- In these topsy turvy times, it can be hard to know how to go about ensuring your long-term financial health.
- Even before the pandemic, many underestimated their need to be proactive about saving for retirement.
- It may be tempting to reduce or pause your retirement contributions. Unless absolutely necessary, the best thing to do is ignore the panic and stay the course.
No matter where you have been investing your money or whether you've started investing at all, now is a good time to reevaluate your portfolio and assess potential opportunities.
There is no question that the COVID-19 pandemic is wreaking devastation on people's finances – the Congressional Budget Office estimated recently that the crisis has wiped out close to $8 trillion in growth that the US economy would have otherwise seen over the next decade.
The unemployment rate is three times what it was in February. And yet, the stock market is rallying, which only reinforces the illusion of stability, prompting people to invest on a self-service basis to unprecedented degrees, while staying at home.
But even before the pandemic, many underestimated their need to be proactive about saving for retirement. With the gig economy surging over the past decade, employee benefits are less of a factor, putting more onus than ever on individuals to manage their own long-term financial planning. All the while, younger generations are trending towards earning less than – and living longer than – their predecessors.
Do you plan to keep working well into your 70s? The reality of today's economy dictates that you might have to.
In these topsy turvy times, it can be hard to know how to go about ensuring your long-term financial health. But with the economy being as it is, whatever advice you acted on in the past, and whatever mix of long-term investment types you felt served your retirement needs best, it's probably a good idea to revisit that logic.
What was once a conservative investment may have become high-risk, and vice versa. New tax benefits, stimulus grants and bailouts are rapidly changing the landscape, too. This is the time to take a step back and think about the best way to attain your retirement goals.
First, secure your emergency fund
While it's often true that it takes money to make money, investing without savings is not a good idea. Before taking the plunge, make sure that you are earning enough to live on and have cleared out any high-interest debts, for example credit card debt.
If you are covering your monthly expenses and have money left over, set some aside until you have enough for your household to live on for a few months – this is your emergency fund. If you are unable to work or have to cover an unexpected expense, this fund will make sure that you don't have to dip into your long-term investments to cover the gap.
Have you received stimulus money that you don't need for immediate expenses? Consider putting that towards your emergency fund if you don't already have one. Your emergency fund should cover at least three months of expenses, with six months being the ideal benchmark.
Once you've reached your target amount, there are a few ways for you to lock up your fund that will be both secure, easy to access, and may even earn you some interest. Some options include a high-yield bank account, money market accounts and Roth IRAs.
IRA or Roth IRA? It all depends on you.
Individual retirement plans, or IRAs, let you contribute money that may be eligible for a deduction on your tax return. Plus you can defer taxes until you retire, when you will likely be in a lower tax bracket. If you've been laid off or your employer isn't keeping up with contributions, you can rollover eligible assets to an IRA.
If you are expecting to earn less income this year than last year, then it may be a good idea to consider converting some or all of your IRA holdings to a Roth IRA investment account. This means that you will owe tax on the converted funds now, but you will be able to withdraw from them tax-free in the future. Why does it matter if you are earning less? If you place in a lower bracket or are on unemployment, you will pay less taxes on your Roth IRA conversion. Just make sure that you have the funds to cover the taxes without having to dip into your retirement funds.
Another reason to convert now is the dip in the market. While this may have negatively impacted your portfolio, it also means that it's a buyers market. Buying low now could mean big earnings as the economy inevitably recovers down the line.
Keeping up with your 401(k)
During difficult and volatile times, it may be tempting to reduce or pause your retirement contributions.
Unless absolutely necessary, the best thing to do is ignore the panic and stay the course. Continuing to make contributions even if your portfolio has taken a hit is your best bet right now. It may even be a good time to increase your contributions with stock prices lower. When the market returns and stock prices stabilize, this will translate to investment gains.
Another reason to keep investing, or to begin investing, is that every second counts. For many Americans, the number to hit for secure retirement is $1.7 million, and that can take a lot of time to build up to. Considering the current uncertainty, the faster you get started, the sooner you will be able to reach whatever the right number is for you. With many funds having taken hits, if you are still employed and spending less under lockdown, putting some extra money into retirement savings is a great way to get ahead of your financial goals.
In one recent survey, researchers found that 12 percent of employers have suspended matching 401k contributions, and another 23 percent are considering suspending contributions. If your employer is suspending or cutting 401k contributions, or if you have been fired, then consider rolling your savings over to an IRA or Roth IRA. Taking money out of your 401k may come with hefty penalties, so keeping this money invested is your best bet.
Laying foundations with real estate investment
With the tumult of the markets, many investors are looking at the resilient real estate market for long term financial growth. This has been the case for nearly a decade, with 35 percent of Americans ranking real estate as the best investment bet over stocks, savings accounts, or gold.
This isn't a bad idea – housing prices are still rising and will likely continue to do so into the future. But there are a few things to keep in mind. Even if this downturn won't affect housing the way it did during the 2008 crisis, unless you are confident that you will be able to make your mortgage payments and have saved money for a down payment, this type of long-term investment is a major commitment.
Of course, with interest rates lower than they've been in years, mortgages are more affordable, so if you are secure then this is a good time to buy. If you currently own your home, these reduced interest rates mean it is a good time to refinance for more favorable terms.
If you are looking at investing in rental or commercial real estate, COVID-19 has created some unfavorable circumstances you should be aware of. While unemployment and recession mean more people are renting than buying, with some even selling their homes and moving to a rental. The economic situation also means more tenants will be unable to pay rent consistently. Plus, distancing restrictions make showing properties a challenge.
For larger commercial properties, the market has fallen dramatically. With a 28 percent dip across all industries and a 48 percent drop in travel and tourism properties, buying into commercial real estate is tempting but poses risks if the industry doesn't recover.
Taking stock of the market
One interesting investment trend that has emerged during the pandemic is online stock investing. Investment apps are surging in popularity, with Robinhood growing it's retail investor user base and experiencing a threefold increase in trades in the first half of 2020. The average age of users hovers at around 30, making stock trading the millennial investment of choice these days – but there is plenty to be wary of.
Many of the young people flocking to online investing are first-time investors with time on their hands and little money to spare. If you're looking to recoup lockdown losses or make a quick buck, know that stock market investing is risky and may not be the best idea for a long-term retirement strategy.
If you are able to maintain an emergency fund, make regular contributions to secure, long-term investments, and still have some money left over to play with, then the market is a great place to explore, with caution. But if you don't have a safety net, focus on saving first.
Conclusion
Calling these times uncertain and tumultuous is an understatement. But despite short term chaos, it is important to stay committed to your long term financial goals. For most Americans, retirement means saving every month for decades on end – the pandemic hasn't changed this.
However, it may be time to reassess your investments. For example, if your income has been cut or you are unemployed, then converting your IRAs or 401k to Roth IRAs may be your best bet. Of course, always make sure you are making your monthly expenses and have an emergency fund on hand before investing.
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