Three Actionable Financial Steps During COVID-19


Three Actionable Financial Steps During COVID-19

We are beginning to see various areas of the U.S. open their local economies amid pressure from small business owners. I don’t blame the owners as their livelihood is likely under significant stress. You can’t pay your mortgage or feed your family if your business is cash flow negative. Between catching COVID-19 and feeding your family, the latter seems to be more critical in many minds. Especially when many news outlets are reporting that COVID-19 is not as deadly as we initially thought.

Early antibody testing suggests COVID-19 infections in L.A. County greatly exceed documented cases

Antibody study suggests Covid-19 could be far more prevalent in the Bay Area than official numbers suggest

However, I am not here to debate whether or not their actions are justified. However, it important to note that there are serious concerns with the previously mentioned antibody survey results as they are likely flawed and unreliable. So, who do what are we to believe?

I have a client that works for a biotech company that specializes in these types of tests. She said that the majority of the COVID-19 antibody test kits that are currently being used are unreliable. Nevertheless, that still does not mean that the virus isn’t more prevalent than we realize nor that the death rate is far lower. 

My point is that none of us truly knows what is going on. We do not have enough reliable information to know how prevalent COVID-19 has spread throughout our communities and what it’s actual death rate is.

The reality of the situation is that our lives will not return to ‘normal’ until people feel safe again. Government-imposed lockdowns, partial reopenings, etc. will continue to be a drag on our economy until we find a vaccine, a powerful therapeutic drug, or if we achieve lasting herd immunity. Anything short of this is only a reprieve.

Yet, neither should we be immobilized by the instability of our situation. We must all do what we can to persevere in this environment. Whether you are a small business owner, an executive, or any other professional, you have the right to do what is necessary for you and your family to survive. Just be safe and please do so with grace. 

While we cannot control when our local government reopens our economy, there are some steps we can take to help mitigate the situation. 

Three Actionable Steps to Consider Now

Stock market volatility is giving many investors reason to feel anxious about their financial health. The $2 trillion relief package called the CARES Act (Coronavirus, Aid, Relief, and Economic Security Act) is helping stocks recuperate from the March lows. It’s been an impressive rally thus far, yet the economic contraction continues to hobble the people’s livelihoods and personal budgets.

Throughout this fluid time in the market, I’ve spoken with many of you about your assets and financial plan, conversations that helped me pinpoint some actionable ideas to share. One involves a retirement savings opportunity driven by the new legislation, while the other two emphasize checkups to fine-tune your financial plan.  

They all, however, focus on factors we can directly work on now, which feels better than getting swept up in the emotional aspects affecting money and wealth. Remember, when you have a thorough financial plan in place, it’s easier to withstand and adjust to market turbulence, so long-term goals remain intact.

1. Roth IRA Conversion

Roth IRA ConversionA Roth IRA conversion enables you to transfer retirement funds from a Traditional Individual Retirement Account (IRA) or 401(k) into a Roth IRA account. This is typically a desirable move for investors early in retirement when their income is low, and the taxes from a conversion would be small, too. Current law requires IRA account holders to take out a percentage of their account balances each year once they reach 72 (previously 70½).

However, the CARES ACT suspends RMD rules for 2020. That means no distributions are required from IRAs or any defined contribution plans. It also opens the door to a new opportunity for people of RMD age because they don’t need to take out their RMD before a Roth IRA conversion.

The idea is that when you drop into a lower tax bracket because of decreased income, you’ll pay less income tax on the amount converted. For example, a married couple in the 24 percent federal tax bracket had anticipated earning a combined $200,000 this year. Then, one of them loses a part-time job paying $40,000 annually. That event effectively shifts them into the 22 percent bracket. So the couple could convert a portion of assets to a Roth IRA at the lower rate.

This is just one example. The decision to convert assets requires an analysis that assesses personal circumstances, IRA income amount, tax strategy, and other factors. The Bull Oak Capital team has created a calculator to sort through these considerations if you’re curious to learn more about your options.  

The calculator takes into account:

  • Estimated 2020 household gross income (base pay, bonuses, restricted stock units, etc.)
  • How do you intend to file taxes for 2020 (married filed jointly, single, etc.)
  • Estimated 2020 qualified contributions (traditional IRA, 401(k), etc.); and
  • Any other taxable income

The silver lining here is that we will be able to convert pre-tax funds at lower prices during a crash. We are actively working with our clients to determine whether the cost (taxes paid on such a conversion) is worthwhile over the longterm. Yes, the stock market has made an impressive comeback as of late, but I would not be shocked if this rally is short-lived. Again, these shutdowns will continue to be a drag on the economy and it will continue to impact corporate profits. The opportunity to take advantage of a Roth Conversion has likely not yet passed.

2. Budget Review

A budget is a critical part of any sound financial plan that juggles the need to save and squash debt. But experiencing job loss, logging reduced hours, or even working remotely from home can introduce monthly income changes that affect this balance. For example, a layoff will likely prompt the need for more liquid funds, while working from home can cut out public transit, gas, and other commuting-related expenses that slightly shift cash flow.

Indeed, the downturn has introduced new issues. In an earlier blog, I wrote about budgeting strategies, including one built on automation, another in which you manually track expenses via a spreadsheet, and a third that relies on apps and other methods to check expenditures. Ultimately, the approach you choose depends on your personality, so it’s crucial to find a plan that feels comfortable.

Budget-creation itself can be eye-opening by identifying habits and whether they support or detract from your financial priorities. Most financial advisors recommend having enough savings to cover six months of living expenses. But certainly, this target may be adjusted if you’re nearing retirement.

Is your budget on track? If the answer is NO, it’s important to review your spending habits. Pay attention to each line item and consider trimming variable expenses like streaming subscriptions or take-out food orders. It’s a good idea to remove yourself from retailer emails advertising new products or sales to avoid shopping temptations. If possible, pay monthly credit card balances in full.

Another approach is to check in with your car insurance provider. Some are offering modest discounts this spring since fewer miles are being driven due to shelter-in-place orders.

3. Risk Tolerance and Rebalancing 

Typical portfolio returns
Chart source: Fidelity Data source: Ibbotson Associates, 2018 (1926-2018)

A stock market downturn is unsettling, to say the least, especially if you feel like it’s testing your confidence in your investment strategy and capacity for risk in your portfolio. So during times of financial concern, it’s wise to review and rebalance when necessary.

Rebalancing makes sure your portfolio is in alignment with your target asset allocation, which is rooted in your financial plan, goals, and risk tolerance. The reality is that downturns tend to expose the actual amount of volatility with which you’re comfortable.

To deal with that, Bull Oak Capital has a risk tolerance questionnaire to help gauge where you stand. It’s an exercise that might be good to revisit if you’re feeling rattled by recent losses. Have your attitudes toward risk remained the same or changed?

The answer will guide how you split your funds among stocks and bonds, as well as determine your portfolio’s short- and long-term return potential.

Even during the current volatile period, a traditional 60/40 mix of equities and bonds, respectively, has offered a straightforward approach to lower risk. Remember, a high-quality bond portfolio should be the safer part of your portfolio and one that acts as a counterweight to your stock portfolio.

However, even this approach may not be right for everyone. As always, it’s important to speak with a financial advisor who can help assess your situation and goals to determine the best asset allocation.

Bull Oak Capital offers five investment strategies that range from conservative to aggressive and are based on your financial plan needs. Please reach out to my team and me should you have any questions.

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