Financial Planning Before and During a Pandemic
The COVID-19 pandemic has had sudden and significant repercussions for how individuals conduct their financial planning, specifically, how they approach their spending and saving goals. Many households have seen a steep reduction in income and have subsequently, though unintentionally, burned through their savings as the pandemic nears the one year mark. For many, this pandemic has illustrated the critical role that liquid assets play in an individual’s financial health and the importance of planning ahead for such unforeseen circumstances.
The pandemic’s economic side effects also have significant implications for when and how older adults plan their retirements. Not only have older workers experienced some of the highest rates of job loss of any age group but it is likely that older workers will also take much longer to become re-employed than younger workers, a pattern we have seen in previous recessions. This has led many older individuals to consider early retirement. But this presumes that they have the financial ability to do so.
The economic shock related to the current ongoing pandemic illustrates the importance of having emergency cash reserves on hand and viewing savings as an essential part of financial health and planning. While the size of an emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. This amount can seem daunting but the idea is to put a small amount away each week or two to build up to that goal. Unfortunately, most households did not have a healthy cash reserve when the pandemic hit, leading many to struggle financially and resorting to dipping into retirement savings.
In an effort to help individuals affected by COVID-19 access cash, the CARES Act was signed into law in late March of 2020. This act enables COVID-affected individuals to take up to $100,000 from their IRAs and 401(k)s without the additional 10% penalty that normally applies to early withdrawals. Taxes on those withdrawals still apply, but the provision also allows such individuals to pay those taxes, and pay back the withdrawn funds, over a three-year period.
However, drawing from retirement funds, such as an IRA or 401(k), should always be a last resort. Withdrawing from retirement accounts is suboptimal because those withdrawn funds cannot benefit from market appreciation. That money is intended to last an individual through their retirement years. If those funds are being accessed early it is unlikely that they will be built back up in order to appreciate in value and to be there when you need it most, during the years in which you cannot and should not have to work.
Financial advisors can play a role in helping clients set a savings goal for these emergency funds based on factors like their employment status, variability of earnings, number of earners in the family, etc. Advisors can also help clients determine where to hold their emergency funds. While a nonretirement brokerage account is the simplest holding place for short-term cash needs, other vehicles can also work. For example, health savings account assets can be used in the emergency funds context to pay healthcare expenses. Consider meeting with a certified financial advisor or doing an audit of your financial health yourself. There is no time like the present to start saving and planning for the future.
Ask Bertie: Flying Reindeer
Hook Law Center: Hi Bertie! Where Did We Get The Myth of Santa’s Flying Reindeer?
Santa Claus became connected to reindeer largely through the influence of the 1823 anonymous poem, “A visit from St. Nicholas.” In this poem, Saint Nicholas arrives with eight tiny reindeer pulling a sleigh full of toys and, miraculously, the reindeer have the ability to fly. Interestingly, many scholars believe that this fictionalized tale has a foundation in fact from which the anonymous storyteller drew upon.
The origins of the animals’ flight may be linked back to the Saami reindeer herders of northern Scandinavia. The herders were said to feed their reindeer a type of red and white mushroom with psychedelic properties known as fly agaric fungi (Amanita muscaria). The mushrooms made the reindeer leap about giving the impression of flying.
The herders would then collect and consume the reindeers urine with its toxins made safe by the reindeers metabolism. The reindeer herders could then possibly imagine the miraculous flight through the psychedelic properties of the mushroom. However, while this seems to be a very plausible theory it is disputed by some.