5 Planning Strategies For 2020
As we wrap the first quarter of 2020, the whirlwind continues. Last Friday, the U.S. Congress passed and our President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. This stimulus package and new law affects nearly everyone and provides many opportunities to adjust planning strategies. Also, we received the first full week of economic data impacted by the orchestrated shutdown related to the COVID-19 pandemic. It’s pretty ugly. We cannot anchor on how good the economy felt going into 2020. Instead, we all need to quickly reset our expectations and planning.
Below are five planning strategies and considerations we think you should consider for the remainder of 2020.
Understand How the CARES Act Applies to Your Family and/or Business
First, The CARES Act is a massive $2 trillion federal stimulus package aimed at alleviating the painful economic disruption brought on by COVID-19. The primary policy tools the federal government chose to assist Americans included refundable income tax credits; temporary waivers for accessing cash from retirement plans; additional tax law and debt repayment deferral provisions; an expansion of unemployment benefits; and small business loans, payroll tax deferrals, and debt forgiveness benefits.
We are still digesting The CARES Act and range of potential benefits to taxpayers. If you have any questions, please reach out to us. We may not know the answer, but we can certainly research it for you. However, please know that we may have to wait on regulatory guidance for certain questions. Here is a detailed initial resource you may find helpful.
We want our clients to understand how The CARES Act impacts their family. We will be reaching out in the weeks and months to come with planning recommendations, but please don’t hesitate with any questions in the meantime.
Analyze the Impact of Your Cash Flow
As hyped as The CARES Act was last week, the impact on most families’ cash flow will be modest. A one-time check for few thousand dollars simply doesn’t go that far for most Americans when faced with job or income loss. A significant increase in weekly unemployment benefits will certainly help, but most impacted individuals will need to also fall back on the oldest social safety net of all – family and community.
There is a tremendous opportunity for individuals who have been blessed and are faithful financial stewards to bless hurting family members, neighbors, and organizations. Charitable giving will decline significantly as many businesses and families look to survive financially. Now is not the time for the rest of us to pull back. The greatest returns are earned by investors who have the margin to wisely invest in a financial crisis. Likewise, the greatest impact is made by stewards who give their financial, social, and spiritual capital in a human crisis. Let’s not miss the opportunity.
Refresh Your Financial and Tax Planning Strategy
The CARES Act is going to materially change the tax planning strategy for some families and businesses in 2020. Turmoil in capital markets will also provide opportunities. A few examples include:
Required Minimum Distributions (RMDs) can be skipped in 2020.
Coronavirus-Related Distributions from retirement plans have more favorable tax treatment.
Certain small businesses can qualify for SBA loans at low interest rates and are eligible for full or partial forgiveness based on certain guidelines.
Opportunity for Roth Conversions given the market sell-off and potentially lower income.
Tax loss harvesting and portfolio rebalancing to a more aggressive asset allocation. This primarily means selling bonds and buying stocks in 401(k)’s and other investment accounts.
Ability to refinance mortgage debt and other liabilities to more favorable terms.
The CARES Act allows for more financial planning flexibility than the typical year. We encourage you to take advantage of these temporary tax law changes and favorable financing options if they apply to you and are beneficial.
Slow Down Opportunistic Investing
After one of the quickest declines in stock market history, last week, equities rebounded sharply on the promise of The CARES Act stimulus package. We answered a number of calls and emails from optimistic clients looking to invest cash quickly. While current valuations are much more favorable than at the beginning of the year, our advice is slow down and pace your investment strategy.
We are headed into a recession. If you’re in doubt about this, please refer to the weekly unemployment claims number – a leading economic indicator - from last Thursday. A rule of thumb economists use is that when unemployment claims rise above 400,000 per week, we’re usually headed into a recession. Last week, initial claims spiked from close to all-time lows to 3.2+ million. And that’s just the first week. The CARES Act may cushion the blow, but the decline in economic activity will be severe and a recovery will be dependent on the containment of the COVID-19 pandemic. This is not cause for panic, but a realistic understanding of the challenge we’re facing. Instead of trying to time the bottom, we recommend investors who have analyzed their cash flow pursue a dollar cost averaging strategy of investing in public and private investments. This strategy has multiple benefits, but the primary ones are avoiding analysis paralysis, avoiding the mental trap of waiting to “go all-in”, and minimizing potential future regret over mistiming the downturn.
Reset Your Expectations
Finally, all of us need to rethink our thinking. The vast majority of us have never lived through a pandemic before and we don’t know anyone who did. We simply don’t have a category for what’s happening now. We mentally anchor on how good the economy felt headed into 2020 or on a prior crisis in our collective memory like 9/11 or the Great Financial Crisis. In reality, we are facing an entirely different type of crisis today. It is time to reset our expectations. We highly recommend reading or listening to this thoughtful discussion from Andy Crouch at Praxis Labs, directed especially at leaders of organizations. To summarize his analogy, we are treating the current COVID-19 outbreak as a blizzard (15 Days to Slow the Spread to now 45 days) while our leading epidemiologists are describing this pandemic as winter (several months) to even a mini-Ice Age (18 – 24 months). That has significant implications for how we sustainably plan our lives and work and mission as businesses or non-profit organizations. While strict quarantine requirements may be over in 30 days, we all have a new normal to adjust to beyond that period. Most of us need a new playbook.
Our world is going to change, and fear is a natural response. But sudden change does not mean we are to live in a spirit of fear. In fact, the most relevant truth about living in an age of uncertainty came from the Apostle Paul almost 2,000 years ago:
“for God gave us a spirit not of fear but of power and love and self-control.” – 1 Timothy 1:7
Empowerment, love, and self-control… all these lived out are the antidotes to fear. As we all reset for 2020, we hope these qualities will define your plans. It is our pleasure to serve your family during this time of uncertainty.
Daniel T. Phillips, CFA®, CFP®
As Director of Investments, Daniel has served as part of the core team that launched EverSource Wealth Advisors. He advises on the development of EverSource’s middle office services and technology platform with a focus on the investment consulting needs and experience of advisors.