Over 3 million people in the U.S. have recently filed unemployment claims as a result of the severe economic impact of the coronavirus. Some of those suddenly jobless have limited financial resources besides unemployment benefits. Others are fortunate to have emergency savings or investment vehicles they can draw from such as a 401(k). Then there are those who are still working but feeling the effects of business slowing down.
“Overall, the pandemic has put many people in a weakened financial condition that they didn’t expect,” says Steve Kruman, a financial planner and investment adviser at Bryce Wealth Management (brycewealth.com). “And there are some lessons in there that could better protect them and their loved ones going forward.”
Kruman has tips to help people weather the financial storm and learn how to plan differently for the future:
— Be careful with the 401(k). “When sources of funds are limited, people should withdraw only the amount they need from their 401(k),” Kruman said. “You want to look for other sources that would be accessible without taking on the major tax hit of raiding the 401(k). Home equity loans are great and they are at rates much lower than the tax rates of the 401(k).
— Also, cash value life-insurance policies are good sources to borrow from as well. For those who lost their job but have adequate reserves, it’s advisable to roll their 401(k) money over to an IRA at the earliest possible opportunity. Employer-sponsored plans have several drawbacks, including limited investment options. By rolling to an IRA, you can select from a much wider investment universe.
— Don’t panic in the stock market. ”Don’t sell now,” Kruman said. “People who are being induced into panic are selling and somebody else is buying those shares for when prices recover. The stock market always has fluctuations. It comes down to risk tolerance. You have to be prepared for volatility and be diversified.”
— Don’t rely on group life insurance anymore.Many people have the majority of their life insurance through their job. But when you lose the job, you lose the life insurance. “You have to replace it with new life insurance at an older age, which means a higher premium, and with possibly negative health changes, again upping the premium,” Kruman said. “It’s vital to have a well worked-out plan of personal life insurance, which means not tied to a job.”
— Find an independent financial adviser. “An independent adviser doesn’t have a company telling them what to invest clients’ money in,” said Kruman. “A client’s best interest should always be the number-one priority for an adviser and it’s easier to maintain that focus by being independent of any parent company’s fee goals or investment selection limitations.”
— Consider making a Roth conversion now.When you move money from a tax-deferred retirement account into a Roth account, the money is taxed at that time. “But by making that conversion, you are putting yourself in a position to get tax-free income for life if you comply with two requirements,” Kruman said. Those requirements: be at least age 59 1/2 and don’t take any gains out of the Roth for five years. Most financial professionals expect taxes to go up sometime in the future. One reason is that the recent economic stimulus will need to be paid for at some point. Another reason is that the tax cuts passed in 2017 will expire at the end of 2025 for personal rates. “So paying the taxes now at a lower rate when you make the Roth conversion is the better bet for the long run,” he said.
“Now is a tough time for many,” Kruman said, “but it is time that can be used wisely to consider the things you can do differently to protect yourself and your family financially from the next period of economic uncertainty.”