We ask the experts for financial advice for the pandemic economy.
The coronavirus pandemic has left a lot of pain in its wake, namely for the 5,000+ Michigan families grieving for lost loved ones and those now recovering from the virus.
A different kind of pain has hit even more people — the kind you feel in your pocketbook. For nearly three months, businesses have been shuttered, workers furloughed, paychecks cut and people laid off. On Monday, June 8, the National Bureau of Economic Research officially declared the country to be in another recession.
Over the past eight weeks, more than one in four individuals in the U.S. filed for unemployment, many of them from Michigan. According to Bureau of Labor Statistics data, Michigan had the second-highest April 2020 unemployment rate (22.7%) of all 50 states.
Those still working are feeling the pinch, too. Many are concerned about their investments and retirement in the current economy, considered the worst since the Great Depression.
We asked local financial experts for their best advice on weathering the storm.
If you’ve lost your job or just need extra money to weather the storm, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides for special distribution options from 401(k) plans and IRAs. Qualified individuals may take a distribution up to $100,000 for coronavirus-related reasons and the distribution is eligible for favorable tax treatment.
In addition, individuals have up to three years to repay these distributions to their plan account or IRA, according to Lisa Zimmer, a partner in Warner Norcross + Judd’s Southfield office. Zimmer has over 30 years’ experience in employee benefits.
Qualified individuals who participate in their employer’s 401(k) plan also may be able to take larger loans up to the lesser of $100,000 or their entire account balance, and delay repayments for up to one year for coronavirus-related reasons.
Zimmer said that coronavirus-related distributions and plan loans are optional, which means that employers may choose whether to amend their plans to add coronavirus-related distributions and/or loans. She adds, however, that a plan must accept repayments of coronavirus-related distributions if it accepts rollovers.
“The special distribution and loan options are available to people diagnosed with COVID-19 or whose immediate family members have been diagnosed with COVID-19,” Zimmer said, “as well as individuals who have experienced adverse financial consequences because of being quarantined, such as being furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reduced hours of an individual’s own business.”
When it comes time for filing taxes, individuals may designate any eligible distribution as a coronavirus-related distribution up to $100,000 on their tax return, even if the plan or IRA did not treat the distribution as coronavirus-related.
“The distribution is reported in income ratable over the three-year period — 2020, 2021 and 2022 — unless the individual elects to include the entire amount in income in 2020,” Zimmer added.
According to Ken Gross at Thav Gross P.C. in Bingham Farms, tapping your retirement funds should be a last resort.
“Your IRA and 401(k) are protected assets. In bankruptcy, you keep these assets. Tapping your retirement funds to stay current on bills is thus a big mistake unless you have reached the point of desperation,” he said.
His advice is to first use all available credit on your credit cards. “Once that is exhausted, stop paying on the cards. If, at this point, you need money to pay for essentials such as food, housing and transportation — and there are no other alternatives — then resorting to a loan from your 401(k) or a hardship withdrawal makes sense.”
As to the credit card debt: “You will want to eliminate it in the fastest manner at the least cost. Bankruptcy or debt resolution — which is settling the debts outside bankruptcy — are the solutions,” he said. “Yes, your credit score will go down, but it will return once the debt is resolved. The key is preserving your retirement.”
Investing for the Future
According to Ken Bernard of Bernard Wealth Management in Birmingham, you should stay the course when it comes to investing.
“It’s very difficult to predict how the market will perform in the short-term. This is especially true in this unusual and sometimes scary environment,” he said. “We generally counsel our clients to stay invested; our economy has a very good long-term track record of recovering from crises.
“If you’ve experienced losses in your investment accounts, you may feel the urge to sell. This is a very normal reaction but staying invested is the only way to capture the turnaround. If your investments took pain, stick around for the gain.”
According to Bernard, there are very few “recession-proof” or “virus-proof” places to put your money. “Certificates of Deposit (CDs), fixed annuities and U.S. Treasury bonds are secure but currently offer very low interest rates,” he said. “Investment grade corporate bonds will generally hold up well during a recession and pay slightly higher yields.”
Some industries, such as consumer staples, have historically performed relatively well in bear markets, Bernard added. “Walmart and Kroger are up so far this year, and so are many e-commerce retailers, including Amazon and eBay. We generally invest our clients in diversified portfolios comprised of low-cost mutual funds and exchange-traded funds, so they don’t face outsized risk from single companies.”
His bottom-line advice? “Having an appropriately balanced portfolio with a three-to-six months savings cushion can help reduce volatility in uncertain economic times.”
Some people are taking a hit to their 401(k)s right at the time they were planning to retire. Larry J. Glanz, CPA, APMA, CRPC, Private Wealth Advisor at Glanz Wealth Advisors, a private wealth advisory practice of Ameriprise Financial Services LLC in Farmington Hills, advises his clients to “focus on long-term success instead of current market volatility.”
He also recommends calculating what working and investing for an extra few years would provide in additional income before making a decision.
“Your financial advisor should be able to provide you guidance on how to weather this volatility with confidence, which can reduce your anxiety as your retirement nears,” he said, adding this piece of good news:
“Financial markets have been resilient after downturns; historically they have recovered over time. During the last 10 most recent virus outbreaks, the U.S stock market delivered positive returns the majority of the time in the six- to 12-month period after the virus peak.”
According to Glanz, although this economy is unsettling, it’s not a signal to change investment strategies no matter where you are in saving for retirement. “Staying invested through volatile periods lets you benefit from the next rebound,” Glanz said.