on your bills and salary. You may choose a percentage, such as 15 percent of your take-home income, or a dollar amount, such as $400 each month. Then, make sure you move the money into a savings or investment account or create a savings column in your budget to avoid absorbing it elsewhere, such as overspending on your credit card to compensate for the income now going to savings.
Track Your Spending
Whether your spending goals include buying a house, paying off a car loan, or spending less on groceries, keeping track of how much you spend is a vital first step to creating a budget to help you get there. When we estimate our spending, we often underestimate, which can lead to overspending and no progress toward larger financial goals.
You can figure out exactly how much you’re spending by examining old credit card and bank statements or using budget tracking software. Then, you’ll have a realistic idea of how much you spend and can make educated decisions about budgeting and saving—including chipping away at those big spending goals.
2020 provided some unique opportunities for spending changes that you may want to make permanent. Many people saved money due to restrictions on travel, dine-in eating, and entertainment venues. If your budget benefited, you may want to consider making those spending cuts permanent.
Focus on the Future
Sadly, COVID-19 cut many lives short unexpectedly, and it often left these people isolated in hospitals and assisted living facilities unable to consult with family, friends, or planners who could help them with financial paperwork. Future financial planning, whether it’s outlining your wishes for your estate or solidifying your retirement savings plan, is vital.
One smart resolution is to create a detailed retirement plan and stay with it. Do you want to continue your current lifestyle after you retire? Downsize your home and lifestyle? A planner can help you figure out how much you need to save to achieve your retirement goals and show you how to organize your financial documents to keep your spending and savings up to date. With a retirement plan in place, make it your resolution to follow it.
Estate planning is another key factor in planning for your financial future. A financial planner can talk to you about your goals for your estate and help you put plans in place now.
Pay Off Debt
Aside from causing anxiety, debt can hold you back from living the lifestyle you’d like and reaching big goals like traveling the world or purchasing a house. If you struggle with debt, resolving to pay it down is vital.
Financial planners recommend approaching your debt strategically. That means paying off higher-interest debt, such as credit card balances, first. You could also take a wider approach and focus your payments on debts that carry a specific interest rate and above.
Whatever approach you choose, resolve to understand the amounts and interest rates of your debt and create a strategy for tackling them in 2021. And that doesn’t necessarily mean paying them off completely. If repaying 25 percent of your balances in 2021 is realistic, set that as your goal. The satisfaction of reaching it will only serve as a motivator to continue working toward debt-free finances.
Build up Your Emergency Fund
If we’ve learned anything from 2020, it’s that life can change drastically, and sometimes that comes with unexpected financial ramifications such as a job loss or hospitalization. While financial experts recommend shoring up at least six months’ pay in savings for such situations, the Financial Industry Regulatory Authority found that almost half of Americans don’t have enough in an emergency fund. Without savings set aside, you are risking financial disaster.
Savings like this doesn’t happen quickly, so plan to build it gradually by committing to a monthly contribution to your emergency fund. Additionally, set this money aside for true emergencies—don’t dip into it to pay bills or offset extra spending if you can help it.
Sometimes, we decide we’d rather not know the details of our finances. Maybe we’re worried that an in-depth look at our money would reveal spending habits we’d prefer not to acknowledge, or perhaps “ignorance is bliss” and we don’t want to think about how little money we have in the bank. Perhaps we’re embarrassed by our lack of savings and investments.
Financial planners note that these kinds of fears, whether of change or the unknown, often prevent people from seeking financial planning services. We know it’s important to save money and plan for our future, but we often don’t know how to do it, and sometimes, learning seems overwhelming. However, taking charge of your finances by working with a financial planner can help you achieve major financial goals such as buying a house or paying for your child’s college tuition.
Here are a few ways to approach your finances with confidence.
Remember: No One Is Judging You
Whether your savings are scant, you’ve taken on two large car payments, or you’ve made a poor investment, a financial advisor will not judge your decisions. Finance professionals are there to help you manage your money—they aren’t concerned with how much you earn, what your assets are, or what financial mistakes you’ve made. Their job is to help you get into a better financial situation. And remember, you will not be the first client they’ve worked with who’s made a financial mistake!
Don’t Believe It’s Only for the Wealthy
One common misconception is that financial advisors are only for the ultra-wealthy. Many people worry that their money doesn’t warrant advice or that they don’t have enough to invest. This may have been true in decades past, when most financial advisors required clients to have a minimum amount of assets, but today, financial advisors are increasingly offering services catering to people who have less money to invest. These services focus on helping people manage their money, often through online financial planning investment services. Financial advice benefits everyone, even those who haven’t accumulated a lot yet.
While the details of financial planning can be intimidating at first, once you delve in, you will likely find rewards in managing your money well. There’s a certain satisfaction that comes with paying off credit card debt, retiring student loans, and building your savings and retirement accounts. The best part is that once you get a taste of the personal benefits of financial planning, you’ll want more.
Know You Can Afford It
While the perception is that financial planning is expensive, it’s simply not the case. Working with a traditional financial planner can indeed cost thousands of dollars, but there are less-customized options for financial planning that are much more affordable. While you may have to trade in-person, personalized attention for an online financial management service, these cheaper alternatives are still excellent options for helping you invest and manage your money.
Also, these services typically don’t require cash up front. Instead, they’ll take a percentage of the money you invest through them. They usually charge around 1 percent, so if you invest $10,000, your financial advisor’s fee will be $100, which likely will be deducted directly from your investment account.
Computer-based services, also called robo-advisors, are another affordable way to manage your investments. They likely won’t require a minimum account balance (or if they do, it’s low), and their fees are based on your assets under management (AUM). The AUM fee will range from .25 percent to .5 percent, which calculates to between $12.50 and $25 for a $5,000 account balance. While you won’t get personalized financial advice for your fee, computer algorithms will create and monitor your portfolio for you.
Online financial planning services, a step up from robo-advisors, offer investment management along with personalized financial planning. Some services don’t require a minimum account balance, and their customized services can range from a dedicated Certified Financial Planner to a team of financial planners. Typical AUM fees for these services range from .30 percent to about .9 percent or a flat annual fee starting at several hundred dollars based on the level of services you need.
Take the First Step
While finance professionals have sometimes gotten a bad rap as predatory, self-serving people, that’s not reality. Financial advisors care about their clients, work with their best interests in mind, and don’t judge clients’ situations or choices. They are focused on finances and helping you make the best decisions with your money.
When you find the financial planning service that best matches your needs and goals, you’ll be glad you did. The peace of mind you’ll get from having and sticking with a financial plan will be well worth the discomfort you may feel when you first reach out to a professional for help.
Due to the pandemic, colleges across the United States are starting to rethink their approach to how to provide an education. In response, many families are wondering whether paying for a college education is worthwhile right now.
Recent statistics bear out this trend. In October, the National Student Clearinghouse Research Center reported that undergraduate enrollment is down 4%. Experts attribute the decrease to concerns about contracting COVID-19, a dislike of online learning, and issues with families not being able to afford tuition. Some students are opting to take a gap year or to postpone college.
While reconsidering your college plans may be an option for some, financial planners advise families to continue saving—at least in some form—for their children’s college education. The following is some information and advice on how to manage your 529 college savings plan as the educational system navigates COVID-19.
Community College An Option
One popular option for students who don’t want to virtually attend a pricey university is to enroll in community college, which is generally a less expensive choice. Some financial advisors recommend that parents pay the lower tuition for community college out-of-pocket rather than draw on their student’s 529 plan, a popular education savings plan that allows families to invest money that has already been taxed into several investment options. Your earnings grow tax-free, and withdrawals for qualified expenses are not taxed.
This approach offers several benefits. Parents can continue contributing to their child’s 529 account and increase its long-term growth potential. In addition, they will not be withdrawing money from their student’s college savings account and taking a loss during an economic downturn. Students can also take out separate loans for community college and use the 529 proceeds later to repay up to $10,000 of those loans (principal and interest), a one-time option now available under the recently passed SECURE Act. As an added bonus, up to $10,000 in 529 plan distributions can be put toward the educational debt of each of the beneficiary’s siblings, including stepsisters and stepbrothers.
Continue to Contribute
The market ups and downs over the last year may set off warning alarms for your 529 college savings plan. Your account balance may drop, which may make the plan seem less valuable. The statistics back this up. According to data from the College Savings Plans Network, the average account reached a high of $26,054 in 2019, but now it is down to an average of $25,657.
Even with so much uncertainty, advisors recommend that families continue contributing to their 529 college savings plans as much as they can. Recent research finds that many are doing just that—total investments in 529 plans have risen to nearly $374 billion, a record. Investors value the savings plans’ tax-free deductions when the funds are used for qualified educational expenses such as tuition and books.
“When it comes to 529 college savings, staying the course is an essential component of a successful long-term savings strategy,” stated Michael Frerichs, the chairman of the College Savings Plans Network, in a recent interview with CNBC.
Other Ways to Use the Money
COVID relief legislation that was passed earlier this year allowed families who had paid for tuition from their 529 plans—before classes were moved online due to the pandemic—to receive refunds from the colleges. As long as the money was deposited back into the 529 plan within 60 days, the withdrawal was not taxed.
While families have the option to leave the money untouched, there are other ways they could use it because the law allows for 529 funds to be used to pay for a variety of qualified educational expenses. Up to $10,000 per year can be spent on private school tuition for each younger child per year (private, public, or religious education for students in kindergarten through 12th grade), and in many states that amount can be applied to reduce the taxable income of the parent or grandparent who started the fund.
The money also can be used to pay for apprenticeship programs, vocational school, and other post-secondary institutions that participate in the U.S. Department of Education student aid program. Qualified expenses also include computer software, textbooks, and supplies.
The Long-Term Outlook
For families with younger children, now may be a good time to think about what higher education will look like in a decade. Some experts predict that post-COVID, the cost of a college education will become even more expensive. In order to compensate, you can change the asset allocation of your 529 plan portfolio, making it more aggressive or conservative based on your feelings about the market.
Parents may want to explore other savings options, as well, so that they can work around the restrictions on the 529 plan. Other good investment choices include U.S. Treasury bonds, one of the safest—and slowest—investments, or stocks, which will be more volatile but could provide a much larger payoff. Parents also could consider a Roth IRA savings account, which offers the tax savings of a 529 account without the restrictions.
If your target retirement age is less than 10 years away, it may be tempting to glide into your post-work life and hope for the best. However, without proper retirement planning, you may find yourself making a bumpy landing.
Here are seven steps to ensure that you’ll be financially prepared for retirement.
Consider Your Plans
As the reality of your post-work life draws closer, it can be helpful to envision what your days will look like. Will you be traveling around the world? Downsizing your house? Taking up a pricey new hobby? Will you volunteer or work part-time? All of these decisions will play into your retirement budget.
Most importantly, ask yourself if you have the money to pay for your retirement dreams. If you don’t, there’s still time to save. First, go over your current budget and look for items that can be cut. Do you need Netflix and Hulu? Could you cut out coffee runs and eating out? Any money you save can be invested in your retirement savings.
If your dreams outsize your financial reality, it may be time to reconsider what retirement will look like. Steps such as moving into a more affordable home or working a 10-hour-a-week job could positively impact your retirement budget. A downsized retirement budget, however, doesn’t mean a downsized retirement. Spending more time with grandchildren can be more rewarding than an expensive vacation to Europe.
Get a Handle on What You Have
This step can be intimidating, especially if you haven’t been on top of retirement savings. However, you need to face the truth to best prepare for the future. You need to know how much you’ve saved and how much you’ll likely receive in Social Security and pension payments so that you can calculate a reasonable retirement budget. If your retirement savings are in several different accounts, consolidating them could provide a better idea of how much savings you have.
A financial planner can help sort through your financial situation and build a strategy for retirement savings to maximize the time you have left to save. With an accurate assessment of what you’ve saved, you also can make decisions on whether you need to work more to increase income or cut back on spending to boost your savings.
Pack Your Retirement Savings Accounts
This is the time to increase your contributions to your retirement account to the maximum allowable, including making catch-up contributions permitted under IRS rules (the agency gives contributors age 50 and older extra time each year to contribute). Also, check with your employer about whether the company matches employees’ retirement account contributions.
Get a Plan
It’s easy to put off retirement savings and justifying spending what could be potential contributions to other items. However, it’s never too late to map out a retirement plan—even if retirement is just a few years away. A financial professional can help you maximize your savings, create a strategy, and chose the most advantageous options for claiming your employee pension or Social Security when the time comes.
Pay Down Debt
Retirement budgeting will be much easier with less debt, and it’s wise to pay off as many loans and outstanding balances as possible while you’re employed. That can mean making extra mortgage payments, paying off credit cards quickly, and limiting new debt. One wise move is to pay cash for larger purchases to avoid additional credit card spending. The overall benefit? Less of your retirement income will go toward debt interest payments.
Choose your location
Your retirement budget will largely depend on where you choose to live. Downsizing to a smaller house in a more affordable area could drop your mortgage payment. On the flip side, you’ll also need to consider your budget if you move to a more expensive house or location to be near grandchildren, which can increase your retirement budget.
Factor in Medical Costs
While it’s impossible to predict the state of our personal health at retirement age, it’s wise to consider how to cover potential increased medical costs without decimating your retirement savings. One option is to maximize your contributions to your health savings account now—if you don’t spend the money, it will grow tax free and be available to spend in your retirement.
Another option is to buy long-term care insurance, which will pay for home health aides and, if needed, assisted living facilities, which aren’t covered by Medicare. The earlier you buy the insurance, the lower the premiums will be. If you wait to buy, you’ll risk rejection from insurers if you are in poor health.
Finally, you can protect your retirement savings by investing in additional health insurance. When you turn 65, Medicare will pay for most of your routine health bills, but you’ll need supplemental coverage to fund non-routine medical issues.
If you want to leave your estate to beloved family members or friends upon your death, a life insurance payout can be key to helping them pay for expenses that could decrease the impact of your estate.
Dispersing an estate can take time—sometimes months or longer, particularly for complicated estates. In the meantime, beneficiaries can be left with bills for everything from funeral costs to debt payments.
To leave those you love in the best financial position possible, it’s important to include a life insurance policy in your estate planning. Here are ways that life insurance policies can be utilized when planning your estate.
Paying funeral fees
Even the most basic of funerals can cost thousands of dollars. Low-end caskets generally start at about $2,000, on top of fees for embalming, funeral home staff services, and a grave marker. Meanwhile, cremation costs can start at $4,000. A life insurance policy can provide immediate cash to pay these costs so that your beneficiary doesn’t have to spend their savings or go into debt themselves to pay for these expenses.
Paying estate taxes
A life insurance policy can be an excellent planning tool for protecting the wealth you plan to pass on. If you anticipate your estate will be subject to federal estate taxes, which heirs must pay within nine months, your life insurance policy can pay them instead. If your estate is primarily real estate, this strategy will prevent heirs from having to sell property or liquidate assets to pay estate taxes.
It’s not uncommon for decedents to leave unpaid debt and monthly payments, including credit card bills and utility bills. A recent study by credit company Experian found that 73 percent of Americans who die leave debt behind.
While creditors likely won’t try to get payments out of surviving family members, they often will from the estate. The collections process can send an estate into probate, which can stretch out for years as creditors try to collect from it. Life insurance policies, however, aren’t subject to probate laws. That means beneficiaries can receive the entirety of the policy quickly.
Building financial wealth
A life insurance policy, especially one with a large payout, can change your beneficiaries’ lives and your or their family’s legacy. For example, life insurance payouts can be used to pay off a beneficiary’s mortgage or student debts. Without this costly debt, they can invest or save their money, building wealth for future generations.
Replacing family income
If you are the primary earner in your family, life insurance can replace vital income if your spouse does not work or is underemployed. A life insurance payout will provide survivors will financial stability while they reconfigure their lives in your absence. Financial experts recommend that a life insurance policy cover between seven and 10 years of your income.
Life insurance also can become very important for families with young children or children with special needs. In these cases, surviving parents or guardians may not be in a position to cover the children’s financial needs on their own. Life insurance benefits, however, can pay for everything from medical bills to education.
Protecting family real estate
Family-owned property can become an immediate financial issue for heirs, who must make decisions about who will own the property. In some situations, heirs may decide to sell the property and divide the proceeds, but preparing the property for the market and waiting for a sale can take time. In the meantime, the mortgage must be paid.
In these cases, a payout from a life insurance policy can help. Beneficiaries can use it to make mortgage payments or, if they decided to keep the property in the family, pay off the mortgage.
Giving to charity
Life insurance can be an excellent way to make a significant gift to a charity of your choosing. Any charity can be designated as the beneficiary of a life insurance policy.
As you integrate life insurance into your estate planning strategy, there are many factors to consider when deciding how much and what type to invest in. You’ll need to look at whether you are the primary income earner in your household and how many people depend on you financially. You’ll also need to factor in your debts and other financial obligations (including your mortgage), whether your estate will be subjected to federal estate taxes, and whether you’d like to leave any of your estate to charity. Life insurance will provide liquidity and readily available funds for your beneficiaries.
Estate planning professionals can help you determine how life insurance can benefit your estate, regardless of your age or income. It can be a key tool in providing peace of mind that your family will be financially protected and your estate preserved as you pass it on to your heirs.
Federal unemployment benefits prompted by pandemic job losses expired at the end of July, and a recent flurry of government activity resulted in an executive order issuing $400 a week to people who are unemployed.
The weekly benefit will help the more than 30 million Americans now claiming unemployment as well as the hundreds of thousands of new applicants each week. The details surrounding this round of benefits have not been finalized, however, and it remains unclear as to who will be eligible, exactly how much they will receive, and when the payments will begin.
Here’s what we do know.
$400 a Week Isn’t Guaranteed
While this payment program, called Lost Wages Assistance, will come on top of state unemployment benefits, it looks like not everyone eligible will receive the full $400 each week. The reason? One stipulation of this new benefit is that states must provide 25 percent, or $100 of each payment, unlike the recently expired program, which was fully federally funded.
Some states aren’t in a financial position to supplement federal unemployment and may take advantage of a loophole that will lower the payment. The federal government has noted that states can count existing benefits they pay an unemployed worker toward their share of the new supplement. That would reduce the federal payment to $300 per week.
One expert believes few states will provide the additional $100 on top of state unemployment benefits. Many states are facing budget shortfalls due to decreased tax revenue during coronavirus lockdown—the Center on Budget and Policy Priorities predicts state budget shortfalls could total $555 billion.
“They’re stretched,” Andrew Stettner, a senior fellow at the Century Foundation, recently told the New York Times. “They don’t have money for masks for the teachers in their schools. They’re probably not going to come up with an extra $100 for everyone on unemployment insurance.”
In late August, the states of Kentucky, West Virginia, and Montana announced that they would provide the $100 in matching funds so that unemployed workers will receive the full $400 weekly federal benefit. South Dakota has opted out of the program entirely, and other states have announced that they will not provide the extra money. In those states, eligible people who receive unemployment will get $300 each week.
Not Everyone Will Qualify
Unfortunately, new Labor Department guidelines for the Lost Wages Assistance program could exclude the people who need it most, including people who freelance or work part-time.
People who qualified for the Pandemic Emergency Unemployment Compensation or Pandemic Unemployment Assistance programs through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and can continue to provide self-certification that they lost their job because of COVID-19 should receive the new unemployment benefits. To ensure that they receive the new benefit, however, they should be careful to state on the application that they are unemployed or underemployed due to COVID-19.
Another loophole could be problematic as well. People who receive less than $100 a week in state unemployment benefits won’t be eligible for the federal weekly $300. Experts estimate this could exclude as many as 1 million workers, including low-wage earners and people who work part-time.
When will the benefits be paid?
Right now, there’s no clear guidance on when the first Lost Wages Assistance checks will be sent. Some estimate it could take months, as states that are already managing huge loads of unemployment filings will have to administer their portion of the program. Precedent may be helpful; some states took months to send out checks under the initial pandemic federal unemployment assistance program.
One Department of Labor official who works in Hawaii recently said in a media interview that the state’s computer system will have to be reprogrammed to meet federal requirements, a problem many states with older computer systems are facing. States with updated computer systems also may not be able to get payments out quickly, according to some estimates.
State offices are busy fielding questions about the new benefits—one New Mexico government official told a news outlet that his office received thousands of calls the first workday after the initial stimulus bill was signed into law in March.
While much about the Lost Wages Assistance program remains up in the air, there is some good news. The program is retroactive to August 1, so qualified recipients will receive a large first payment at some point.
The benefits are scheduled to continue through the week of December 6, which means recipients will receive financial help for another four months. This will provide some certainty for families and individuals as they make decisions about budgeting and spending this year. While the money does have an endpoint, federal elected leaders may implement another round of unemployment benefits at that time if Americans still need additional financial help due to the pandemic.
While the pandemic has created many economic hardships, one silver lining has been a significant increase in personal savings.
According to data from the US Department of Commerce, personal savings totaled almost $4.7 trillion in the second quarter of 2020, an increase of more than $3 trillion over the first quarter. That translates into a personal saving as a percentage of disposable personal income rate of 25.7 percent in the second quarter compared to a rate of 9.5 percent in the first quarter. When the personal savings rate reached 33 percent in April, it was the highest since the US government began tracking it in the 1960s.
The jump in savings can be attributed to several factors related to the pandemic. People have been hoarding cash as an uncertain future looms. As a result, consumers are buying less, traveling less, and going out less.
The country’s financial outlook remains grim, however, as the United States continue to report record job losses and unemployment rates. Personal finance experts recommend that Americans continue to save as a financial safeguard. Indeed, a recent survey from Bankrate showed that about 55 percent of Americans regret not having enough emergency savings.
What is an emergency fund?
Contrary to common belief, a one-year emergency fund isn’t the equivalent of one year’s worth of earnings—a daunting savings goal. Instead, you can calculate a more realistic emergency fund goal by looking at your minimum expenses.
If you are in a position where you need to draw on emergency savings, you likely will only be paying vital bills such as your mortgage or rent, food, and utilities. Likewise, to figure out your desired emergency savings, consider how much money you need to survive. Add up only your necessary bills for a year—the total should be significantly less than your annual income. An emergency fund based on this calculation should be a much more attainable goal.
Buckling Down on Savings
As you grow your emergency fund, consider two primary strategies. The first is to spend less, and the second is to earn more. You may want to jumpstart your savings fund by getting a second job. In today’s gig economy, for example, you could earn extra money as a delivery driver or pick up shifts at a local essential business such as a grocery store.
Here are some other strategies that may help you to save more.
Automate your savings.
Researching which high-yield savings plan is best can be a waste of time, as slight differences in interest rates won’t result in a significantly higher yield. Instead, financial experts recommend setting up automatic withdrawals from your paycheck into your emergency savings account. This strategy guarantees a monthly contribution and removes the temptation to spend the money instead of having to remember to manually deposit it into your savings account.
Automation places systems over human willpower, which can be faulty and forgetful. Automated monthly deposits create a steady flow of savings into your emergency account.
Watch the news.
The federal government continues to make decisions about how to help Americans weather the financial crisis that could impact your savings. While no legislation has been passed yet, government officials have suggested that a second $1,200 stimulus check may be sent to all eligible Americans. The amount each family unit will receive depends on factors such as income and number of dependents.
If you don’t need the entire stimulus check amount to pay urgent bills, consider investing the check in your emergency savings account. This strategy won’t provide the immediate gratification of a shopping spree, but if you find yourself in a dire financial situation, the savings will pay off.
If you haven’t paid your federal taxes, be sure to do that as soon as possible, since the IRS has stated that unfiled taxes could impact your stimulus check. When you do fill out your taxes, include your direct-deposit information—this ensures that the IRS can deliver the any stimulus checks straight to you.
Watch your spending.
Adapting your budget to a stay-at-home lifestyle could reveal several areas of significant savings. For example, working from home should significantly cut fuel or commuting costs. You may even be able to reduce your auto insurance coverage.
You probably won’t need as many new clothes or shoes. If you’re avoiding indoor gatherings, you’ll no longer spend money on movies, bars, concerts, theater, or other forms of out-of-the-house entertainment.
Taking a close look at your monthly subscriptions also could uncover savings. Look at every recurring bill and examine whether you really need it. Are some subscriptions redundant, such as the four streaming services you pay for? Paring down these monthly expenditures can reap significant savings.
Reducing your spending could open up hundreds of dollars in your monthly budget that can be reallocated for savings—and you may find the pandemic pushes you into a simpler, cheaper lifestyle you’ll continue even after the world reopens.
The coronavirus pandemic has wreaked havoc on many aspects of people’s financial lives. Despite this, many people report that they have not stopped contributing to their children’s 529 college savings plans.
In early May, Savingforcollege.com released survey results showing the pandemic’s economic impact on families saving for college. About two-thirds of respondents reported seeing a decrease in their 529 plan’s value since January. Approximately one fourth said that someone in their household had lost a job or was making less money. However, most also said they hadn’t changed their strategy for saving for college.
As the situation developed, though, and economic hardship continued, more families (although not a majority) did report an impact on their college savings. A CollegeBacker survey in May reached out to 1,200 American adults. About 16 percent said they had paused their college savings contributions. Additionally, 17 percent planned to withdraw money from their college savings accounts, and 13 percent had decreased the amount they were contributing.
The June 2020 State of Savings report from Ascensus, which analyzed 529 plans with fewer than 500 participants between early 2019 and May 31, found about a 21 percent decrease in the amount of one-time contributions between the end of March and the end of May. However, Ascensus’ analysis showed hardly any change in automated contributions during that time period.
“There are many families facing a tougher situation so you do see some occasional monthly reductions in their contribution rates, but overall it hasn’t been as dire as you might expect,” Jordan Lee, founder and CEO of CollegeBacker, said in a press statement. Here’s what you need to know about 529 plans during the pandemic:
This Is How 529 Plans Work
The value of a 529 plan is that it allows adults, primarily parents or grandparents, to save money for a designated beneficiary. The account will grow tax-deferred, and money can be withdrawn tax-free for qualified expenses related to education.
The money can be withdrawn for other expenses (financial planners recommend this option only be used as a last resort) if times are hard. However, the plan’s earnings would then be subject to a 10 percent penalty, and the account holder would also be charged federal income tax on the withdrawal.
Extensions Were Granted to Return Money Refunded as a Result of the Pandemic
Federal regulators offered one break, however, for 529 plans during the pandemic. In some cases, families paid for college expenses for spring 2020 out of their 529 plans and may have received a refund for tuition or room and board due to schools closing their physical campuses and going online for much of the semester.
In a typical year, account holders would be required to reinvest the refund into their 529 plan quickly or be penalized. This year, the Internal Revenue Service allowed families 60 days (the deadline was July 15) to return the money without a penalty.
529 Plans Are Good Investments
The pandemic has forced many families into tough situations, as working members of families have faced layoffs, furloughs, and other economic hardships. However, 529 plans remain an excellent investment, as rules for how the money can be used have been relaxed over the years. Qualified expenses can include everything from tuition for vocational and trade schools to paying off student loans to some costs associated with K-12 education.
Federal laws restricting gifts to $15,000 each year are less stringent for 529 accounts. This means that grandparents or other adults who want to invest in a child’s education can give as much as $75,000 in a single contribution. In addition, if the account’s recipient decides not to go to college, another family member can use the money.
Your Budget May Be More Flexible Than You Think
Experts advise families to keep making contributions to their 529 plans—and even increase them if possible—during the pandemic. Some financial planners point out that typical budget items, such as eating out and vacations, may not be spent and the money could instead be allocated to college savings.
Families also should regularly review their budget and financial planning outlook. The current economic situation is changing rapidly due to ongoing questions about employment and the market. However, college will still be an expense in most cases, and a 529 college savings plan remains an excellent way to save for college even if you find yourself in financial hardship.
Plans May Be Uncertain, but 529s Are Flexible
The pandemic has forced many to change their plans, and your student may even be considering putting college off or choosing a different route all together. Restrictions on indoor gatherings have required many American colleges to remain online, an educational format that is less appealing to many students.
The good news is that 529 plans are designed for flexibility. This means you can continue saving while your student’s educational future unfolds, and the plan likely will cover other educational expenses if your student decides to pursue a nontraditional educational opportunity. And if your student foregoes education entirely to work or travel, the 529 plan can be transferred to a qualified relative whose education can benefit from the savings.
Retirement planning advice—which is not in short supply—can linger long past its time. Advice that may have worked 20 years ago, for example, may not be as applicable today, when the economy is different and people are making different choices about their retirement. It may be time to reconsider the following common retirement advice.
You Must Pay Off Your Debts, Including Your Mortgage
In reality, this advice is unachievable for many Americans. Becoming debt-free for many may be impossible or so difficult that it pushes retirement back many years. Following this guideline, then, would mean trading enjoyment in your senior years for more years of work.
In some cases, it’s OK to carry debt into your retirement; the key is determining which debt is manageable. Paying off high-interest debt, such as credit card balances, is important—interest rates on credit card debt can be 15% or higher, which means your debt can quickly build. Growing debt and a fixed retirement income aren’t compatible, and in this case, it’s a good idea to pay off all high-interest debt before retirement.
Other debt, however, may be tolerable—and even beneficial—during retirement. If you can comfortably make the payments on low-interest debt with your retirement income, there’s no reason to postpone retirement. In other situations, your money may be better spent on investments rather than paying off low-interest debt. For example, if your mortgage interest rate is 4% and your investments are generating a 6.5% rate of return, it makes more sense to invest your money rather than use it to make additional mortgage payments.
The 4% Retirement Withdrawal Rule
This rule was developed in the 1990s. It essentially says that you’re ready to retire when your savings will last for 30 years if you plan to withdraw 4% of your retirement savings the first year and a similar amount, adjusted to inflation, over the remaining 29 years.
However, many financial planners say this formula doesn’t fit all retirement situations and doesn’t take into account a fluctuating market. Retirees also don’t spend consistently over the course of their retirement—they tend to spend more in the early years when they are traveling and marking off experiences on their “bucket list.” Spending may drop as retirees settle down or increase if health issues arise.
A better strategy is to consult with a financial planner about a safe withdrawal strategy based on your circumstances and plans for your senior years. For example, a plan could be built around your required minimum distributions, or you could calculate what you need to cover basic living expenses and then factor additional money into your budget for travel and other expenses.
You Need $1 Million in Savings
Saving $1 million has been the longtime gold standard for retirement, but more recent estimates from the Bureau of Labor Statistics have increased that estimate to $1.5 million per family. Reasons for the increase include a drop in pensions, which previously could be relied upon to supplement retirement savings; inflation; and longer lifespans. Many people are in retirement for three decades or more.
Retirees Spend Less
Retirement doesn’t necessarily cause your spending to decrease. Traditional guidelines state that retirees should plan to spend between 75% and 85% of their current budget, but that estimate doesn’t always hold true.
The best way to map out retirement spending is to make a retirement budget, estimating what you’ll spend each month when you stop working. You may delete some budget items, like commuting costs, but you may take on new expenses with more travel or new hobbies. Creating a retirement budget will help you avoid an unexpected surprise if your spending in retirement doesn’t drop.
Social Security Withdrawals Should Begin at a Certain Age
Conventional wisdom has advised everything from withdrawing benefits immediately when you become eligible at 62 to delaying until you reach 70. In reality, the ideal age to begin claiming Social Security benefits depends on your individual situation.
The best time for you to claim benefits will depend on your retirement budget. For example, if you begin withdrawing at age 62, your monthly benefits will be reduced because you haven’t reached your full retirement age, which will range between 66 and 67, depending on your birth year. If you wait until your full retirement age, your monthly check will include a bonus.
Retirees with comfortable savings may choose to withdraw early for extra spending cash, while people who know they will need help with income later in retirement may want to hold off so their monthly check is larger. Your health may also be an issue—people in good health who think they will live a long time may want to delay claiming benefits, while those who are in declining health may benefit more from larger checks now.
Regardless of your situation, it’s wise to consult with a financial planner about your retirement plan to make the most of the options available.
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.
While few like to entertain thoughts of death, making a will while you’re healthy is a smart financial move. People who die without a plan for their estate leave their assets and property subject to rules of state law, which could mean giving everything to a spouse or dividing it among a spouse, parents, children, and even distant relatives. In cases where the deceased had more than one marriage, laws applying to the division of assets can get messy and cause family tensions.
Estate planning is the only way to ensure that your wishes will be carried out. Estate planning will leave your family in a better financial position, and it also could eliminate any fees associated with state dispersal of your assets. If you have not made plans for your assets in the case of your death, consider taking this important step.
Estate Planning Trends
Caring.com, a website that connects service providers with clients, surveys American adults each year to determine the average level of engagement with estate planning. The 2020 survey found that the number of adults who have a will or other estate planning document has decreased by almost 25 percent since 2017. The survey also showed that in comparison to 2019, 20 percent fewer older adults and 25 percent fewer middle-aged adults have wills or an estate planning document.
The survey asked respondents why they did not have a will, and a majority said it was because they didn’t know how to get one or couldn’t afford it. Around 60 percent responded that estate planning was “very” or “somewhat” important, yet the number of people who hadn’t considered whether a will or living trust was important rose by 12 percent over 2019.
Some of the reasons why people don’t think about estate planning vary. Some don’t like to consider death or believe it only happens to older people. Others don’t believe they have enough assets to warrant making a will, while others think the process is too complicated.
Basic Estate Planning Documents
Here are the three primary types of estate planning documents you’ll want to consider.
While you’ve likely heard of a will, perhaps you aren’t exactly sure what it is. In its most basic form, a will is a legal estate planning document that articulates how your assets will be distributed. Wills typically also stipulate:
- An executor who will make sure the will’s instructions are carried out
- Which people or entities, also called beneficiaries, will inherit the assets and deal with debts
- Directions as to when and how the assets will be distributed to the beneficiaries
- Who will serve as guardians for any minor children
Generally, you work with an attorney to prepare your will.
A trust is somewhat more complex and costly than a will. People establish trusts primarily when they anticipate a dispute among their beneficiaries over their assets. Trusts typically benefit people who have large estates, own a lot of property, or expect to have a disability or become debilitated before they die. Unlike a will, a trust can take effect while someone is still alive—it is then called a living trust.
The main benefit of a trust is that it allows large estates to avoid the costly and long probate process while ensuring that all assets are properly distributed and all of the decedent’s wishes are carried out. Also, wills that go into probate become public record, but a living trust remains private upon death, allowing it to be managed out of the public eye.
Like a living trust, an advance directive takes effect while you are still alive. It outlines your wishes for your life if you become incapacitated mentally or can no longer communicate. This important document can determine, for example, if you wish to receive CPR in an emergency.
In an age when modern medical care can provide many measures to sustain life, without an advance directive, your family can be left to make difficult decisions about your care. Estate planners recommend that all estate planning documents include an advance healthcare directive so that your loved ones can make decisions in line with your wishes.
How Can I Get Started?
While it’s possible to plan your estate using online advice, software, and forms, professionals do not recommend this route. Estate planning is an important step, and financial and legal professionals provide sound guidance through the process. They will get to know you and your wishes for your estate and can offer advice based on years of knowledge and experience. Professionals will also take into account state laws and any personal, tax, or legal issues that could impact your estate. You can make the estate process more streamlined by getting your documents in order and thinking through your feelings about end-of-life decisions and how you’d like your assets to be divided.
When uncertain financial times loom, questions about your retirement are sure to come up. Have I saved enough? Do I need to keep working? How can I safeguard my savings?
As people who lost significant savings in the economic recession of 2008 can attest, it’s possible to survive a recession. That year, an economic crash erased about $2.4 trillion from Americans’ 401(k) and IRAs. This was an especially hard hit for people approaching retirement, who didn’t have much time to rebuild their savings or wait for the stock market to rebound.
Here are some questions to consider when thinking through how your retirement will weather a recession.
Should I Begin Taking Social Security Payments?
While Americans are eligible to begin drawing Social Security benefits at age 62, often it can be beneficial to wait. The earlier you begin collecting Social Security, the smaller the payments will be—although one benefit is that you will receive more payments overall.
For every year that you wait to collect, your Social Security benefits typically will increase about 8 percent. You could claim the benefits early and invest them, but that option requires the discipline to invest the checks and a market that’s going to generate at least an 8 percent annual return (unlikely during a recession). Financial planners find that many people end up spending at least some of those early benefit checks. A better choice could be to hold off on withdrawing Social Security as long as possible.
When Should I Retire?
A recession may cause you to rethink your retirement plans. If you can no longer afford to stop working completely, you may find that a part-time job will generate enough income to match or exceed your portfolio’s annual distribution. For example, if your part-time job pays $13 an hour for a 20-hour workweek, you’ll earn $13,520 annually—the equivalent of a 13.5 percent annual return on a $100,000 portfolio value.
In today’s job market, you may find several types of part-time jobs that match your interests or skills. You could pet sit, plan weddings, repair cars, or turn almost anything you enjoy doing into a small business. You’ll also find plenty of work-from-home jobs that could draw on your professional skills or areas of interest. Working a part-time job would allow you to postpone withdrawing Social Security benefits and buy your portfolio some time to recover.
Should I Keep Contributing to My Retirement Account?
If you are still working full-time and have an IRA or 401(k) when a recession hits, you may have to consider whether you want to continue contributing. If you feel secure in your job, this can be a great time to buy into the market at low prices, and the market most likely will rally back.
However, recessions can be scary and emotional times for investors. Instead of getting caught up in the market, you may want to continue investing on your regular schedule. If you already have automatic paycheck deductions into your 401(k), this will be easy.
If a recession leaves you cash poor, however, and you haven’t been able to save up an emergency fund, you may need to temporarily stop contributions to free up cash for monthly expenses.
Should I Invest?
The days following a financial crash can be an excellent time to invest if you are willing to take the risk. For example, people who bought into the S&P 500 the day after Black Monday in 1987 saw 50 percent increase in only two years. If you have cash or savings on hand, consider investing through an index fund. You could recoup your losses from a recession quickly.
Which Accounts Should I Withdraw From?
Sometimes, people must draw on their investment portfolios during a recession to meet monthly expenses. While the best plan is to not touch your retirement accounts prematurely, if you’re in this situation, consider the tax implications of withdrawing from different types of accounts before you decide where to withdraw.
If you are already collecting Social Security and withdraw from a 401(k) or traditional IRA, the combined income could move some of your Social Security into a category where they are taxable. In this case, a better choice would be withdrawing from a Roth IRA, where withdrawals are not taxed and will not impact your Social Security payments.
If you do not collect Social Security, you won’t be affected by these rules. However, if you do prematurely withdraw money from your 401(k) and don’t pay it back, the withdrawal will set off a 10 percent penalty if you are younger than 59 1/2. However, the IRA does have 18 exceptions to this rule, so it may be worth reading the fine print if you need to make this kind of withdrawal.
Of paramount importance during a recession is staying calm and making good decisions about your retirement, even as the financial markets are in turmoil. If you are in doubt, a financial planner can help you navigate your finances during difficult times, as the decisions you make could significantly impact your retirement long after the recession ends.
While wealth managers and private bankers may seem interchangeable, these two financial services professionals are different. As you look for assistance and advice in managing your money, here’s what you need to know when deciding which one will best fit your financial needs.
What are they exactly?
One difference between wealth managers and private bankers is the way they interact with their clients. While there are many overlapping areas in their two approaches to managing money, wealth managers are more holistic; they get to know their clients individually and help them assess, manage, and plan their financial futures.
Though private bankers also provide financial guidance, they primarily work with high-net-worth individuals (HNWI) and provide access to concierge banking services that go far beyond what a typical bank customer would receive. And, unlike wealth managers, private bankers do not invest their clients’ assets—although they may provide in-house investment opportunities from time to time.
What do they do?
Wealth managers provide a long list of financial services to help you create and execute long-term plans for your finances and optimize your portfolio. Along with offering advice and recommendations on financial decisions, they can also execute investments. They bring to the job significant experience from working with other clients to provide context and seasoned advice for your financial decisions. You’ll meet in person with your wealth manager to talk extensively about your financial plans and current situation as well as your comfort level with risk.
Along with connecting clients with financial and legal specialists, wealth managers can provide services such as:
- Estate planning
- Tax strategies
- Retirement planning
- Charitable giving planning
- Risk management
- Financial planning
- Trust services
- Investment advice
- Legal planning
As with almost all financial advisors, you’ll likely be charged a fee (typically a percentage of assets under management that averages about 1 percent annually) for a wealth manager’s services. However, some may bill an hourly or fixed annual fee.
Private bankers offer similar services, including cash-flow management, investment planning, estate planning, and risk management. Banks assign HNWIs a private banker, who looks over their finances and sets up banking services that cater to their needs. Clients also are given access to perks and financial services at their bank, such as higher interest rates, prime mortgage rates, no fees or overdraft charges, and preferential pricing. Private banking clients will never have to stand in line for a teller or wait to meet with a banking specialist. They also will have access to exclusive opportunities such as private equity partnerships and hedge funds. Clients typically do not pay fees for private banking services, as private bankers are paid by the institutions that employ them.
Who do they serve?
Private bankers work with HNWIs—a client group that each bank may define a little differently. In general, however, an HNWI has at least $1 million in investible assets, although some banks will allow clients with liquid financial assets in the six figures access to private banking services.
Wealth managers typically have served a similar clientele, but in recent years, their services have become available to clients who aren’t considered HNWI but still have a considerable amount of investable assets.
Wealth managers build their practices on the relationships they have with each client. That means that you’ll do much more than fill out a survey or answer cursory questions when you first meet with your wealth manager. They will want to talk with you at length about your values, goals, and life plans. They may ask about any anxieties you have about your financial future, such as paying for your children’s college tuition or saving enough to retire comfortably. As your wealth manager gets to know you and what you value, they will be better equipped to guide you in all aspects of your financial life and build long-term strategies to help you reach your financial goals. As your relationship with your wealth manager deepens, you’ll likely find that they become an indispensable part of your financial decision-making process.
Private bankers may play a similar role in your financial life depending on the level of involvement your bank offers. However, turnover can be high—when a private banker moves to another institution, you’ll have to decide whether to stay with your bank or move with your private banker.
How do I choose one?
Deciding whether to work with a private banker or a wealth manager depends on your needs. If you are looking for financial advice along with the perks that a financial institution will offer an HNWI, you’ll likely want to work with a private banker with the financial institution that holds your money. If you are more interested in wealth management, you should research firms to find a good fit. Be sure to examine the firm’s size, services, and costs as well as any potential wealth manager’s expertise and experience.
While a college degree symbolizes another educational milestone, it may not mean that recent graduates have learned enough to manage their finances well on their own. Colleges typically don’t require students to take a personal finance course, leaving new alumni on their own to figure out budgeting, investing, and how to pay off sometimes staggering student loans.
That’s where a financial planner can step in. Working with a finance professional can help college graduates establish good habits, whether it’s designing and sticking to a budget or investing early in retirement savings. Here are some benefits of working with a financial planner after your college graduation.
Get Off to a Good Start
Figuring out how to manage your finances through trial and error can take years, and errors can be costly. You could quickly find yourself deep in high-interest debt with no savings and high student loan payments without a financial plan in place.
A financial planner can help you make good decisions from the start, which will shield you from developing bad spending and saving habits. You may make big decisions in your 20s, such as buying a car and a house, getting married, and saving for retirement, that will impact you for decades—if not your lifetime. Discussing your long-term goals with your financial planner beforehand can lead to good decisions that will build a solid financial foundation.
Make a Budget
Typically, a financial planner will first help you create a monthly budget that fits your income. If you’re a typical college graduate, you’ll likely leave school with a low bank balance, a higher income than you had while in school, lots of bills, and little inclination to stick to a budget.
That’s where trouble can seep in. Without a budget, we tend to lose track of how much we’re spending, rack up debt, and neglect savings. In the long term, this is not a good strategy for preparing for big financial outlays—such as paying for a house, a postgraduate degree, or travel—down the road.
A financial planner will work with you to create a budget, line by line. You’ll estimate how much you’ll spend monthly on recurring bills, such as your smartphone and rent, and then you’ll see how much is left over for “extras” such as eating out and entertainment. While a budget can feel limiting, getting your spending under control early in your post-college adult life will help you live within your means and avoid extra debt.
Plan for Student Debt Payments
Student debt payments typically don’t kick in until six months after graduation, and if your budget isn’t ready for it, this new monthly bill can be shocking. If your student loans are large, you may find the payment won’t fit into your new monthly budget.
This is where a financial planner can assist. Student loan repayment options can be complex, and you may be eligible to refinance your loans for a lower payment or to apply for a special payment plan or federal loan forgiveness program. Together, you can determine the best strategy for managing your student loans.
Building Your Savings
While retirement may seem a long way away, the earlier you start saving, the bigger payoff you’ll receive later, thanks to compound interest. A financial planner can talk to you about retirement savings options, such as a 401(k) plan or Roth IRA account. With a financial planner’s guidance and understanding of the level of risk you are comfortable with, you can make good investment choices that will build your savings over decades and set you up for a comfortable retirement.
If you have money left over in your monthly budget, a financial planner can help you invest it to build your savings so that you’ll have a financial cushion and a start on funds for big-ticket items such as a house. A financial planner also will work with you to draw up a long-term plan, factoring in your dreams and goals. With a financial strategy in place that includes a budget, savings plan, and retirement plan, your goals will seem more attainable, and you’ll have the tools you need to make good financial decisions.
Managing your own money right after college can be difficult, as you are suddenly juggling a (likely) higher income than you had from a college job, a myriad of financial choices, and the temptation to spend your newfound earnings at will. Enlisting the help of a financial planner will allow you to understand your financial limitations, pay down your debt, and avoid accumulating new debt through irresponsible spending. If you stick to a budget and make informed financial decisions starting in your 20s, you can enjoy decades of financial stability before you reach retirement.