It’s happening all across the country. In the midst of work and home life being upended in response to the Covid-19 pandemic, many physicians and allied healthcare professionals are finding that they are within just a pay period or two of a salary cut or furlough.
The reactions to this news can vary. For the fortunate few a furlough is a low-key staycation and an opportunity to relax. For many, many more a pay reduction doesn’t come with a chance to renew. Instead, you may be finding that fulfilling your professional oath comes by way of threat to personal health and getting compensated less. What can be done? How can your finances be maintained in this uncertain and stressful time?
I strongly assert that there are not always-right and very few always-wrong answers. While every situation is different, here are a few tips for navigating this space.
If you won’t make it to your next paycheck: In the words of the well-loved children’s book We’re Going on a Bear Hunt that I read often to my daughter when her daddy was deployed “We can’t go under it, we can’t go over it, we’ve got to go through it.” Start with reviewing your budget and identifying sources of cash when a shortfall occurs. You may choose to work with a CFP® professional who is offering pro-bono financial advice in response to COVID-19. Access a list of advisors, including RVPF, who are offering pro-bono services at the XY Planning Network.
The CARES Act (mostly known for direct stimulus payments) provides for enhanced access to retirement accounts like 401(k)s, 403(b)s or IRAs. Covid-19 related distributions, such as those resulting from income loss due to hours being cut, lay-offs or loss of childcare, may be taken up to $100,000 without the standard 10% penalty. Associated income taxes may be spread out over three years.
Roth IRAs may be another source of funds as contributions, but not distributions, may be accessed without penalty. Keep in mind that these funds cannot be put back into the Roth IRA, other than annual contributions, when cash flow frees up again.
Some home lenders have put consumer assistance programs in place, such as Wells Fargo when they announced that they will grant an immediate three-month suspension for borrowers who request it. Utility companies are also stepping up to the plate as some have put measures in place to help customers including waived late fees, reduction of credit card payment fees, and elimination of shut-offs. Local and state governments may also have policies in place that protect consumers.
Opening new lines of credit is getting harder due to high demand associated with falling interest rates and general income insecurity. Home equity loans, 401(k)/TSP loans, cash values of life insurance and credit cards are all additional sometimes-right options. A few almost always wrong answers are payday loans and vehicle title loans. The interest rates on these high-cost consumer products are exorbitantly high and often create more problems than they solve. Other options are to seek assistance from a family member who may be feeling more generous than usual or dare I say even pick-up an hourly retail job for yourself or your spouse. In many places retail establishments are hiring on-the-spot as the labor force gets completely rearranged. Maybe you even have a friend or family member in need of a place to stay after losing their own job and they could provide some amount of income or childcare.
If you're still able to make ends meet: Thankfully this situation is more about prioritizing than surviving. With at least six months or more of expenses in a liquid account like checking, savings, or a brokerage account then it’s wise to continue funding long-term assets like a 401(k), 403(b) or TSP.
If your emergency fund isn’t quite at the six-month threshold then reducing contributions to restricted qualified accounts makes sense, especially if you don’t have a second income earner to rely upon. IRA contributions can be suspended and then later funded up to the April 15, 2021 deadline. Extra payments on debts should be eliminated to focus on increasing savings. It’s difficult to do with stock market prices relatively low, but even stopping contributions to a 529 college savings plan or HSA may be a right next step as both of these can be funded later in the year. If you have funds sitting in a Flexible Spending Account you should request reimbursement provided that you have qualifying expenses instead of waiting until the end of the year.
It’s tempting to carry on as usual and hope that your job will be spared, however it’s possible that financially-strained hospitals won’t survive or will face permanent staffing cuts. I hate to be a pessimist, but it’s better to err on the side of caution and build up cash savings where and when possible.
If you're financially comfortable: Relatively frugal professionals who have routinely socked away a significant portion of their income may enjoy a sigh of relief. While there is never a guarantee, continuing to invest through stock market volatility may lead to enviable long-term returns. If you are sitting on a sum of low-yielding cash, it’s worth considering implementing or supplementing a well-diversified investment strategy. It’s definitely time to evaluate the merits of a Roth conversion. You may be able to convert more shares at a lower tax rate resulting in higher long-term after-tax returns. Another must-do is to rebalance your portfolio for tax loss harvesting. While the mechanics of tax loss harvesting are beyond the scope of this article, it’s worth conducting further research or reaching out for advice.
It’s also prime time to seek opportunities to support others through either charitable donations or purchasing from locally owned establishments that are struggling to survive.
For everyone: The threat to your personal health may be imminent or seem far-off, but everyone is well-served to make sure that their estate plan is in order. It was this story of a 37-year old OMFS senior resident and father of three who died from suspected Covid-19 that struck me most seriously. If you don’t have an estate plan in place, use an online service or contact an attorney who may be offering virtual services to get estate planning documents completed. Some states, including my home state of Iowa, have modified requirements about the physical presence of mandatory parties when executing legal documents. Designate beneficiaries on your retirement plans, savings accounts, life insurance and other assets. Write down your accounts and grant someone legacy/trusted person access to your digital assets such as Facebook and Gmail. And for goodness sake, tell someone where you have stored this information in the event that it is needed.
It’s stressful and hard to face uncertainty and the pressure may be storming at you on multiple fronts right now. I’m hopeful that we’ll collectively emerge from this more resilient on all levels. If you’re looking for someone to help that become a reality for your financial life, please get in touch with me using the form below.