By Sandra D. Adams, CFP
Do I need a coronavirus financial plan? This is a question that has come up several times over the last few months from both individuals and from media looking to get information out to the public. It is certainly an interesting question. Would we ask if we needed a “Hurricane Irma financial plan?” Or a “911 financial plan?”
As a financial planner who has worked with hundreds of clients over the years, my perspective is that if you have a solid long term plan, it should take into account these rough patches — these downturns in markets and the economy that may set your plan back periodically. And the fundamentals of your overall financial plan just become all that much more important when these times come around. What kinds of things am I talking about?
Emergency reserves: Having and maintaining a solid base of emergency reserves (cash or cash equivalents) is something that is recommended in all financial plans. It is one of the most important pieces to have in place to start yourself on your way to a sound financial future. During normal economic times, a minimum of 3 – 6 months’ worth of expenses should be held in emergency reserves. For those who feel more comfortable or have a more volatile employment situation, holding 9 – 12 months in emergency reserves is a more appropriate goal. As we approach times of more elevated economic stress, some clients prefer to hold 12 -24 months’ worth of expenses in cash, particularly if they are close to or in retirement.
Managing debt: Managing debt responsibly is part of a solid financial plan. Keeping overall debt as low as possible at ALL times is important. In particular, keeping retail debt (credit credits cards, purchasing things like furniture, etc., on credit) in check is important, as those sources of debt can get out of hand easily and tend to be the more expensive sources of debt over time. Mortgages and car loans can be less expensive forms of debt, but the balances will be higher. During times of financial crisis it is particularly important to pay close attention to what is absolutely necessary and to what rates you are paying on all sources of debt. Often times, there are ways to refinance debt to make payments more manageable when cash flow is tight.
Savings towards goals (like retirement): Consistency and discipline is the name of the game when it comes to saving for any life goal, particularly long term goals like retirement. Generally, saving on a consistent basis (usually beginning in an employer retirement plan on a pre-tax basis) and having the ability to increase the amount being saved over time is the best recipe for success. If you have an employer who matches some portion of your employer plan contributions AND you can also add savings outside of your employer retirement plan, even better!
During times of financial crisis like we are currently experiencing, you may be forced to cut back on retirement savings due to decreased work, layoffs, furloughs, etc. In addition, your employer may need to decrease or stop their matching program, at least on a temporary basis until the economy picks back up. If at all possible, continue to save SOMETHING towards your savings goals, even if it is much less than you were saving before. The mere act of continuing the process of saving will help you to pick up where you left off when things get back to normal. It is those that stop saving altogether that will have a hard time starting back up again, putting a major kink in their progress towards their savings goals.
Investment policy: Generally, you determine your investment policy — how you wish to invest, including your goals and objectives, liquidity needs, time horizon and risk, and asset allocation — before you design your investment portfolio. Your investment policy is meant to guide the management of your portfolio through short and long term markets, with the objective of meeting your goals within the constraints of your risk tolerance and time horizon given your chosen asset allocation.
Generally, if you have chosen the proper guidelines (especially asset allocation) you should be able to stay invested through various types of markets. This comes into play especially during difficult economic times when markets can get more volatile than normal. Those who are comfortable with their allocation (mix of bonds and stocks) and can stay invested even when things get a little rough will weather the investment storm much more successfully than those who go all to cash or cash and fixed income when fear sets in and then try to buy back into the market when they think that things are going back up again (by then it’s often too late!).
Insurance: Reviewing your plan to make sure that you have the rights kinds and amounts of insurance is always important.
Are you covered by employer disability insurance in the case that you are temporarily unable to work due to some kind of disability? If your employer does not offer this insurance, can you purchase this insurance reasonably on your own?
Do you have sufficient life insurance to cover your family for the income you provide to your family that would be missing if you were to pass away, to cover outstanding debts owed (mortgage, etc.), and to do things like sending your children to college?
If you are approaching middle age, have you thought about what might happen if you should have a long term care need and if you should consider covering that potential risk with insurance?
These are all risks that we should be considering ongoing as part of a solid overall financial plan. During times like these insurance issues get a little more complicated. Many insurance products have been modified or taken off of the market due to the coronavirus. Currently, many insurers are not offering insurance to individuals over age 65 and/or are temporarily not underwriting new policies for anyone who has recently traveled out of the country or has had the virus or knows someone personally who has had the virus. So, even if you had a need for life or Long term care insurance and were over age 65, you might not be able to get insurance currently.
Estate planning: Having currently drafted and up-to-date estate planning documents is always important, particularly powers of attorney for general financial and health care (the most important documents to have while you are still living). Never before have we seen how important these documents might be than during this pandemic. When individuals need to go in for care alone with no family allowed by their side, if they are ill enough to be unconscious in a hospital or nursing facility and do not have powers of attorney in place, there might be no one in place to help make crucial medical decisions on their behalf for their care.
In addition, this pandemic has brought to light the thousands of Americans that do not have wills in place — there has been a rush to draft wills, as many thought they might get sick and were not sure what might be the result. The simple truth is we should always have these documents in place and up to date so that in a crisis we would not have to worry that decisions could not be made responsibly on our behalf or that our estates were at risk.
So, do you need a coronavirus financial plan? No. Do you need a financial plan? Yes. If you have a solid overall financial plan, you will be prepared for any crisis.
About the author: Sandra D. Adams, CFP®
Sandra D. Adams, CFP®, can be reached at 248-948-7900, Center for Financial Planning, Inc. 24800 Denso Drive, Ste. 300 Southfield, MI 48033. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements. Any opinions are those of Sandra D. Adams, and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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