Over the past 4 months, the COVID-19 pandemic has significantly impacted the finances of most Americans— in widely varying ways. Many have faced unemployment or furloughs, though Pandemic Unemployment Assistance (PUA) may have softened (or even offset) the blow to their incomes. Others have faced temporary pay cuts. Those whose income has remained steady often have enjoyed positive cash flow in the past few months since their expenses have decreased—spending less money on travel, eating out, possibly childcare, and other activities curbed by the pandemic. Now, a set of new challenges looms on the horizon.
Over the coming months, PUA will run out (absent another round of Congressional intervention). Workers in some segments of the economy may be forced to consider changing careers due to the long-term impact of the pandemic on their industries. Many parents will face difficult decisions regarding their children’s education that could impact their finances—sending kids to private school, pulling kids out of private school, hiring private tutors to assist with homeschooling, hiring childcare for young children doing distance learning, etc. How is it possible to keep your finances on track amid such changing circumstances? How can you continue to pursue your financial goals while the country is in crisis mode? Certain principles of financial planning still apply and can serve as a guide in these challenging times. We discuss some of those “truths” below.
The More Income You Make, the Harder It Is to Retire: If you earn high income during your working years, you have to save a lot (usually more than the annual IRS limit on retirement contributions) in order to maintain the same standard of living in retirement. Conversely, if your income declines—e.g. you face a pay cut, you are furloughed or lose your job and are living on unemployment benefits, one spouse in a two-earner household loses a job—and you adjust to living on the lower income level, you will not have to save quite as much for retirement. When you reduce your spending, you do not need as big of a nest egg to support your reduced standard of living in retirement. Sometimes, especially later in one’s career, a decline in income can be a blessing in disguise from a financial planning perspective.
What Matters Most Is Not How Much You Make, But How Much You Spend: A key driver of financial success is not how much you make, but how much you spend relative to your income. With so much economic uncertainty amid the current crisis, this point is especially important. Have you been saving diligently from your income so that you have an emergency fund (and retirement assets) to tap if you face an interruption in income or unexpected expenses? If not, then start now, if you can. Even for some who are unemployed, your weekly unemployment benefits while collecting PUA might be similar to—perhaps even more than—the amount of income you had while employed. If this is the case, tighten your belt and reduce spending before the PUA or general unemployment benefits run out. Any time that you are living below your means, there is a double benefit for financial planning purposes: reducing spending and increasing savings, both of which improve your ability to retire and meet other long-term financial goals.
Child-Related Expenses will Go Away… Eventually: One client, who chose to send her four kids to private school, said that she looked forward to no longer “having to eat dirt” after finishing her last tuition payment. Despite earning significant income, she felt strapped for cash because all of her money seemed to go to the kids’ schools. Many parents might feel that way this year due to added childcare expenses or paying for tutors, new private school tuition, or private teachers for their family or “pod.” However, if such changes cause you to reduce spending in other areas, this is again a positive development from a financial planning perspective. The vast majority of child-related expenses will eventually go away. In the meantime, they force parents to live on less, which means that parents have a lower standard of living to support in retirement than they would otherwise have without kids.
Many People Go through Financial Crises at Some Point (and Live to Tell about It): We have walked with clients through periods of unemployment, unexpected medical conditions, disabilities, serious mental health issues, family crises that required financial support, etc. While in the midst of such trials, it often seems like they will never end. And you may have to drain a significant amount of savings or other assets, sell properties, and/or incur some debt before reaching the end. That is a very scary prospect, but if you find yourself in that situation, please know that you are not alone. We are here to help, and we have assisted many clients in navigating personal and financial crises. Even if you are forced to veer off-course from your financial plan for months or even years, we have hope that you will recover from the crisis at some point, regain a sense of normalcy, and be able to set a new course to reach your financial goals.
Most Portfolios Require Growth to Last through Retirement: On occasion, we encounter a client who has enough income or assets relative to their expenses in retirement that they could stick all of their savings under a mattress and still have enough to last for their lifetimes. This is very rare. Most of us need growth in our portfolios so that our assets can keep up with, or exceed, the decades of inflation that we will face in retirement. The federal response to the pandemic provides further rationale for pursuing growth in investments. This spring, U.S. government spending exceeded tax revenue by around $2 trillion, pushing its monthly budget deficit to record highs. At some point in the future, the deficit spending (which has been growing over the past two decades) will likely contribute to increased inflation. While many investors may be scared away from investing in stocks after the huge market decline in March, it will be particularly important over the coming decades to have a portfolio that is poised for growth, so that inflation doesn’t erode the real value of your assets over time. Investing for growth could also benefit your loved ones, since you’d be better poised to gift assets to them if they face periods of financial stress in the future.
While COVID-19 has created uncertainty throughout our personal and financial lives this year, certain principles of financial planning remain true. We will continue to rely on the tenets of financial planning and investment that have withstood the test of time and will trust that this too shall pass eventually. Please call us if you are facing financial challenges or just are struggling to navigate financial decision-making in this volatile time.
