Because economic markets are intrinsically linked across the globe, the impact of a global pandemic can be widely felt. Disturbances in supply chains can impact inflation rates, and an increase in unemployment is a viable risk. Due to this, low inflation rates can impact forex trading and force central banks to reduce country-wide interest rates, resulting in a weaker currency. Despite these changes, it’s vital to take an informed approach when it comes to managing your finances. Here are some ways you can re-strategize in the time of a pandemic:
How to rebalance your portfolio
During epidemics over the last 20 years, the S&P 500 Index tends to exhibit a pattern of dramatically falling then powerfully recovering over a period of approximately six months. A generally prudent strategy to follow is to seek expert advice in redistributing your investment portfolio. In general, selling US growth stocks and buying bonds is suitable for many clients. Selling partial or full positions in order to boost your tax savings is also good advice to follow in the long run. Keeping an eye on your portfolio and avoiding making panicked decisions is crucial in the event of a pandemic.
How to invest according to your current situation
Something else to keep in mind is to invest according to your age group and particular situation. This advice applies whether you’re experiencing the effects of a pandemic or not. If you’re a young investor, it is recommended to hold on to your existing investments and patiently waiting for your returns. If you’re nearing retirement age, you should consider delaying your retirement if possible and focus on building up your funds. Lastly, if you’re already retired, you should hang on to your investments if you can afford it, or attempt to reduce your expenses.
How to re-categorize your budget
During a pandemic, individuals and families are likely to juggle new financial challenges. At this time, it’s a good idea to rethink your priorities. For instance, figure out your new baseline income based on potential pay cuts or unemployment, as well as any benefits you may receive. After this, work on calculating how much you need to pay for the essentials, such as rent, utilities, and food. Finally, you should try eliminating or reducing unnecessary expenses where you can. Dining out, entertainment, clothing, and travel are some areas where you can cut costs during this time.
How to get refunds where you can
In order to limit the spread of illness, it’s common practice that major events, flights, and services like gym memberships will be canceled. Because of this, you’re usually entitled to some form of compensation. If a travel ban has been put into place, airlines are likely to give you a refund or some form of credit if your travel plans were made in advance. Concerts and sports events should have similar policies put into place, so check your spam folder for any emails and updates regarding your refund. If you haven’t received any communication from the relevant organization, reach out and contact them to see what can be done.
In the event of a pandemic, it might be tempting to give in to your emotions and worry about your finances. To prevent this, building up an emergency fund beforehand with approximately three to six months’ worth of expenses and maintaining a strict budget plan will help you maintain peace of mind.
Prepared exclusively for merriman.com by Danielle Houston
Important Disclosure: This article is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. The general suggestions provided are not intended to serve as personalized financial and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors are highly encouraged to work with a financial services professional to discuss their financial situation and suitable solutions.
Because of the pandemic, many companies are trying to rapidly reduce their workforces. Boeing recently offered their voluntary layoff (VLO) to encourage employees near retirement to do so. Other companies will resort to traditional layoffs.
What should you do when you find yourself unexpectedly retired—whether voluntarily or not?
Assess the Situation—Review Your Numbers
Retirement is a major life change for everyone—even more so when it happens unexpectedly. The first step financially is to get a clear picture of your assets. This includes investment accounts and savings. It also includes debts like credit cards and mortgages. In addition, you’ll want to identify current or future sources of income such as pensions or Social Security.
Next, you’ll want to be clear about how much you’re spending. Free or low-cost tools like mint or YNAB can help you easily track how much you’re spending as well as categorize your expenses. That may make it easier to see if there are ways to reduce costs, if needed.
Knowing your minimum monthly costs is a major part of determining if you have the resources to retire successfully or if you need to find another way to work and earn money before retirement.
If you’re unexpectedly retired, identify if you need to reduce your expenses. Some of those reductions may happen automatically—most families aren’t spending as much on travel right now—while other reductions may require more planning.
You’ll want to account for healthcare costs. For some, employers may continue to provide health coverage until Medicare begins at age 65. For others, health insurance will have to be purchased either through COBRA to maintain the current health insurance or through the individual markets. These policies can cost significantly more than when the employee was working, although by carefully structuring income, it may be possible to get subsidies to reduce this cost.
Identify if you need additional sources of income. This may come from part-time employment. It may also come from reviewing your Social Security strategy. Social Security benefits can begin as early as age 62, although doing so will permanently reduce your benefit. Take time to compare the tradeoffs of starting your Social Security benefit at different ages.
Finally, review your investment allocation. You’ll want to make sure you have an appropriate percentage providing stability (cash, CDs, short-term bonds) to protect you from the fluctuation of the market when you need the money. With a retirement period of 30 years or more, stocks will likely be an important part of your investment strategy, too.
Do Some Tax Planning
It’s important to identify what mix of accounts you have. IRA, Roth, and taxable accounts are all taxed differently. It’s often best to spend from the taxable account first, then the IRA, and save Roth accounts for last, although there may be times where it’s better to use a mix from different types of accounts each year.
Many early retirees temporarily find themselves in a lower tax bracket because they don’t have a salary and they haven’t yet started Social Security. This may be a time to take advantage of Roth conversions. Moving money from a traditional retirement account to a Roth account now, while you’re in a lower tax bracket, can significantly reduce taxes over your lifetime.
Planning Beyond Money
When a major change like this occurs, it’s important to take care of your finances. It’s also important to take care of your mental health. Retirees often have years to plan for this major life change. Because of the pandemic, many are making this change suddenly and unexpectedly.
It’s essential to take the time to set a new routine and identify new hobbies or other activities to incorporate into your life.
When retirement is unexpected, it doesn’t have to be scary. Building a financial plan to determine if you’re on track to meeting your goals, to discern what adjustments should be made to help you reach those goals, then to execute that plan can help provide the peace of mind brought about by a successful retirement—even when it comes sooner than expected. If you want help with this process, reach out to us.
“The world makes much less sense than you think. The coherence comes mostly from the way your mind works.” – Daniel Kahneman, Thinking, Fast and Slow
“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger, Berkshire Hathaway
In its most basic form, investing involves allocating money with the expectation of some benefit, or return, in the future that compensates us for the risk taken by investing in the first place. Investing is a decision: buy or sell, stock A or stock B, equities or bonds, invest now or later. But as the great Charlie Munger reminds us above, investing is far from easy. Prior to making an investment decision, we create statistical models, build spreadsheets, use fundamental and technical analysis, gather economic data, and analyze company financial statements. We compile historical information to project future return and risk measures. But no matter how much information we gather or the complexity of our investment process, there isn’t one rule that works all the time. Investing involves so much more than models and spreadsheets. It is an art rather than a science that involves humans interacting with each other—for every buyer, there is a seller. At its core, investing is a study of how we behave.
Daniel Kahneman and Amos Tversky are famous for their work on human behavior, particularly around judgment and decision making. Judgment is about estimating and thinking in probabilities. Decision making is about how we make choices under uncertainty (which is most of the time). Kahneman won the Nobel Prize in Economics for their work in 2002, an honor that would have certainly been shared with Tversky had he not passed away in 1996. Their findings challenged the basic premise under modern economic theory that human beings are rational when making judgments and decisions. Instead, they established that human errors are common, predictable, and typically arise from cognitive and emotional biases based on how our brains are designed.
In his book, Thinking, Fast and Slow, Kahneman describes our brains as having two different, though interconnected, systems. System 1 is emotional and instinctive. It lies in the brain’s amygdala and uses heuristics or “rules of thumb” to simplify information and allow for quick gut decisions. In contrast, System 2 is associated with the brain’s prefrontal cortex. It is slow, deliberate, and calculating. As an example, if I write “2 + 2 =”, your mind without any effort will come up with the answer. That is System 1 at work. If I write “23 x 41=”, your mind most likely switches over to the slower moving System 2. While Systems 1 and 2 are essential to our survival as humans, Kahneman found that both systems, and how they interact with each other, can often lead to poor (and sometimes irrational) decisions. We can apply much of what Kahneman and Tversky discovered to investor behavior. Let’s focus on some of the most common biases and how they impact our decision making.
Kahneman and Tversky summarized loss aversion bias with the expression “losses loom larger than gains.” The key idea behind loss aversion is that humans react differently to gains and losses. Through various studies and experiments, Kahneman and Tversky concluded that the pain we experience from investing losses is twice as powerful as the pleasure we get from an equivalent gain. This can lead to several mistakes, such as selling winners too early for a small profit or selling during severe market downturns to avoid further losses. Loss aversion, if left unchecked, can lead to impulse decision making driven by the emotions of System 1.
Confirmation bias leads people to validate incoming information that supports their preexisting beliefs and reject or ignore any contradictory information. In other words, it is seeing what you want to see and hearing what you want to hear. As investors, we are prone to spending more time looking for information that confirms our investment idea or philosophy. This can lead to holding on to poor investments when there is clear contradictory information available.
Hindsight bias is very common with investor behavior. We convince ourselves that we made an accurate investment decision in the past which led to excellent future results. This can lead to overconfidence that our investment philosophy or process works all the time. On the flip side, hindsight can lead to regret if we missed an opportunity. Why didn’t I buy Amazon in 2001? Why didn’t I sell before this bear market? As I always say, I would put the results of my “Hindsight Portfolio” up against Warren Buffet’s any day!
As mentioned above, investors can become overconfident if they have some success. This can lead to ignoring data or models because we think we know better. As Mike Tyson said, “Everyone has a plan until they get punched in the mouth.” Overconfidence can lead to a knockout, and investors must be flexible and open with their process.
Recency bias is when investors emphasize or give too much weight to recent events when making decisions and give less weight to the past. This causes short-term thinking and allows us to lose focus on our long-term investment plan. It essentially explains why investors tend to be more confident during bull markets and fearful during bear markets.
I could write an entire book on investor psychology. The bottom line is that we cannot eliminate these biases. After all, we are all human. Even Kahneman, who made the study of human behavior his life work, admits he is constantly impacted by his own biases. However, there are certain actions or “nudges” that can help address such biases and avoid making costly mistakes. At Merriman, we have built the firm in such a way to use our knowledge about human behavior in the work we perform for our clients. Below are some of the main examples:
We build and design our investment strategies based on academic data going back hundreds of years. We are evidence-based rather than emotionally-driven investors. We think long term and do not let short term noise or recent events impact the process. We build globally diversified portfolios across different asset classes to produce the best risk-adjusted returns. That said, we are consistently researching and studying to find data that might contradict our investment philosophy and will make changes if the evidence supports it.
A well-built financial plan is at the core of our client’s long-term success. It is a living document that requires frequent updates based on changes in our lives—retirement, education funding, taxes, change in job, business sale, and estate planning. This forces us to make investment decisions based on the relevant factors of that plan and not on emotions—because at the end of the day, investing is meant to help reach our goals.
At Merriman, we do our best to help educate our clients on our investment philosophy. Blogs, quarterly letters, seminars, client events, and video content are all examples of tools we use to educate our firm and clients. Knowledge and awareness are powerful tools to help us make sound decisions.
We are all going through an extremely stressful situation right now—both personally and professionally. Now, more than ever, we need to lean on each other and show empathy and support through this unprecedented time. Remember, investing is a study of how humans behave. At Merriman, we want to be your resource to guide you through both calm and turbulent markets, helping you reach your financial goals. Please don’t hesitate to contact us if you’d like to discuss how we can help.
COVID-19 is causing different challenges for everyone. Things that were once easy have become more complicated and time consuming, especially when it pertains to financial decisions. Deciding whether to renovate your home or move into a new one in the midst of this global pandemic for one, comes with added stressors. Try some of these helpful tips to take the financial anxiety out of moving or remodeling and make this milestone a little easier in the midst of these uncertain times.
Consider the area:
Location is more than just your home – consider the school district, surrounding community, neighborhood and amount of land. Most will agree location is everything, and If you love the location of your current home, that is a great enough reason to stay put. However, if you’re still adamant about moving for other reasons, these location factors could attract potential buyers as well… let’s review your options.
Renovating your home may require more than just a fresh coat of paint, and instead could mean much needed addition. If you plan to expand your family or if you just want more space, first determine whether your current property can accommodate the addition or renovation. The growth of your family may require more bedrooms or a larger common room, but if your home and property size are too small to make an addition, this may be a sign to move.
Another consideration is the community you live in. Whether it’s a cozy village, offers great community activities, or you just love your neighborhood, these are the things you may miss if you move to another area. The same sentiment goes for the school district. If it’s highly rated and you have kids in school, it might be worth staying in the area. If you decide moving is the best option for you and your growing family, look for a home in the area that checks off all of the boxes, while offering the space you need!
Keep all of these considerations in mind when looking for a buyer as well. If you are an empty nester contemplating moving, these details may be important for a young family looking to move into a top school district. Have your home appraised and research recent comparable homes sold in your area to decide if yours could be an easy sell in the current market.
Review your finances:
Buying a home is always an investment. If that’s the side you’re leaning toward, you have to consider if you’re financially ready to go through the process. Right now, mortgage rates are at an all-time low due to COVID-19, and that may be enough to sway you in the direction of buying a new home. However, you may need to invest in minor upgrades to your current home before listing it to sell, as well as pay an agent and movers. Set extra money aside for these improvements when budgeting for the big move. You may also want to consider keeping your current home to rent on Airbnb for added income, while buying a second home to live in.
If you’re leaning toward renovating your current home and staying long-term, you have a multitude of choices to consider depending on your financial situation. Home equity loans are an option for homeowners with a decent amount of equity built up in their purchase. Usually, if you’ve owned your home for five years or more, you can take out this loan to use for whatever you’d like. Most homeowners choose to use a home equity loan or line of credit for home upgrades but you can also consider liquidating investments, using a personal loan, margin loan, or pledged asset line of credit. Be sure to pay attention to interest rates, as they may be higher for these types of loans considering the economic times.
Be aware of timing:
Due to COVID-19, selling your home or starting renovations will take longer than usual. We are living in unprecedented times, where those who can help you sell or update your home are finding unique and optimal ways to get their jobs done, while still experiencing some barriers that may slow their services down. Be patient,and use this time to connect with your renovators or realtors to find or build your perfect home.
Right now, it’s smartest to work with a realtor if you’ve decided to sell your home. Viewings have to be done virtually for the time being and you will strongly benefit from using a realtor to advertise your home online. Be aware that selling your home may take longer than in years past because many people feel less secure in their finances. Additionally, it’s hard for a buyer to make this decision without seeing their potential new home in person.
On the other hand, finding a contractor won’t be easy either. All over the country, home renovation projects are being delayed or cancelled due to stay at home orders. However, some states have recently allowed construction workers back on the job, deeming them essential. If your desired contractor is able to work and follows all CDC regulations, you can likely get your home renovation started now!
Our work at Merriman is all about empowering our clients to live their lives fully. Having a financial plan in place for even the most unpredictable aspects of life provides peace of mind, allowing people to focus on what they love to do most.
We conducted a survey to see why our clients chose Merriman and why they’ve continued to work with us throughout the years. We compiled their top ten reasons why—in their own words—and decided to showcase their responses in a ten-part blog series. This is part nine, out of ten.
Reason #9: “I know my family will be taken care of even after I’m gone.”
Life is about living! At Merriman, we get that. We’re here to help you gain control of your finances and get your money to work for you and your family, while you’re here and even after you’re gone. We find having a plan in place and knowing that everything is under control makes things crystal clear. It’s like preparing for the worst. When there’s a plan in place, there’s less room for stress. There’s more freedom.
Are you confident that your other family members will be taken care of even after you’re gone? An advisor who understands your values, wishes, and financial standing will often be an asset to other members of your family or business partners. Your personal advisor can provide family continuity. Plus, an advisor will help you think about how you want to prepare for the unpleasant aspects of life, like death or the idea of dementia, and work to provide a continuation of whatever plan you put into motion.
We’ve each got our own passion about living. Our Chief Operations Officer and Chief Investment Officer Kristi de Grys proudly owns a flag that flew in one of the space shuttles. Paresh Kamdar, one of our Wealth Advisors who loves to travel, could eat Vietnamese soup, ramen, and tacos for the rest of his life. Michael Van Sant, another one of our Certified Financial Planners, took his family abroad last year for the first time and has slowly been getting back into music, thanks to the inspiration and encouragement from his thirteen-year-old daughter. We’re all about being here and being present for the lives we’re living. Once you join our Merriman family, we take care of the financial aspects and you take care of the rest: you can get back to living.
If you’d like to feel more in control about your finance future, contact us! We’ll get to know you, your goals, and your future plans, so you can start focus on living life fully. We’re looking forward to hearing from you and having you join our family!
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our first of six installments on…
In light of the SECURE Act, should I convert my IRA to a Roth IRA, and if so, how much of it should I convert?
The answer is maybe. First, some old Roth conversion strategies may still hold true. If you are in an especially low tax bracket for a few years (e.g. you are retired and no longer bringing in employment income, but you haven’t started taking social security yet), then a Roth conversion may make sense for you. It would likely be a good idea to convert as much as possible during those lower income years without pushing yourself into the next bracket. The idea is to pay the least amount of tax possible on that tax-deferred money so more makes it into your pocket. In light of the SECURE Act, there are now additional considerations due to the elimination of the stretch IRA for most non-spouse beneficiaries. These beneficiaries will now have to withdraw inherited IRAs down completely within 10 years, which could have major tax ramifications for them. A Roth conversion might make sense if all the following criteria are met:
You will not need your IRA for your own retirement needs.
You can afford to pay the tax bill out of pocket or with non-retirement assets.
You want to leave the money to someone other than your spouse, your minor child, someone not more than 10 years younger than you, or someone who is chronically ill.
The beneficiary will likely be in a higher tax bracket than you are now.
Example: Gertrude dies in 2020 and leaves her IRA to designated beneficiary Suzie, her granddaughter. Suzie is not an eligible designated beneficiary because she is more than 10 years younger than Gertrude and not her minor child. The balance in the inherited IRA must be paid out within 10 years after Gertrude’s death, which means a large tax bill for Suzie as she is in her prime working years. Had Gertrude converted that IRA money to a Roth, the taxes would have been paid at Gertrude’s much lower bracket, and thus Suzie would have received more money when all is said and done. With the Roth IRA, Suzie must still abide by the 10-year withdrawal rule, but now she can let that money grow tax free in the Roth until year 10 and then withdraw it without paying taxes.
I’m still working. Should I be contributing to a Roth IRA / Roth 401(k) / taxable account instead of a pre-tax account now?
It depends, and there are a lot of factors to consider. To start, please see the question and answer directly above and consider whether an IRA or Roth account makes more sense for you today. The analysis will consider your current tax bracket, your estimated future tax bracket, whether or not you will need the money for your own retirement, and who your beneficiaries are.
If you are nearing retirement while in your prime working years, it likely makes sense to contribute to a pre-tax account versus a post-tax account. You are potentially in your highest tax bracket now, so getting the tax break with a pre-tax contribution is generally more valuable. After retirement, when you are in a lower tax bracket, you may decide to make Roth conversions at that time to take advantage of the lower rates.
Taxable accounts are another story completely. Due to their flexibility, having a taxable account is beneficial whether you are also contributing to an IRA or a Roth. If you plan on leaving money to non-spouse heirs, then a taxable account can be a great way to do so. There is no contribution limit on these accounts and there will be a step up in basis upon your death. This will eliminate capital gains as the account passes on to your heirs and they will not have to deal with the forced 10-year withdrawal rule.
Again, this is a loaded question with many moving parts and will be very specific to each individual. It would be best to speak your advisor about which type of account makes the most sense in your situation.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.