Think back to January 1, 2020. The economy was booming and markets were approaching record highs. Then, the Coronavirus pandemic happened. Many lost their jobs, benefits – or worse. Even if you and your partner have maintained employment and stuck to your investment plans, there are still lessons to be taken from recent events. Here are 6 financial moves you can make to help prepare for the post COVID-19 world.
1. Re-Build Your Emergency Fund
We all need emergency savings. Depending on your risk tolerance, job security, and streams of income, that can range from 3-to-12 months of expenses. But even those who came into the pandemic prepared quickly realized they hadn’t squirreled enough away in readily accessible, liquid assets. According to Time, over half of Americans were very or somewhat anxious about their financial situation at the height of the pandemic, with many citing available funds and credit lines as a worry:
Of particular note: many consumers eschewed liquid savings in recent years, preferring to rely on lines of credit (primarily, credit cards) should an emergency strike. But as events have unfolded, many banks have reduced lines of credit and even closed accounts to limit their exposure to default. That’s why it’s important to rebuild – or even increase – your emergency fund in 2021.
2. Refresh Your Insurance Policies
If you haven’t updated your insurance policies and beneficiaries since Reagan, now’s the time. At Magellan Financial, we consider solid estate planning strategies as essential to financial success. You need to ensure that you and your loved ones are prepared for the worst. Out-of-date beneficiary information is a common (and costly) mistake.
Besides updating your will, checking insurance coverages and updating beneficiaries, consider making it through the COVID-19 pandemic as a reminder to include medical directives into your estate plan. If you own a small business, now is also the time to review your business interruption insurance and any liability insurances such as worker’s compensation coverage.
3. Get Your 401k Back On Track
Many investors found out this Spring (the hard way) that they weren’t as risk averse as they had thought. Some panicked and sold stock holdings only to see the market bounce back sharply. Others faced financial hardships and saw reduced retirement contributions – either directly or via their employer reductions. In fact, nearly a quarter of employers have already cut or plan to cut contributions. Luckily, unless you’re on the cusp of retirement you have plenty of time to recover. It’s a lesson learned but now it’s time to get your retirement plan back on track.
Start by increasing your contribution – many don’t realize that after age 50, you can contribute an additional $1000 to an IRA and $6,500 to a 401k plan. From there, check your allocation mix. Did you panic and sell shares at a low? We are strong proponents of a portfolio with a sizable stock allocation, especially considering historic low fixed-income returns in the current environment. But we know that every investor is different, so we can devise an asset allocation for you that matches your risk tolerance but still provides sufficient long-term returns. We can also provide guidance if you or a family member has lost a job or suffered other financial setbacks due to the pandemic.
4. Diversity Your Income Streams
If you lost hours, clients, and income due to lockdowns or changed consumer habits, you probably realized just how vulnerable your income was to disruption. Even people in otherwise stable and secure industries saw unprecedented lockdowns and resulting lost revenues. Now is the time to protect your financial future by diversifying your income streams.
We know what you’re thinking – how, and with what time? Trust us, we know. We work with lots of high earners who have demanding jobs and young families who are already pulled in different directions. If time is the biggest constraint, consider sitting down with an investment planner to see how passive investments such as fixed income, dividend stocks, or even an annuity can be incorporated into your plan. Depending on your age, there may even be tax-savvy ways to take 401k, IRA, or Social Security benefits prior to the full, traditional retirement age.
Looking for a more active approach? One of our favorite niche blogs is by a physician who details a variety of ways that doctors can earn extra income – yes, even doctors have side hustles in 2020. The takeaway from his approach is that there’s always some way to monetize your expertise. It might be teaching a class at a community college or consulting via Zoom. Taking the time to think about how you can diversify your own income streams will reduce your worry AND may allow you to be more aggressive with your investment portfolio.
5. Pay Down Debts
Keeping a low debt-to-income level is recommended regardless of your salary. When you have to tighten your belt or feel the stress that accompanies financial uncertainty, that’s when personal debt really comes into focus. Many financial experts recommend the 28/36 rule, with no more than 28% of income going toward mortgage payments and 36% to other debt (college loans, credit cards, cars, etc.). Now’s the time to reassess your debt levels to protect yourself against further lockdowns and disruptions.
While each person is different, think about how you fit within those guidelines. If you felt especially pressed during the height of the pandemic, perhaps it was because you didn’t have as much saving & discretionary spending ability as you wanted? Reducing that 36% figure can help with that. With many businesses moving at least in the medium term to a remote/hybrid work environment, is there a way to reduce your number of household cars? Or, apply any future stimulus check, tax refund, or bonus to reducing other outstanding loans, starting with the one with the highest interest.
We Help High Earners Make The Right Financial Moves
Earning a high income gives you an advantage when you want to prepare yourself for the post COVID-19 world; however, you should not waste that advantage by neglecting your budget, failing to increase your emergency fund, or ignoring the necessity of developing a rock-solid estate plan. In addition, you can protect your assets and income to make sure you keep your nest egg secure and your income streams diversified. That way, you can enjoy faster growth through the power of compounded earnings.
The more you save and invest, the faster you can get that money to begin earning for you. Contact us here at Magellan Financial to tell us about your financial goals, and we’ll demonstrate how we have helped plenty of clients in similar situations.
The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
When considering rolling over your QRP assets, key factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10% additional tax for early distributions , treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.