Health and finances are likely the only two topics on most people's minds these days. How can you keep yourself and your loved ones safe and healthy through this pandemic? And what should you do with your investments during this recent market drop? Managing your investments prudently and resisting the urge to sell stocks while the market is down are certainly important financial planning considerations. However, as financial advisors, we wanted to highlight other crucial financial planning areas that often don't get as much attention in the news media.
Disclaimer: Past performance does not predict future results. Do not make any financial planning decisions without talking to a professional financial advisor, preferably a Certified Financial Planner(TM) practitioner with individual income tax expertise.
What should you do with your investments?
Many are likely concerned with the recent stock market drop and what this means for their financial goals and retirement plans. You may be fighting the urge to sell out now and cut your losses. Others may be tempted to invest everything they have in the stock market to take advantage of lower stock prices. In either case, we ask that you stop, take a deep breath, and read our thoughts of what to consider below.
Should I sell my stocks?
No. Please don't. As financial advisors we strongly discourage selling stocks now while the market has dropped. While past performance does not predict future results, historically, these stock market drops have always been temporary. We understand that it's scary watching your hard earned, diligently saved money drop in value day after day. But our focus is on your long-term goals and selling out when the market has dropped can be an irreversible mistake.
No one can consistently time the market and know, with certainty, where the bottom will be. If you sell out of stocks you need to be right twice. First, when to get out of the market, and equally as difficult, when to invest back in. Missing even a few good days in the stock market can have a disastrous effect on your overall performance. This article from the Simple Dollar shows how drastic overall returns can be when missing even just a handful of the best days in the stock market (although past performance does not predict future results). The only way you can ensure you're not missing any rebound is to be invested the entire time, as difficult as that may be. This is why we strongly advocate staying invested in stocks even when the stock market has gone down in value, at least temporarily.
Another important aspect of investments is to be diversified in a well-rounded portfolio. This means owning large US companies, small US companies, international stocks, REITs (Real Estate Investment Trusts), and also high-quality bonds, among others, in your investment portfolio. In addition to that, it's also advisable to have an emergency fund with 3-6 months' worth of expenses to cover a potential cash shortfall plus any cash needed for upcoming expenditures over the next year. When the stock market drops, it's best to take money from assets that don't drop, or drop as much, in value like bonds or cash. This will give you time for the stock market to recover without having to sell stocks while the prices are low.
Should I buy stocks now?
This is a complex question that needs to be addressed in a few parts. If you're still working, and are regularly contributing to a 401k, or other investment plan, then you should absolutely keep contributing. Stocks have dropped in value, which means you are able to purchase more shares for the same cost. You will be buying many more shares of a diversified stock fund now for the same amount of money than even a few short weeks ago. When looking over the long-term, this is likely to be advantageous assuming stocks recover as they have historically always done.
Should you invest more than your normal contributions? This gets a little more tricky. As we've mentioned before, no one can consistently time the market to know when it has hit its peak, or when it's at its lowest. You certainly should not invest your emergency fund. Stocks on sale does not constitute an emergency. However, if you do have extra cash on top of your emergency fund, have a stable source of income and are comfortable with short term fluctuations in the value of your investments, investing some of that money now could be prudent. Since we don't know when the bottom will be, instead of investing a lump sum of this additional cash, we have been suggesting dollar cost averaging this additional money. What that means, is that you would invest a little bit at a time on a scheduled basis. This way, you are not tempted to try to time the market.
As an example, if you had an additional $10,000 that you wanted to invest, instead of doing it all at once you could invest $2,000 on the 1st of every month for the next 5 months. If the market continues to go down, you can continue to invest at lower and lower prices. This reduces the risk of the stock market dropping further by spreading out your investments over time.
Should I make a Roth conversion?
A Roth conversion is common financial planning strategy where you take money from an IRA, and move it to a Roth IRA. You pay the taxes on the amount moved over now, but going forward, it grows tax-free inside the Roth. The potential benefit of doing it when the market has dropped is that you are taxed only on the amount moved over, while any growth won't be taxed in the future. This is similar to buying more stock at lower prices, acquiring more shares for the same cost. In the case of a conversion, you are converting more shares at the same tax cost. Whether a conversion is worth doing or not depends on your unique tax situation. You can read our previous post on why 2020 may be a great year for conversions for more details.
Should I claim Social Security?
If you're around the traditional retirement age, you've probably thought a lot about when to claim Social Security. You can claim early at age 62, for a permanently reduced monthly amount. You can also defer claiming until age 70 and receive an enhanced benefit with an increased monthly payment. When should you be claiming Social Security? Much of this depends on your health and financial situation. However, based on research, the vast majority of Americans choose the wrong time to collect. Believe it or not, for many Americans it makes the most sense to delay payments until age 70.
While collecting at age 70 might usually be the best financial move, choosing to claim Social Security before age 70 may be a wise decision now for a few reasons. First, if you're withdrawing funds from your portfolio and are not yet claiming Social Security, the amount you receive by claiming now will reduce the amount needed from your investments. If you don't have a well diversified portfolio and are at risk of selling stocks when they have dropped, it may be a better decision to claim Social Security a little earlier to reduce this draw down now.
Delaying Social Security is only advantageous if you live long enough. However, if you have a good reason to believe that you may not live long enough to reach break even, which is usually somewhere in your mid 80s, claiming sooner could be appropriate. While it often isn't worth claiming until at least your full retirement age (between age 66-67 depending on your birth date), it may make sense depending on your situation.
Social Security is complex and many factors must be taken into consideration when deciding when to collect. Some of the many considerations include: How long do you expect to live? Are you still working? Do you need the cash flow? What is your spouse's earnings record? Have you been divorced and can collect on an ex spouse's record? What is your other income? How will claiming Social Security impact your taxes? How long do you expect your spouse will live? Are you or your spouse also receiving a pension?
With the complexity of Social Security in general, and with the recent market volatility added on top of it, we strongly encourage you to speak with a financial advisor before making any permanent Social Security claiming decisions.
Have you reviewed your estate plan?
In all the years Milestone has been doing financial planning, we've yet to encounter a client excited to talk about their estate planning. It's a tough topic to approach, but arguably, it's one of the most important. A common misconception is that an estate plan is just outlining who you would like to inherit your assets when you pass away. A complete estate plan goes far beyond that topic alone. While deciding who you would like to inherit your estate, and how you would like it handled is clearly important, you likely already knew about that. Something equally important is to consider is how you would like to be treated medically if you were unable to make decisions for yourself. Who would pay your bills? Take care of your children? A global pandemic is clearly a serious medical situation, and making sure you have a plan is vital, regardless of your age.
Health Care POA (Power of Attorney)
There are generally two power of attorney documents in a complete estate plan. One is to decide who will handle your financial matters if you were unable, and the other is for medical decisions. The individuals you name do not need to be the same for each document, but it should be someone you trust.
It is also important to make sure you have at least one, preferably two, back-ups named. This way, if something happened to your first choice, you would have other alternatives listed without having to get new documents drafted, or need a court order for someone to make decisions about your medical care. Having a power of attorney for health care puts you in control of who you want making medical decisions if you cannot.
This document is nothing like a Last Will and Testament. This document expresses your wishes about difficult end of life decisions. This document acts more of an instruction manual for your agent (power of attorney) to follow when it comes it making these incredibly difficult decisions. Having your specific wishes spelled out in writing can assist those who have to decide feel more comfortable that it is what you would have wanted.
Doctors are legally only allowed to provide medical details about you to individuals who you authorize. In many instances, someone may only trust a couple people to make decisions about their care but would like others to be able to understand what's going on. This is typical with families where one child is trusted as the health care power of attorney, but they would like the other children to be able to hear information about their medical situation. Without a HIPPA release this is not possible.
When you fill out a HIPPA release you are listing individuals who you authorize to get information about your medical situation, although they have no power to make decisions on your behalf.
What can happen if you do not put this in writing is that individuals who you may want hearing information about your medical situation will be asked to leave when the doctor is reviewing information with the assigned agent. This can leave children, or other loved ones, out of the loop in discussions about your care.
To prevent this, a HIPPA release needs to be completed and sent to your doctor. Some states, like New Hampshire, allow you to print out and complete the form online. The document does need to be notarized, but it is a simple form to complete. This is something anyone over 18 should have filled out so that the people who they want hearing about their medical situation can have access to it, without needing a court approval.
By this point it is clear that we are living in uncertain times. However, the only thing we can do is focus on what we can control. There is much you can do to put yourself on a solid financial footing and avoid irreversible mistakes during this chaos. Despite the uncertainty, there are potentially many positive financial moves you can make to put you in better shape for when things return to normalcy. We highly suggest you speak with a financial advisor before you go and tackle any of these financial decisions alone. For more information on Milestone Financial Planning and how we may be able to assist you, click here.
- CDC Coronavirus resource page
- CDC actions and response
- CDC: Coronavirus symptoms
- CDC Coronavirus preparedness
- FEMA disaster preparedness resources