Rocco A. Carriero
In response to the severe economic fallout stemming from the COVID-19 pandemic, a record $2 trillion fiscal stimulus package was enacted at the end of March. The wide-ranging CARES (Coronavirus Aid, Relief and Economic Security) Act is designed to help ease the financial hardships many Americans are facing. You may be wondering what, if any, economic relief is available to you. Here are some possible ways you may qualify for support.
#1 – Direct payments to many Americans
The CARES Act includes a provision to send most Americans direct payments of $1,200, or $2,400 for joint filers, plus $500 for each child. The amount of the payments will be reduced for those with higher incomes. For individuals filing taxes as singles, the reduced amount begins at an adjusted gross income (AGI) of $75,000 per year and is completely phased out at $99,000. For joint filers, the reduced amount begins at $150,000 and payment is eliminated at $198,000. Your AGI will be determined by your 2019 tax filing (or 2018, if 2019 is unavailable). These payments will primarily come via direct deposit within weeks, but when you actually receive the rebate may vary depending on your circumstances.
#2 – Enhanced unemployment compensation
For those collecting unemployment benefits, the federal government will bump up your weekly benefit by $600 for up to four months. Laid off workers who file for unemployment would usually need to wait a week to receive benefits. However, the act now allows for that week to be funded by the federal government. Benefits are also extended to self-employed individuals who often don’t qualify for coverage.
#3 – Penalty-free distributions from retirement accounts
If today’s circumstances require you to tap your workplace retirement plan or IRA to meet current financial needs, you may have more flexibility to do so. Affected, eligible participants in workplace retirement plans and IRA owners can take an aggregate distribution in 2020 of up to $100,000 from all retirement accounts without incurring the usual 10% early withdrawal penalty. The affected participant or IRA owner (including a spouse or dependent) would need to either be diagnosed with COVID-19 or experiencing adverse financial consequences that meet a broad-set of COVID-19-related criteria.
Income taxes will still apply to the distribution but can be spread out over three years. You also have the option to refund your retirement accounts any or all of the distribution within three years of the initial withdrawal and adjust your tax liability accordingly.
#4 – No required minimum distributions in 2020
Those who are required to take minimum distributions (RMDs), can ignore RMD rules this year. RMDs for 2020 are suspended for certain defined contribution plans and IRAs to help retirement accounts try to recover from stock market losses. Check with your tax advisor about other options you may have related to RMDs.
#5 – Tax-deductible charitable contributions
As a result of the 2017 tax reform, the vast majority of taxpayers lost their ability to choose itemized deductions due to a dramatic increase in standardized deductions. That eliminated the ability for many to write off charitable contributions on their taxes. The new CARES Act allows for a $300 above-the-line deduction for charitable contributions made to 501(c)(3) organizations for taxpayers who take the standard deduction or those who itemize. The deduction applies to cash contributions. The changes go into effect beginning in the 2020 tax year. The tax savings may be modest, but it helps.
#6 – A break for those with student loans
All federal student loan payments are deferred until September 30, 2020. However, you need to contact your loan provider and inform them that you plan to pause payments as allowed under the CARES Act. There are additional benefits for borrowers and grant recipients as well, so check with your loan provider or school administration for more information.
How To Approach Market Volatility If You Are In Retirement or Close To It
Retirement is an important milestone that often comes after years (or decades) of careful planning. But even the most seasoned planners couldn’t have foreseen the severe market selloff that happened in March in reaction to the COVID-19 pandemic. The abrupt end to the 10-year bull market surprised investors of all ages who are now wondering how long it will take for their portfolios to recover.
Unlike younger workers with many years ahead of earning and saving, investors who are retired or nearing retirement have less time to wait out their losses. But there are still actions they can take to help secure their finances, even during periods of uncertainty like we’re experiencing today.
If this situation applies to you, here are a few steps to consider in this new environment:
If you are approaching retirement:
- Pick your retirement date.
If you haven’t already, take time now to decide the year and month when you (and potentially your spouse or partner) want to retire. Given the current environment, you may want to consider extending your time in the workforce – whether it’s continuing your current career or moving into a new full or part-time role. Either way, your answer can have a big impact on your investment decisions from this point forward.
Ensure your investments are diversified.
Not all sectors of the economy are alike, and they react to news and events differently. For those nearing retirement, the recent spike in volatility is a reminder of how having a broadly diversified portfolio can help reduce your investing risk.
Instead of simply selling your stocks in attempt to cut your losses, review your portfolio to see if it is properly balanced between stocks, bonds, and cash that align with your goals, time horizon and your ability to manage risk. While a diversified portfolio can’t guarantee profits or protect against all losses, it can greatly reduce the impact of volatility.
- Balance your need for protection with growth.
Protecting your portfolio from market downturns becomes more important as you approach the day when you start living off your savings. During this time, you may want to consider investing the money you plan to use for income in the first few years of retirement more conservatively in liquid vehicles that are easy to access. This can help give you peace of mind that you are prepared to handle upcoming expenses no matter what’s happening in the markets.
If you are currently in retirement:
- Review your withdrawal strategy.
If the recent decrease in the value of your portfolio makes you nervous, revisit the amount of money you withdraw monthly to meet your expenses. As you review, the goal is to be assured that the amount you withdraw to meet the next year or two of expenses does not put your long-term financial security in jeopardy. If your base of assets is reduced, you may have to trim your withdrawal amount to assure you have a sustainable long-term income strategy.
- Don’t take unnecessary chances in your stock exposure.
For the long-term investor – which may include you as a retiree – volatility in equities can work in your favor. It’s possible that you will spend one to three decades in retirement, giving you time to withstand some market moves. At the same time, it’s important to preserve your base of savings and not be overexposed to stock risk. Now is a good time to review your exposure in the context of your full financial plan to evaluate if you are taking the right amount of risk. Additionally, focus your equity portfolio on higher quality stocks – primarily blue-chip companies that tend to demonstrate more stable performance. Stocks that pay competitive dividends may also be an effective choice to provide a source of reliable return on your investments.
Tips for Investing in a Bear Market
In mid-March, a fear-induced global sell-off triggered by the COVID-19 pandemic ended the longest bull market in U.S. history – leading us into our first bear market in 11 years. Bear markets are commonly defined as a decline of at least 20% from the market's high point to the low during the selloff.
If you compare your investment portfolio today to what it looked like at the beginning of the year, you are likely to be unhappy with what you see. But there’s also a potential upside to bear markets, as you may be able to capitalize on the fact that stock prices have come down across the board. Investing in a bear market is possible, but it’s important to approach it with the right mindset. Here are a few tips to keep in mind:
During a bear market, your focus should generally be on preservation. Diversification can help you accomplish this. Essentially, diversification is just a fancy word that means “don’t put all your eggs in one basket.” While it’s true that the trend is downward during a bear market, not all stocks will go down at the same rate. It’s possible that some might even thrive.
Review your portfolio to see if it is properly balanced between stocks, bonds, and cash that align with your goals, time horizon and your ability to manage risk. By having a portfolio that covers various sectors, you can mix your winners and losers to help reduce overall losses.
Keep a level head
Bear markets are painful but temporary. The U.S. stock market has recovered from every previous bear market. Of course, the past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march higher for stocks.
If you are in a well-diversified portfolio, your bear market experience will be very different from that of the S&P 500. Sticking to your plan is key, so resist the urge to change the risk profile of your portfolio or make sizable shifts out of stocks or into cash.
Don't attempt to time the market
Rather than aim to buy stocks when they're at a so-called low during a bear market, employ a strategy called dollar-cost averaging. Dollar-cost averaging involves making regular investments of consistent dollar amounts over an extended period of time. This allows you to build a portfolio and help protect against wild fluctuations while continuing to accumulate assets. It's a smart strategy in general, but one that can really pay off during a bear market. After all, it’s not about timing the market, it’s about time in the market.
Look to the future
It's hard to predict how long a bear market will last, and in some cases, they can be quite drawn out. As such, don't invest in a bear market with the hopes of buying low and getting rich within the year. That's unlikely to happen. Instead, take a long-term approach to investing, and assume that any stocks you buy now are stocks you'll continue holding for a number of years.