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You are no doubt reeling from the recent events attributed to COVID-19. Stress and fear weigh on all of us and the uncertainty is unnerving. The Coronavirus has caused significant disruption in nearly every facet of our lives. Between working from home, balancing work with homeschooling, cancelled sports, travel, and school, closed stores, and the constant feeling of vulnerability, our lives have changed.
This disruption is cause for action to make sure your clients maintain financial stability. At my firm, WealthChoice, we are working on five key action items with clients to address some of the financial uncertainty many are experiencing, and we are sharing them so that you can take these steps, too.
1. Check in on financial plans to see if they are still on track, or if you need to make some changes
Each client we work with has different life and financial goals, some of which may be happening in the not-too-distant future. Take stock of where you are given the market decline, to see if you are still on track, and if not, to determine the impact of recent events and steps you can take. You will want to re-run your plan so you know what you are dealing with and can determine any options if there are gaps that need to be addressed.
2. Revisit budgets to find places to cut
If your plan is not on track, revisit where money is being spent to see where there are options to cut. Spend a few minutes penciling out expenses so you know what clients must pay for versus what they’d like to spend money on. The must-haves are fixed expenses, and everything else is discretionary your clients truly don’t need. Discretionary spending has been cut back with the elimination of big expenses like travel, but online shopping and take-out can be a financial drain.
The CARES Act allows for the deferral of federal student loan payments through 9/30/20, as well as mortgage forbearance. Many credit card companies are also offering relief. Speak to lenders for deferral on payments, but these actions can free up much-needed cash.
This may also be the time to cut back on retirement contributions temporarily, if it makes the difference between covering living expenses.
3. Find capital to replace lost income
If your clients’ income is impacted as a result of events, once they’ve revisited their budget and know how much they need to cover costs, they will want to look to replace the lost income. I suggest using that emergency fund that they have saved for over time. Ideally they will have the equivalent of three to six months fixed expenses in a savings account for just this purpose. If that isn’t the case, or if they have depleted their savings, look to what is most people’s biggest asset for cash – their house. Rates have been bouncing around quite a bit, but if they drop again, consider refinancing.
Another option to tap into a house is a home equity loan (HELOC). While clients may not need to draw on it, having access to a HELOC could help bridge the temporary income gap.
If needed, consider withdrawing money from a taxable brokerage account but know that they will have to pay capital gains taxes on any gains from the account.
Lastly, The CARES Act provides for exceptions to rules for taking withdrawals and loans from retirement accounts before the age of 59 ½. The Act allows for a maximum of $100,000 loan from employer retirement plans, as well as a withdrawal of up to 100% of a vested balance. Payments to the loan will be delayed one year. You are still required to pay taxes on any withdrawals, but no penalties are charged. Clients can also take a withdrawal of up to $100,000 from an IRA, employer plan, or combination of both. This withdrawal must take place in 2020, and taxes are paid over a three-year period.
4. Apply for an Economic Injury Disaster Loan (EIDL) or the Payroll Protection Program (PPP)
These are two separate programs created by CARES Act that apply to small businesses affected by the COVID-19 pandemic. Both are available to businesses with 500 or fewer employees, though the PPP is forgivable. EIDL is a low interest rate loan specific to payroll and other business expenses with up to a 30-year repayment period. PPP is financial relief that is forgivable if it is used on qualified expenses within eight weeks of receipt.
Speak with a bookkeeper or CPA for guidance here. Both applications are now live and you can learn more by going to sba.gov.
5. Rebalance your portfolio
With the big decline in the market, investment accounts may no longer be in line with your clients’ appetite for risk. Typically, when stocks decline, bonds increase in value. With the market pull back, accounts may have less stock value relative to bonds than your clients would ideally like. This is a good time to review what allocations and rebalance back to the ideal risk tolerance.
Many 401(k) plans allow you to choose the frequency of rebalancing. Now is the time to choose to rebalance given the big swings in investments to get portfolios back on target.
Resist the temptation to move accounts to cash. We have been here in the market before and we have always recovered. Locking in losses does not get you closer to financial goals. Avoid the media and stay with your strategy. Get your portfolio back on track with rebalancing, and let it not only recover, but grow over time.
These are challenging times and there is a lot on everyone’s mind. Have your clients take a few minutes to get their arms around their current financial situation, and by acting, weather this storm and be okay now and in the future.
Bridget Venus Grimes is president of the financial life planning firm WealthChoice, and is passionate about helping women attorneys make smart financial choices and live the life they want.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
