“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.”
– Confucius
While many people are rushing to the grocery and big-box stores around the world to stock up on life’s necessities, many are failing to see the long-term implications of reviewing their financial situation. Instead, individuals are replacing their well-thought-out strategies with emotional reactions, often through fear. In times of fear, the action itself does not matter rather, any gut instinct can feel necessary. This is why if you go to a grocery store today there are empty shelves amid a misguided rush on toilet paper.
At My Financial Coach, we agree that it is important to follow the advice of the Center for Disease Control and Prevention (CDC), and it is in your best interest to be concerned about the impact of the Coronavirus (COVID-19). That said, an individual needs to take action and have a measured response to this situation. From a medical perspective, we would highly recommend following the latest advice from the World Health Organization and federal, state, and city governments.
We are all in this together. As we wrote previously My Financial Coach is taking steps to be safe and available to those who might need a voice of reason when the world seems unreasonable. For those that might find the expense of financial planning to be a barrier to getting help, we are even waiving our onboarding fees so that we can help more people make sound financial decisions.
There is a lot of news out there, and deciphering between fact, fiction, and speculation can be difficult. Recognizing that we are not health professionals, we have been fortunate to have leadership at My Financial Coach that is keyed into the major societal health and economic issues working with those looking for answers.
As you educate yourself on the facts and follow these precautions, you can then focus on positive action items in your own personal finances that can help improve your situation. Below are five financial steps that My Financial Coach recommends you should consider taking in these uncertain times:
Reviewing Your Budget
Budgeting may not sound like the fun and exciting Instagram worthy 
move but it is by far the most essential! Understanding your income and expenses helps you understand the big picture of your finances. Through this exercise, you may even find that you do not even need to make adjustments. However, by reviewing your numbers you are now armed with important information on how much flexibility you have. Furthermore, this information can arm you to review and prepare in case of an unexpected job loss.
Some questions to ask yourself during this step: How would an unexpected job loss affect your budget and what life/career decisions would you need to change? Is your emergency fund built? Is there anything in your budget that you can easily do without?
Roth Conversion
For all of the unfortunate market news, did you know that there may be a silver lining for those that have been saving for retirement with pre-tax funds into a 401(k) or Traditional IRA? Now could be a great time to consider Roth Conversions. While you should always consider the tax ramifications of your own personal situation, with current market indices like the Dow Jones, S&P 500, and Nasdaq has dropped dramatically, the opportunity to convert assets can possibly create a lower future tax bill. This strategy allows a “discounted” asset to be moved from a pre-tax account to a Roth, with the cost of the conversion locked in on the day of the conversion The benefit of this strategy is that as the economy recovers, these funds can now grow tax-free inside of the Roth account. See example below:
Terry is 40 years old and has saved and grown $50,000 in pre-tax assets inside of her Traditional IRA. During the downturn in the economy, her portfolio lost 30% in value dropping to $35,000. She decides to convert her $35,000 to a Roth IRA which will be added to the calendar year’s taxes (as ordinary income). Now, these funds are in a Roth IRA and going forward will grow tax-free for the rest of her life. Had she converted, when the economy was doing well, she could have owed taxes on $50,000 of ordinary income but is instead taxed on $35,000? For someone in a 25% Federal tax bracket, she could pay $6,250 in taxes instead of $12,500 – a savings of $6,250!
It is worth noting that prior to 2018, a tax-payer could reverse a Roth conversion through the use of a Roth Recharacterization. Recharacterizations are no longer permitted for anyone making a Roth conversion so we recommend consulting with a qualified tax-specialist before committing to this transfer.
Refinance Your Mortgage:
Currently, the Federal Reserve Board (FED) has introduced 0% interest rates in response to the current economic situation caused by the Coronavirus. This has rocked the mortgage market lending rate but for you the consumer this can be a great opportunity to consider refinancing your mortgage. When it comes to refinancing, you can work with a lender to see if you qualify for lower rates, as well as discuss whether rolling the fees into the loan or paying for them upfront is the best option. Some lenders are even waiving fees but often offer slightly higher interest rates in this situation. Here is a link to a great mortgage refinancing tool from NerdWallet that you can use to get started!
Tax Loss Harvesting:
For those that have been investing in a taxable brokerage account, the current market downturn has likely resulted in some losses. If you are expecting higher taxes this year, this could be a great opportunity to sell assets that are held in a taxable account at a loss. These tax losses can be used to offset potential capital gains you may have had in the current year, carried over indefinitely to be used against future years’ gains, or have up to $3,000 per year ($1,500 if married filing separately) to offset ordinary income.
It’s also important to be careful around the wash sale rules as you invest back into similar holdings. By investing back into the market at a later date, you can take the loss but still potentially get back into the same position to capture the future growth potential. While we are not advocates of market timing as a long-term strategy for building wealth, there can be some strategies around timing that can have a profound impact on your tax bill.
Rebalancing From Bonds to Stocks
Yes, you read that correctly. While it might be hard to follow why you may 
want to buy or sell assets in today’s turbulent markets, headline news should not be a factor in how you choose to invest. For those of you that do your own investing, an efficient-markets based approach is tracking one’s portfolio based on an asset allocation between stocks and bonds that is appropriate for your objective, time-horizon, and risk tolerance without regard for headlines as it assumes the markets are priced fairly daily given all available information. With major market movements occurring in stocks, this could have affected your desired asset allocation and as a result, you may now have more bonds than desired. See example below:
Tom has been running a retirement investment portfolio at 80% stock and 20% bonds in his 401(k) and IRA’s. Tom has 20 years left until retirement. With a 32% decrease in stocks and 5% gain from his investment-grade bonds, Tom’s asset allocation now sits at 72% stocks and 28% bonds. To stay in line with Tom’s goals and investment risk, Tom should sell the outperforming bonds and buy the underperforming stocks to bring it back to the desired 80% stock to 20% bonds allocation for his retirement goals.
The advantage of running a stock to bond allocation strategy is that it forces you to buy stocks if they go down (on discount) and sell out if they go up with major market movements. Unfortunately, many investors instead choose to sell out when markets go down and buy in after they come back up (at a premium). Under more stable market conditions you may be able to go years without rebalancing due to continuing contributions to your 401(k), IRAs, and other investment accounts that are in line with your allocation. However, when major market changes occur, it is time to review your portfolio for opportunities and adjust accordingly.
Our Part
During this time My Financial Coach wants to do our part to help people with making important financial decisions. We understand an initial upfront fee can be a barrier to speaking with an expert to help you with your finances especially when your financial priorities may be stretched thin. In light of this, we are waving our $900 onboarding fee for any participants that sign up to speak with a Financial Coach until May 1st, 2020. We want to provide this opportunity to those that want a customized plan for their specific situation done by a trusted CERTIFIED FINANCIAL PLANNER™.
To see if speaking with a Financial Coach is right for you, Click Here to schedule a no-obligation introduction meeting today!
Best,
James Hargrave
Director of Financial Planning
