Budget overhaul may be due after COVID-19
June 1, 2020
You’ve planted a victory garden, cleaned the garage, and caught up with old (and older) friends. If you’re lucky, you’ve stayed healthy and are still employed (or retired). COVID-19 has affected each of us differently, but there’s no doubt it’s been a game changer for those of us at or near retirement.
What effect might the pandemic have on your financial life? I like to believe every problem comes packaged with its own solutions. Maybe it’s not a welcome solution, and maybe it doesn’t present itself as quickly as we’d like, but patience and precaution will pay dividends. By examining where we are and planning new steps to our goals, we can improve our chances of achieving the retirement we dreamed of so recently.
If you have a financial planner, schedule an update meeting in person or by video conference. If you’re on your own, it’s even more imperative to comb through your budget and long-term plan. Discuss these and any potential long-lasting changes with your partner. If you’re single, share your thoughts with a friend who is willing to give you honest feedback.
This pandemic could affect your priorities and monthly expenses for years to come. The goal is resiliency. As the Stanford Center on Longevity warns, “no one promised it would be easy to live 20 to 30 years in retirement. No one suggested you should just wing it.”
Depending on the shape of your long-term plan, you may need to increase cash reserves or cut spending. You may want to stretch out your working years if possible or delay collecting Social Security benefits for the 8% annual bonus. If you need to bridge the period between retiring and collecting benefits, consider such “gap” measures as a HELOC, liquidated life insurance, or reverse mortgage. These are major decisions which are best reviewed with a financial advisor.
One silver lining of quarantine times is potentially lower costs for the short term. Many automobile insurance companies are rebating part of the premium since less driving has led to fewer accidents. Check with your insurer and ask for a refund if one is not offered.
Most of us refrained from dining out during spring and summer. The year’s travel plans have been back-burnered. Some of us forfeited travel purchases for which we’d already paid, but other costs were saved.
If you’ve been paying an annual travel insurance policy and now don’t have upcoming plans, read your policy. You may be able to obtain a refund by canceling. Then, the next time you purchase travel insurance, check the policy for coverage in a pandemic. This coverage likely will only be possible with a “cancel for any reason” policy versus a “named peril” one. The pandemic is causing insurers to rewrite these types of policies to avoid liability, so ask questions and read the fine print.
This is my first pandemic, but I find myself reacting as I usually do in hard times: circle the wagons and hunker down. I look for ways to reduce expenses. I acknowledge my tendency over time to morph my “wants” into “needs.” Given that, I try to recognize that, even as my aging results in more desire for creature comforts, my actual needs are relatively small.
Nevertheless, some expenses may have increased. Overhauling our emergency kits for our home and cars has been a worthwhile project and expense for us. Health costs may increase. We have avoided coronavirus thus far, but as holders of a high-deductible policy, we recognize that we may have higher future costs if we contract coronavirus. When we switch to Medicare we will choose the best Medicare supplement available in our area.
On the investment side, do your best to stick with your long-term plan. Likely your plan does not call for selling low (whose corollary is buying high). If you are earning an income and still adding to your investments, use new funds to rebalance rather than selling existing funds for this purpose.
Investing is risky, whether you currently are staged in blue chips, spread out in mutual fund and ETFs, hunkered down in bonds and CDs, or banking on real estate or some other fixed assets. The five years before and five years following retirement are the riskiest in your financial life. They are the apex of investment risks: market, sequence, interest rate, longevity, inflation and health.
Market risk is the risk that your investments go down in value. Beyond stocks, the housing market may be down in your area just as you were planning to sell the family home to fund your retirement.
Sequence risk is the risk you have to sell some assets in a down (i.e., bear) market, leaving you with a smaller base when the recovery comes. You may never catch back up.
Interest rate risk means that when your CDs or bonds mature, you can only replace them with new ones paying considerably less interest.
Finally, COVID-19 adds to our ever-increasing health risk as we age. Perhaps the only risk which is lower is the risk of inflation. Your dollar buys about the same basket of goods now as it did a year ago, and may buy the same basket in a year.
It is not a happy time to be an investor, for sure. Nevertheless, it is the perfect time to be grateful for life, family and friends. Together, we will declare victory over COVID-19.
Karen Telleen-Lawton is a Certified Financial Planner in Santa Barbara, California.