One of the questions that I get asked most frequently by retirees is “What should I do now?”
Given that many have seen their portfolio balances plummet, they wonder how they will access the cash they need to pay the bills without jeopardizing their ability to pay for future needs. Today, there are several considerations that have changed the advice that you might normally receive.
To determine what we should do, we first want to see how much money we are sending out each month. Next, we want to determine if we have untapped income streams available to us. Finally, if we have to access funds to pay for expenses that we can’t trim, we want to do it in the way that makes sense long term!
Here are some good things to do in the short term that benefit you in the long term.
One of the hardest things to do is reduce expenses. This usually means telling ourselves, our spouses, and children that we will not get something that we want or have become accustomed to. However, beyond the traditional cost-cutting strategies, you can also appeal to many lenders such as mortgage companies and utilities providers to see what programs they have in place to defer payments that are due. The following link, provided by the American Bankers Association, allows you to see what specific banks are doing for their consumers. ABA COVID19 Response
File for Unemployment
The United States is seeing historically high unemployment claims. For many retirees (especially early in retirement) working part time is the new normal. The CARES act not only increased benefits but it also broadened eligibility. The process of filing for unemployment varies by state and the process can be time consuming. However, if you manage to get through the process, you may find that these enhanced benefits are well worth your time and effort.
Withdraw money from my emergency fund
If you have an emergency fund then now is the time to use it! Having the President declare an emergency across all 50 states means that you certainly should feel free to access that cash. This emergency fund should be in cash or cash-like alternatives so you should not have seen a steep drop in the value of these accounts. Remember, you will want to replenish this account once things begin to stabilize.
Start taking Social Security (maybe)
Part of beginning your retirement journey is determining your optimal age to take Social Security. Remember that for every year you delay taking Social Security you increase your annual benefit by approximately 8%. The short-term benefit of generating a monthly paycheck from the government can have long term implications. Delaying benefits by five years can increase your monthly paycheck by nearly 50%! Starting Social Security early is probably not your best alternative.
Take money out of my taxable accounts
This may be an appropriate alternative for you. The primary considerations are how to sell some assets at capital losses to offset your taxable income for this year. You should consider the long-term outlook for the securities that you are selling. If you believe that they will rebound in the next 18 months, then you want to limit the sales to only what you absolutely need to survive.
Withdraw money from my ROTH IRA
For many people this is a tempting alternative because there may be no tax impact to taking money from this account. However, this also means that you are not receiving the benefit of tax loss harvesting either. The most important question to answer before you take money from the ROTH is whether the securities being sold will likely recover quickly. If you believe that they will recover quickly then look for alternative sources to withdraw money.
Use money from my IRA or 401K
The CARES allows people to make penalty-free withdrawals from these tax advantaged accounts if they have suffered harm related to COVID-19. This money is being treated as a loan to yourself and must be repaid within the next three years. Look to sell out of funds that may have lower long-term prospects. Remember that any money that you borrow you will not invest— and it will not grow in value if markets recover before you pay it back.
For most of us, these last two months have been unlike any other part of our lives. Being told to “stay home” and possibly being told “don’t work” is very unusual for most Americans. It is important to remember that this situation is temporary and to try to make short term decisions such as how to access needed cash without creating long term hardships.