Derenda King, CFP®/CDFA®
Your Money and the Pandemic: Commonly Asked Questions
It’s been over two months since the World Health Organization officially declared the coronavirus outbreak to be a pandemic. Since then, COVID-19 has turned people’s financial lives upside down. Millions are unemployed or have experienced a significant reduction in their income. Retirement account balances have fallen. With bills, investments, mortgage payments, as well as looming fears about a recession, many are trying to figure out how to cut through the noise and calm their anxieties. To help you navigate the challenges that exist today and those that might develop, here are answers to the some of the most common money-related pandemic questions.
Historically, trying to guess when it’s the right time to invest has not been a good strategy. We don’t know how the market is going to perform. Today it might rise, and tomorrow it might drop significantly. This is why a common recommendation is to invest a fixed amount of money regularly over a long period of time—yes, that means even when the markets are down. This strategy is called Dollar Cost Averaging (DCA). Why? Because over time—when the market is fluctuating up and down—it should average out in the end. However, if you are still unable to sleep at night, then consider waiting until the market recovers before reallocating to cash. Also, keep in mind that you don’t actually lose money when stocks are down unless you sell.
If you are near retirement, should you follow the old adage, “Don't panic, hold, and wait it out?” To some extent, yes. It’s important to remember that you need your money to last 20 years or longer. So you should still view yourself as a long-term investor. However, you want to make sure that you have immediate cash needs available for at least the first few years of retirement. Beyond those immediate cash needs, hang in there and ride it out because, based on history, the markets should bounce back. Just make sure that you rebalance your portfolio to minimize your risk exposure.
It’s also important to devise a withdrawal strategy, and one that we utilize with our clients is the "bucket approach." Essentially, investors split their portfolios into "buckets" (i.e., a short-term, mid-term, and long-term bucket). The first bucket takes care of their financial needs for the first few years of retirement and contains highly liquid assets. The other buckets will contain investments ranging from slightly riskier to high-risk investments. The rationale is that investors can afford to put money in these riskier investments since they do not plan to dip into those buckets until 10, 15, or 20 years after retirement, thus providing time to wait out market swings.
There are different types of retirement withdrawal strategies, and they can be daunting for many retirees to navigate. So it’s important to understand the pros and cons of each before you need to use them. Make sure you seek professional guidance when choosing a strategy to help ensure that you don’t run out of money in your golden years.
First and foremost, it is important to have an emergency fund. The general rule of thumb is to save somewhere between 3 and 6 months’ worth of take-home pay. To manage your spending during this time, consider implementing the 50/30/20 Rule. Essentially, what you will do is divvy up your expenses so that 50% of your take-home pay is allocated to “Needs” (e.g., mortgage, rent, groceries), 30% to your “Wants,” and 20% to “Debt and Savings.” Given what many are experiencing during the pandemic, some folks are cutting back simply because they don’t have a choice (e.g., commuting expenses or dining out have decreased). At the same time, though, expenses could also be going up in other areas now that people are spending more time at home. If money is a bit tight, cut back on the 30% in the “Wants” bucket.
If you’re experiencing a hardship (e.g., job loss, income reduction, or sickness due to COVID-19) and are unable to pay your mortgage, you might be able to receive help from mortgage relief programs. One of the protections provided by the CARES Act directs lenders to provide up to 180 days of mortgage relief for homeowners affected by the coronavirus outbreak without it being reported to credit bureaus (unless you are already delinquent). A forbearance allows you to make either a reduced payment or no payment at all for a set amount of time. Keep in mind, though, that interest still accrues, and you are required to pay it once the forbearance period ends.
If you are concerned about paying your mortgage, contact your mortgage servicer to request help. You don’t have to wait until you are delinquent on your mortgage. In fact, calling before you miss a payment could give you more mortgage relief options. Here’s what you should have handy when contacting your lender:
- An estimate of your current income and expenses
- Your most recent mortgage statement
- Documentation of what caused a change in your financial situation
Please note that due to the number of homeowners impacted by the pandemic, many lenders are experiencing increased call volumes and hold times.
Lastly, please be aware that for some, delaying your mortgage payments might not be as helpful as it seems and could potentially set you up for serious problems in the future. Why? The CARES Act doesn’t provide specifics on what happens once the forbearance period ends—which essentially leaves it up to the lenders to set their own rules. So before you begin a forbearance, it is imperative that you make sure that the repayment terms offered by your lender are reasonable. Some lenders could require a lump-sum repayment, sometimes called a “balloon payment”, at the end of the forbearance, which might not be feasible for you. Other servicers might offer the option to spread out the forbearance cost over months’ worth of regular payments or add skipped payments to the end of your mortgage term. Make sure you understand ALL of the options and try to negotiate for a solution that works best for you. Also, document everything!
And remember—mortgage relief is truly for people with a genuine need. If you can, continue to make your mortgage payments so that you don’t have to worry about making a large payment or seeing your monthly payment increase to get caught up on your loan.
Well, there’s nothing like a financial crisis to urge us to seriously take the necessary steps to get our financial lives in gear. Now, perhaps more than ever, we have realized the importance of developing a long-term plan. So with that said, here are some suggestions:
- First make sure that you have an emergency fund or cash reserves, probably for longer than the normal recommended amount (e.g., 6 to 9 months' worth instead of the usual 3 to 6 months).
- Second, remember to regularly pay down debt, especially high-interest rate debt.
- Next, continue to save for retirement—or as we like to call it your "3rd Act."
- If you still have discretionary funds or income after following these recommendations, then explore additional investing opportunities.
If you want accountability in these areas, and for achieving other goals, seek assistance from a financial professional to help you put a comprehensive financial plan in place. At UWM, we offer three financial planning platforms, and if you are interested in finding out more about them, please feel free to schedule a complimentary consultation with us by visiting our website.