As bad as the economy is right now due to the COVID outbreak in the United States, many economists are predicting that the long-term outlook is much bleaker. Alas, Congress and the Federal Reserve’s efforts at stimulus and interest rate management have done much to keep the economy and stock market afloat. However, small businesses – the backbone of America’s employment growth – are closing every day. As consumer spending reduces further, the impact will likely affect Wall Street. Consequently, share prices may soon begin correcting to reflect the future more so than the present.
It should come as no surprise, then, that 88 percent of respondents admit they are worried about their finances, according to a recent survey conducted by the National Endowment for Financial Education.
This economic decline has presented an interesting mix of demographics who have or will be affected the most over the long term. For instance, many low-income workers have remained employed throughout the pandemic because their jobs are considered “essential services.” This includes check-out clerks at grocery stores; laborers who work outdoor jobs; nurses, orderlies, and nursing home attendants.
By contrast, many white-collar business owners – such as physicians and dentists– closed shop for a few months and/or have reduced the number of patients they see. Alas, 79 percent of those surveyed with a household income of more than $100,000 a year said they were at least somewhat concerned about their financial situation.
Millennials are the generation most likely to change the way they manage their finances in the future. Although many have remained employed in white-collar jobs – primarily due to their technology-enhanced skills and knowledge – they have reason to be concerned. After all, this generation has already lived through the market downturn following 9/11, the Great Recession, and now a historic economic decline caused by the coronavirus. In fact, once they finally got a foothold in their careers, this recent downturn obliterated the last five years’ worth of economic growth. Going forward, finance experts predict that these young adults will be more focused on stock-piling savings, buying modest homes when the real estate market corrects, and generally working on a long-term plan for financial stability.
While those strategies are mostly good, it’s a shame this generation had to learn the hard way – all while encumbered with historically unprecedented student loan debt. However, as these lessons are passed down through generations – much the way the Great Depression had a lasting impact on the Silent Generation – U.S. populations may see higher savings rates at the expense of lower GDP growth.
For households recovering from financial stress or looking to create a plan for stronger financial resiliency no matter what the future holds, consider the following strategies.
First priority: Save from three to six months’ worth of liquid, emergency funds should you encounter a large expense, such as an auto repair or a temporary loss of income.
Learn how to budget effectively, which includes examining if you overpay for basic household needs or do not know how much of your income is spent superfluously every month.
Take stock of the full scope of your financial resources, including:
Savings accounts
Investment accounts
Retirement accounts
Health savings accounts
College savings accounts
Whole life insurance
Real property
Structured settlements
Vehicles (auto, boat, motorcycle, recreational)
Art, jewelry, wine, or other high-value collectibles
Expensive furnishings and household items
Develop a Plan B to help supplement any income loss right now; a Plan C to help bolster your savings rate once you’re back to full income; and a Plan D strategy for income replacement in case you’re ever in a situation like this again.
Financial setbacks will come and go; it’s the lessons we learn from them that should have the most staying power.
Long-Term Financial Impact of COVID-19
October 1, 2020 · Blog, Financial Planning
⏱ 4 min read
As bad as the economy is right now due to the COVID outbreak in the United States, many economists are predicting that the long-term outlook is much bleaker. Alas, Congress and the Federal Reserve’s efforts at stimulus and interest rate management have done much to keep the economy and stock market afloat. However, small businesses – the backbone of America’s employment growth – are closing every day. As consumer spending reduces further, the impact will likely affect Wall Street. Consequently, share prices may soon begin correcting to reflect the future more so than the present.
It should come as no surprise, then, that 88 percent of respondents admit they are worried about their finances, according to a recent survey conducted by the National Endowment for Financial Education.
This economic decline has presented an interesting mix of demographics who have or will be affected the most over the long term. For instance, many low-income workers have remained employed throughout the pandemic because their jobs are considered “essential services.” This includes check-out clerks at grocery stores; laborers who work outdoor jobs; nurses, orderlies, and nursing home attendants.
By contrast, many white-collar business owners – such as physicians and dentists– closed shop for a few months and/or have reduced the number of patients they see. Alas, 79 percent of those surveyed with a household income of more than $100,000 a year said they were at least somewhat concerned about their financial situation.
Millennials are the generation most likely to change the way they manage their finances in the future. Although many have remained employed in white-collar jobs – primarily due to their technology-enhanced skills and knowledge – they have reason to be concerned. After all, this generation has already lived through the market downturn following 9/11, the Great Recession, and now a historic economic decline caused by the coronavirus. In fact, once they finally got a foothold in their careers, this recent downturn obliterated the last five years’ worth of economic growth. Going forward, finance experts predict that these young adults will be more focused on stock-piling savings, buying modest homes when the real estate market corrects, and generally working on a long-term plan for financial stability.
While those strategies are mostly good, it’s a shame this generation had to learn the hard way – all while encumbered with historically unprecedented student loan debt. However, as these lessons are passed down through generations – much the way the Great Depression had a lasting impact on the Silent Generation – U.S. populations may see higher savings rates at the expense of lower GDP growth.
For households recovering from financial stress or looking to create a plan for stronger financial resiliency no matter what the future holds, consider the following strategies.
First priority: Save from three to six months’ worth of liquid, emergency funds should you encounter a large expense, such as an auto repair or a temporary loss of income.
Learn how to budget effectively, which includes examining if you overpay for basic household needs or do not know how much of your income is spent superfluously every month.
Take stock of the full scope of your financial resources, including:
Savings accounts
Investment accounts
Retirement accounts
Health savings accounts
College savings accounts
Whole life insurance
Real property
Structured settlements
Vehicles (auto, boat, motorcycle, recreational)
Art, jewelry, wine, or other high-value collectibles
Expensive furnishings and household items
Develop a Plan B to help supplement any income loss right now; a Plan C to help bolster your savings rate once you’re back to full income; and a Plan D strategy for income replacement in case you’re ever in a situation like this again.
Financial setbacks will come and go; it’s the lessons we learn from them that should have the most staying power.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
The stock market continues to perform with relative resilience, despite the current economic decline. But to be clear, without 100 percent participation in the economy – in terms of small business job creation, consumer spending, and company growth and expansion – the stock market is apt to reposition prices to reflect slower growth. With no containment or control of the pandemic on the horizon, there is plenty of uncertainty associated with future financial planning.
Anyone looking to retire in the next 10 years or so may want to take a fresh look at their current retirement income plan. In fact, they might need a Plan A, B, and C in order to stay flexible – with C being the option to continue working longer. The following are portfolio tips to consider for a 10-year time frame until retirement.
Emergency Fund
If there was one financial tip worth following pre-pandemic, it was to have liquid cash savings of six months to a year’s worth of expenses available. Workers who did are probably pretty relieved about now if they lost their job or had hours reduced. Having substantial cash available can save you from raiding retirement accounts and/or your investment portfolio.
In preparation for retirement, that cash buffer is even more important. Some advisors recommend a liquid savings fund to cover one to three years’ worth of expenses. That’s because once you’re on a fixed income, you’re not likely to replenish that account. What it can do is supplement variable retirement income that is reliant on the markets. Having a cash buffer gives investments time to recover from temporary losses so you don’t have to plunder your principal.
Status of Social Security
While you may know what your benefit level is for retirement at a certain date, be aware that your benefit could change – even after you’ve retired. Recent research has found that thanks to the loss of FICA revenues resulting from COVID-19, the Social Security Trust Fund might run out of money four years earlier than predicted: as early as 2032. You may want to consider other forms of reliable income in case your benefits are reduced in the future.
Guaranteed Income
Speaking of reliable income, Olivia Mitchell, executive director of the Wharton School’s Pension Research Council, recommends that an annuity option become a staple in employer-sponsored retirement plans. Annuities generally offer an option for issuer-guaranteed income for life. With 10 years until retirement, allocating money to an annuity can help build a separate income stream to supplement Social Security benefits. Even if your employer doesn’t offer an annuity option in your 401(k) plan, you can purchase one separately using other assets.
Employer-Sponsored Retirement Plans
Speaking of the 401(k), consider that when this plan was first established in 1980, the marginal federal income tax rate was 43 percent. Today’s tax rates are historically quite low, so for the time being you might want to consider allocating more savings into a Roth IRA. This means you’ll pay taxes on that money at today’s low rates, but going forward it can grow tax-deferred and be withdrawn tax-free. But don’t leave money on the table if your employer offers a matching 401(k) contribution. Roth IRA contributions are limited to $7,000 (2020) and some deferred income can help reduce your taxes today – so plan accordingly.
Roth Conversion
By the same token, you may want to take advantage of today’s lower tax rates by converting at least some traditional IRA funds to a Roth or by making backdoor Roth IRA contributions. Be aware, however, that you must pay taxes on converted funds, so consider a gradual transition over multiple years to help you stay in a lower tax bracket.
Investor Portfolio
Some market analysts are predicting a “new normal” going forward, which could provide some interesting investment opportunities. Ideas include new operating business models based on a largely remote workforce, population spread as people move out of cities into more affordable rural areas, and innovations borne out of newly created demand. While a buy-and-hold strategy is a common advice for equities, it’s important to stay flexible. As long as you remain within your customized asset allocation strategy, you might want to use your equity portion to explore new ideas that could offer higher return opportunities over the next decade.
Tips for Retiring in the Next 10 Years
September 1, 2020 · Blog, Financial Planning
⏱ 4 min read
The stock market continues to perform with relative resilience, despite the current economic decline. But to be clear, without 100 percent participation in the economy – in terms of small business job creation, consumer spending, and company growth and expansion – the stock market is apt to reposition prices to reflect slower growth. With no containment or control of the pandemic on the horizon, there is plenty of uncertainty associated with future financial planning.
Anyone looking to retire in the next 10 years or so may want to take a fresh look at their current retirement income plan. In fact, they might need a Plan A, B, and C in order to stay flexible – with C being the option to continue working longer. The following are portfolio tips to consider for a 10-year time frame until retirement.
Emergency Fund
If there was one financial tip worth following pre-pandemic, it was to have liquid cash savings of six months to a year’s worth of expenses available. Workers who did are probably pretty relieved about now if they lost their job or had hours reduced. Having substantial cash available can save you from raiding retirement accounts and/or your investment portfolio.
In preparation for retirement, that cash buffer is even more important. Some advisors recommend a liquid savings fund to cover one to three years’ worth of expenses. That’s because once you’re on a fixed income, you’re not likely to replenish that account. What it can do is supplement variable retirement income that is reliant on the markets. Having a cash buffer gives investments time to recover from temporary losses so you don’t have to plunder your principal.
Status of Social Security
While you may know what your benefit level is for retirement at a certain date, be aware that your benefit could change – even after you’ve retired. Recent research has found that thanks to the loss of FICA revenues resulting from COVID-19, the Social Security Trust Fund might run out of money four years earlier than predicted: as early as 2032. You may want to consider other forms of reliable income in case your benefits are reduced in the future.
Guaranteed Income
Speaking of reliable income, Olivia Mitchell, executive director of the Wharton School’s Pension Research Council, recommends that an annuity option become a staple in employer-sponsored retirement plans. Annuities generally offer an option for issuer-guaranteed income for life. With 10 years until retirement, allocating money to an annuity can help build a separate income stream to supplement Social Security benefits. Even if your employer doesn’t offer an annuity option in your 401(k) plan, you can purchase one separately using other assets.
Employer-Sponsored Retirement Plans
Speaking of the 401(k), consider that when this plan was first established in 1980, the marginal federal income tax rate was 43 percent. Today’s tax rates are historically quite low, so for the time being you might want to consider allocating more savings into a Roth IRA. This means you’ll pay taxes on that money at today’s low rates, but going forward it can grow tax-deferred and be withdrawn tax-free. But don’t leave money on the table if your employer offers a matching 401(k) contribution. Roth IRA contributions are limited to $7,000 (2020) and some deferred income can help reduce your taxes today – so plan accordingly.
Roth Conversion
By the same token, you may want to take advantage of today’s lower tax rates by converting at least some traditional IRA funds to a Roth or by making backdoor Roth IRA contributions. Be aware, however, that you must pay taxes on converted funds, so consider a gradual transition over multiple years to help you stay in a lower tax bracket.
Investor Portfolio
Some market analysts are predicting a “new normal” going forward, which could provide some interesting investment opportunities. Ideas include new operating business models based on a largely remote workforce, population spread as people move out of cities into more affordable rural areas, and innovations borne out of newly created demand. While a buy-and-hold strategy is a common advice for equities, it’s important to stay flexible. As long as you remain within your customized asset allocation strategy, you might want to use your equity portion to explore new ideas that could offer higher return opportunities over the next decade.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
As bad as the economy is right now due to the COVID outbreak in the United States, many economists are predicting that the long-term outlook is much bleaker. Alas, Congress and the Federal Reserve’s efforts at stimulus and interest rate management have done much to keep the economy and stock market afloat. However, small businesses – the backbone of America’s employment growth – are closing every day. As consumer spending reduces further, the impact will likely affect Wall Street. Consequently, share prices may soon begin correcting to reflect the future more so than the present.
The stock market continues to perform with relative resilience, despite the current economic decline. But to be clear, without 100 percent participation in the economy – in terms of small business job creation, consumer spending, and company growth and expansion – the stock market is apt to reposition prices to reflect slower growth. With no containment or control of the pandemic on the horizon, there is plenty of uncertainty associated with future financial planning.