Can We Wait For “Normal" Before We Plan?
What is “Normal” anyway? The world of COVID-19 is, at least for the foreseeable future, the reality facing us. 10 years ago, that reality was the Great Recession. 10 years from now… it’s anyone’s guess what may be happening. As a good friend of mine said, “If it’s not one thing, it’s another.”
We must remember, despite what is happening in the outside world, that financial planning is an “always” thing. “Retirement” is always approaching, from the minute we graduate from college to the minute we stop working. The changes and challenges that face us on the road to retirement cannot slow our retirement investing. Here are four things to keep in mind during 2020’s rendition of “unprecedented” crises:
Fund What You Can, When You Can
The IRS has once again increased the amount of money you can put into your retirement account, with the total contribution limit raised to $19,500 for 2020. This may only be an increase of $500 for the year, but it's a good reminder to invest in your retirement while you have the ability to do so. If you are 50 or older, your “catch-up” contribution was also increased by $500 to $6,500.
One of the best ways to save for retirement – regardless of matching – is dollar-cost averaging into your employer retirement plan (401k). If your employer matches, that is all the more reason to contribute at least enough to capture your match. The state of the world is always uncertain, so funding your retirement account while you can makes sense.
Put Your Money to Work… and Let It Work
Not only do you need to fund your retirement with as much as you can, but you need to invest those funds and leave them invested as long as you can. Investing for retirement means understanding the real risk that faces long-term retirement-focused investors: Inflation. Don’t confuse volatility with risk, or stability with safety. Those asset classes commonly referred to as “safe” (i.e. fixed income, bonds, and CDs) are also the asset classes least likely to defend against inflation. Whereas, those asset classes most commonly referred to as “risky” (i.e. stocks, equities, or shares) are the most likely to defend against inflation. Did you know that the dividend payout rate for the S&P 500 has historically risen at roughly twice the rate of inflation?
If you can, especially when markets are down, you should leave your assets invested. (It’s not like you can spend money easily now, anyway.) Both during the Great Recession and again during this pandemic, rules have changed to allow many to avoid their usual required distributions. Keeping your money in your retirement account is going to allow you to keep taxes at bay for a longer period of time, which in turn, should allow you to get more income from your overall retirement investments. If you have the choice, keep your money working for you instead of pulling it out.
Review Your Estate Plan
In light of the many pandemic-related uncertainties, it does make sense that many would start thinking about “what could happen” with their families if a worst-case scenario were to occur. You certainly shouldn’t panic, but you can “walk through” the game plan with your partner and/or kids if you were to become incapacitated or die unexpectedly. Are the documents in order? Are all the assets and insurance policies easily found? Are the instructions clear? Does your family have the capacity to deal with everything… or should you incorporate other people to help?
Taking the time to update your estate plan is a sensible way to deal with current anxieties you may have over the state of the world. Take a look at your existing plan, determine if it makes sense for the current atmosphere, and then make the changes necessary to help you to feel the most comfortable going forward, and to help your family be successful… even without you.
Engage Your Roundtable of Advisors (remotely if needed)
Finally, a huge part of today’s retirement planning involves integrating the work of your entire advisory team. Perhaps you are re-considering your portfolio risk as you approach retirement. This may lead to tax consequences due to sales made in February, March, or April of 2020. Maybe you’ve been more philanthropic than you had planned, and want to review this in the context of both estate planning and tax management. Or, perhaps your income is down for the year and this is your chance to do a ROTH conversion.
Between pandemics, natural disasters, bear markets, recessions, and entire portions of the economy closed for business – there is certainly more going on than usual. For people who enjoy the kinds of wealth that exist in our community, these dark clouds provide the silver lining of planning opportunities. Are your advisors being pro-active?
Whether you’re meeting with your various advisors remotely to help slow the spread of the virus, or you are meeting in person (keeping your distance and wearing a mask, of course), it is vital that you communicate with them to stay on top of it all. If you aren’t managing things pro-actively through this volatility, you may miss opportunities to improve outcomes for your family, and for your community beneficiaries.
Financial planning, like life, is a process of adaptation to ever-changing circumstances. COVID-19 has derailed many plans that had had only just recovered from the Great Recession. Review your plan, continue to invest wisely, take advantage of new rules and regulations. And always, look for opportunities to stay on the right path.
If you don’t have a team, perhaps it is time to ask if one would help.