Making Ends Meet Part 1- Bridging Expense Gaps During and After the COVID-19 Crisis

By Chris Ishida, Director, Financial Planning, Financial Engines

Financial relief from the federal government

The impacts from the coronavirus pandemic have been widespread. We’ve seen a new record for the highest one-week number of initial unemployment claims since the Department of Labor started tracking those figures back in 1967. More than 15 percent of the work force has lost their jobs. The $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act stimulus package signed into law on March 27 is designed to put cash directly into the pockets of millions of Americans and businesses to alleviate some of the financial suffering.

Paying for basic needs

A recent survey from SimplyWise found that 40% of Americans’ income has been lost or reduced due to the virus response. And 43% of those who have been put out of work are not confident they will even have a job in the next three months.

The CARES Act stimulus payments will help people meet immediate needs, such as buying groceries, and paying for rent, prescriptions and utilities. A number of people say they will need the money to make late payments on loans and mortgages. While paying off debt is usually a good financial move, many banks have pledged to help customers who are having trouble making payments on bills and loans, including skipping or deferring payments. Check with your lenders to see what assistance they are offering.

Filling the income gaps

Half of U.S. households have no emergency savings, and nearly 40% would struggle to afford an unexpected expense of $400, according to a survey by the Federal Reserve. For many of the people in these households, stimulus money may not be enough to cover essential bills. What’s needed is a way to create extra income.

According to a SimplyWise survey, here are a few options Americans are considering.

Seek part-time work

While 15% of survey respondents are planning to apply for unemployment insurance, almost a third (30%) of respondents said they would look for part-time work to fill in their budget gaps.

While recruiting in your primary occupation may be down, many companies are still actively recruiting. Businesses offering essential services like Aldi, Amazon, CVS, Walmart, Kroger and FedEx are bringing on tens of thousands of new workers. New Jersey and Los Angeles have created job portals that list opportunities for those unemployed or underemployed due to the pandemic.

Ask yourself:

  • Is my resumé up-to-date and are my social media accounts suitable for a potential employer to view?
  • Do I have the technology in place to do video interviews and work remotely?

Sell assets

Online marketplaces, such as eBay, Etsy, eBid, Bonanza and others, make it easy to sell personal property for cash, and 15% of survey respondents indicated they would sell assets, including their home or car. Keep in mind buyers may be reluctant to purchase non-essential items while money is tight for so many. You can check with  eBay for tips on selling goods during the pandemic.

If you’re considering selling a house, understand that the traditional spring-time real estate market will probably not operate as usual. Nearly half of realtors surveyed by the National Association of Realtors said home buyer interest has decreased due to coronavirus-related concerns.

There are many questions to answer before listing your home, including whether you have enough equity to turn a profit and whether substitute housing is available. Given the need for social distancing, the sale of real property would have to be through a video tour, which could add to the difficulty for sellers.

Ask yourself:

  • Do I have items that are in demand and that I won’t regret selling later?
  • Do I have the time and resources to monitor the sales process and then pack and ship sold items?

Borrow from family or a bank

The SimplyWise survey found that 16% plan to borrow from a family member or friend, while just 10% said they would get a loan from a bank.

Turning to loved ones for short-term funds may be a good way to get a better interest rate without lots of paperwork. But when borrowing from a family member, it’s important to be very clear about loan terms and expectations. Writing up a contract may help avoid misunderstandings and family tension.

Many banks are offering to help customers during the pandemic. Five federal agencies—the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency— issued a joint statement issued a joint statement encouraging financial institutions to “offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. Do your research to find a loan with a good interest rate that is structured to meet your needs.

Ask yourself:

  • Is my credit rating high enough to get a decent interest rate on a loan?
  • Could I combine a loan with other income sources to make the loan as small as possible and limit my debt?

Borrow from your retirement savings

Think very carefully before taking a loan from your 401(k) as it can have long-term impacts on your retirement readiness. The cash you take out of your account won’t have the opportunity to grow over time. This could make it harder to reach your retirement income goals. Retirement plan loans tend to offer favorable interest rates, but you will be paying yourself back—with interest—through automatic payroll deductions. Pay careful attention to whether you can still make paycheck contributions if you have an outstanding loan—if not, you’ll be losing your company matching contributions. IRS.gov has more information on coronavirus related relief for retirement plans.

Ask yourself:

  • If I lose my job, will I be able to pay back the loan all at once?
  • Will the loan repayments make it hard to continue making contributions to my account?

Take a retirement account withdrawal

The SimplyWise survey discovered that 14% of respondents plan on withdrawing from their retirement funds. Taking a withdrawal from your retirement account should be a last resort because it will mean you’ll likely have less money available when you hit retirement. The new stimulus package removed the 10% early withdrawal penalty, so that’s a plus. But you will still owe income taxes on the money you take out. Consider your other options first, and then consult with a financial advisor before requesting a withdrawal.

Ask yourself:

  • Do I really want to sell investments in my retirement account when the market is down?
  • Can I combine a small withdrawal with other income sources to minimize the negative effects on my future retirement income?

Understand your options and ask for help

This is an incredibly difficult time. Many two-income families are now trying to survive on a single wage earner. Some have the additional burden of caring for sick loved ones or worse, being sick themselves. Use the time you have while staying at home to educate yourself about all the available options to bridge the expense and income gaps through the crisis. An advisor can provide a calm and objective view to help you make smart decisions.

In Part 2 of Making Ends Meet we take a look at how personal loans may help support your finances.

© 2020 Edelman Financial Engines, LLC. Financial Engines® is a registered trademark of Edelman Financial Engines, LLC. All advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor. Results are not guaranteed. See FinancialEngines.com/patent-information for patent information. Financial Engines Advisors L.L.C.; Attn: Investor Services; 4742 N. 24th Street, Suite 270; Phoenix, AZ 85016 Links to third-party content are intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals, or points of view outside Financial Engines. AM117811</h6)

Making Ends Meet Part 2 – Bridging Income Gaps With Personal Loans

By Chris Ishida, Director, Financial Planning, Financial Engines

In Part 1 of our “Making Ends Meet” series, Bridging Expense Gaps During and After the COVID-19 Crisis (avaiable in the Education Center), we described some of the financial resources that could help bridge your household’s expense gaps in the wake of the COVID-19 economic slowdown. In Part 2, we look at how one of those resources — personal loans — may help you pay the bills until the economy gets moving again.

What’s the (FICO) score?

Before we get into loan types, interest rates and application processes, let’s examine one of the most important factors in the borrowing world — your credit score, which lenders use to help gauge your ability to repay a loan on time.

The credit score used by more than 90 percent of top lenders is the FICO score, a three-digit number that ranks your creditworthiness. Think of it as a summary of your credit report. It’s a measure of how much credit you have and how long you’ve had it, how much of your available credit is being used and your record of paying on time, among other factors.

Scores run from 300 to 850. The higher the score, the better. The scale is divided into five categories, from “poor” (below 580) to “exceptional” (800 and higher). If your score is 720 or above, you’re generally in the excellent credit range, which should make it easier to get a loan and help you qualify for a better interest rate.

To give you an idea of why your FICO score matters, here’s a look at estimated online personal loan APRs (annual percentage rates) by FICO score range, as reported by NerdWallet’s April 2020 Lender Survey:

As you can see, the difference between fair and excellent credit is significant. You can improve your FICO score by following these tips from myfico.com

  • Pay bills on time.
  • Get current with any missed payments
  • Keep balances well below the credit limits on credit cards and revolving credit accounts
  • Don’t close unused credit cards
  • Don’t open lots of new accounts within a short period of time

Check your credit reports for accuracy

TransUnion, Equifax and Experian are the three big credit reporting bureaus. Each company issues credit reports on individuals to lenders, insurers and other businesses. Before you apply for a loan, review copies of your credit reports to make sure they are accurate.  The three bureaus do not share information with one another, so your reports from each firm may be slightly different. Under federal law, you are entitled to a copy of your credit report from each bureau every 12 months. You should make a habit of doing this even if you’re not in the market for a loan so you can ensure your reports are up to date. A best practice is to request your free report from a different credit bureau every four months.

If you’re about to apply for a personal loan, you can get all three reports at once for free from annualcreditreport.com. This is the only official website that does not charge for the reports. In response to the COVID-19 crisis, all three credit bureaus are offering consumers access to their reports on a weekly basis through April 2021.

Choose a lender

There are three primary sources for personal loans:

Banks — Banks may offer competitive rates, with discounts for banking customers, but they typically have tougher eligibility requirements and can take longer to fund your loan compared to online lenders. If you value personal interaction and the security of knowing who is handling your loan, a bank might be a good place to start. Also, you may be able to negotiate a lower rate or qualify with a lower credit score if you’re talking to a person with whom you already have a banking relationship.

In the aftermath of the 2008–2009 subprime mortgage crisis and recession, many traditional “brick and mortar” banks pulled back on consumer lending. While banks have loosened up a bit in the last of couple years, many are still reluctant to offer unsecured personal loans.

Online lenders — Online lenders are stepping in and offering unsecured personal loans that would not be available at a traditional bank. Online sites like Avant Loans have simplified the process of taking out a loan. Because online lenders don’t have the overhead expenses of maintaining a physical bank, they may be able to offer lower loan fees. For the same reason, online interest rates are usually lower than those of banks if you’re applying for a secured loan, such as a home mortgage or auto loan.

Most online lending is unsecured, which means you’re not putting up collateral that the lender can keep if you don’t pay your debt. Unsecured loans are riskier for the lender, so they come with higher interest rates. If you need a personal loan and borrowing online is your only option, even at a relatively high interest rate, you’ll likely pay less than you’d pay in credit card interest. One positive aspect of online interest rates is that they are usually fixed, so you’re not vulnerable to broader interest rate fluctuations. A fixed-rate loan allows you to know exactly how much interest you’ll pay for the life of a loan.

Credit unions — Credit union loans often have lower interest rates than those of banks and online lenders. If you have a less-than-stellar FICO score, you may find credit union loan officers more willing to consider your overall financial picture when determining your creditworthiness.

There are two types of credit unions: federally chartered and state chartered. At federal credit unions, APRs on most types of loans are capped at 18 percent. Over the past five years, federal credit union loan APRs on three-year loans have averaged 9.29 percent, while the average at banks was 10.18 percent, according to data from the National Credit Union Administration. Rates at state-chartered credit unions have averaged 11.43 percent over the past five years, according to economists with the Credit Union National Association. Your credit union may choose to charge an application fee that isn’t part of the APR.

Pre-qualify to see where you stand

Personal loan interest rates currently range from about 5 to 30 percent. The actual rate you receive depends on factors such as your credit score, credit history, annual income, existing debt and whether you get a loan from a bank, credit union or online lender.

Because rates and terms vary among lenders, we recommend pre-qualifying for several personal loans so you can compare offers. Pre-qualifying gets you access to potential loan terms, like the amount you qualify for and the interest rate, but it does not guarantee that you’ll get the loan. Pre-qualifying for a loan should not impact your credit score. Lenders do a “soft” credit check to determine your basic creditworthiness and that inquiry will not show up on your credit report.

The pre-qualification process generally involves the following steps:

  1. You fill out a pre-qualification form, sharing such information as your income, occupation and existing debt
  2. The lender performs a soft credit check, assessing your credit score and history. This gives the lender a sense of how risky a borrower you may be
  3. The lender either denies or grants your pre-qualification. If you pre-qualify, you’ll receive information about the loan you may receive, including the rate and loan amount

If you continue with a loan application after pre-qualifying, the lender will verify your financial history and perform a hard credit check, which will appear on your credit report for up to two years and may temporarily shave a few points off your FICO score.

In Part 3 of our “Making Ends Meet” series, we’ll take a look at four other loan-based resources that might be used to support your finances: home equity loans, home equity lines of credit, mortgage modifications and payday alternative loans.

 

© 2020 Edelman Financial Engines, LLC. Financial Engines® is a registered trademark of Edelman Financial Engines, LLC. All advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor. Results are not guaranteed. See FinancialEngines.com/patent-information for patent information. Financial Engines Advisors L.L.C.; Attn: Investor Services; 4742 N. 24th Street, Suite 270; Phoenix, AZ 85016 Links to third-party content are intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals, or points of view outside Financial Engines. AM1178119.

 

 

The Federal Government Takes Steps to Stabilize the U.S. Economy

On Friday, March 27, Congress passed, and President Trump signed into law, the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act. The new law is designed to stabilize the economy by providing financial relief to millions of American families and small businesses. Here’s an overview of some of the key features of the CARES Act legislation.

Federal income tax filing date extended
The IRS has extended the 2019 tax-filing deadline from April 15 to July 15. The extension is automatic and does not require you to file an extension request. You can file any time up to July 15 and if you expect a refund you may want to file as early as possible to get your refund sooner. If you file before July 15, you do not have to pay any taxes you might owe until July 15. Some state filing deadlines may not be extended, so check with your tax advisor to confirm when any state tax returns are due.

Cash payments for many Americans
A big part of the CARES Act involves direct payments to individuals. If you are a single adult with income of up to $75,000 you will receive $1,200. Payments will be reduced by $5 for every $100 of income above $75,000. Individuals earnings over $99,000 will not qualify for this benefit.

Married couples with combined income up to $150,000 will receive $2,400. Payments will be reduced by $5 for every $100 of combined income above $150,000. Couples with combined income of more than $198,000 will not qualify for this benefit. Parents will also receive a maximum of $500 for each child age 16 or younger in their household, with similar income-based adjustments. Qualifying income will be determined by your most recently filed tax return (2018 or 2019). Payments will also be made to people who were not required to file a tax return.

Unemployment payments have also been increased. An additional $600 per week will be added to any state unemployment benefits paid through July 31. Unemployment benefits will be extended by an additional 13 weeks for claims filed through December 31, 2020.

Relaxed retirement plan rules
Depending upon your plan provisions, you may withdraw up to $100,000 from your retirement accounts as a “COVID-19 emergency” distribution. These distributions are exempt from the 10% early withdrawal penalty. The exemption applies to withdrawals made since January 1, 2020. Any taxes due on the withdrawals can be spread out over three years. To qualify, you must have been directly impacted by COVID-19 and meet other U.S. Treasury requirements.

If you are over age 70-1/2, you do not have to take a Required Minimum Distribution (RMD) in 2020. This waiver also applies to inherited IRAs. Contact your tax advisor if you’ve already taken a RMD in 2020. You may be able to return the funds to your account or reclassify your withdrawals as special coronavirus retirement distributions. If you are age 70 or older and still employed, you can now continue making contributions to a traditional IRA.

If your workplace retirement plan permits loans and depending upon your plan loan provisions, you may now borrow the full vested value of your account, up to $100,000. But please keep in mind that retirement plans are designed to fund your retirement. You should only consider loans or withdrawals if you have exhausted all other funding options that might be available to you.

Larger charitable giving deductions
If you itemize deductions, your cash donations to qualified charities are now deductible up to 100% of your Adjusted Gross Income (AGI). If you use the standard deduction, you can deduct up to $300 in cash donations. Please make sure your donations are given to legitimate charities that are recognized by the IRS.

Expanded COVID-19 Medicare coverage
The reduction in Medicare reimbursements imposed in 2011 has been suspended from May 1, 2020 through December 31, 2020, which will increase payments to hospitals and other providers. In addition, hospitals will receive a 20% payment increase for patients diagnosed with COVID-19. Medicare telehealth services are being broadened to enable retirees to get medical advice from home.

More diagnostic tests, immunizations and preventive services will be covered by regular insurance for all insured Americans.

Relief for federally-backed mortgages
If your mortgage is federally backed, you can ask the servicer for forbearance (stop making payments) for up to 180 days, and this request may be extended for an additional 180 days. Federally backed mortgages include those purchased by Fannie Mae and Freddie Mac, insured by the departments of Housing and Urban Development, Veterans Affairs or Agriculture or made directly by USDA. Check with your mortgage servicer to see if you qualify.

Benefits for students
If you have federal student loans outstanding, you don’t have to make any principal or interest payments until after September 30, 2020. There will be no penalty for these deferred payments and interest will not accrue.

There are additional benefits available for current students. Students unemployed due to COVID-19 may be able to continue receiving work-study payments from their institutions. Recipients of Pell Grants or federally subsidized loans who have been forced to drop out of school because of COVID-19 will not have to return that money. Any grants or loans students have received will not count against their lifetime eligibility.

Small business benefits
Small businesses and nonprofits with less than 500 employees, along with individuals who are self-employed, operate as a sole proprietor or as an independent contractor, are eligible for an Economic Injury Disaster Loan emergency advance of up to $10,000 from the U.S. Small Business Administration. Restaurants and hotels are also eligible. These loan advances do not have to be repaid if certain guidelines are followed.

The CARES Act also increases the deductibility of business interest expense for 2019 and 2020 to 50% of Adjusted Gross Income (AGI). Self-employed individuals are eligible for up to 39 weeks of unemployment compensation, through December 31, 2020.

Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances. AM1141313

Warning – How to Avoid Coronavirus Scams

As we all face the coronavirus together, there are so many stories about how friends, neighbors, and perfect strangers have been reaching out to help others to weather this storm. Sadly, there are those who are trying to take advantage of the situation.

Criminal scammers exploit times like these to take advantage of confusion, fear, greed and our honest desire to help. Here are some tips from the Federal Trade Commission (FTC) to help you keep the scammers at bay:

  • Don’t click on links from sources you don’t know. They could download viruses onto your computer or device.
  • Watch for emails claiming to be from the Centers for Disease Control and Prevention (CDC) or experts saying they have information about the virus. For the most up-to-date information about the Coronavirus, visit the websites for the CDC or World Health Organization (WHO) directly.
  • Ignore online offers for vaccinations. There currently are no vaccines, pills, potions, lotions, lozenges or other prescription or over-the-counter products available to treat or cure Coronavirus disease 2019 (COVID-19) — online or in stores.

The FTC has also identified some of the common scams that have been reported.

  • Undelivered goods: Online sellers claim they have in-demand products, like cleaning, household, and health and medical supplies. You place an order, but you never get your shipment. Anyone can set up shop online under almost any name — including scammers. The FTC recommends that you check out the seller by searching online for the person or company’s name, phone number and email address, plus words like “review,” “complaint” or “scam.” If everything checks out, pay by credit card and keep a record of your transaction.
  • Fake emails, texts and phishing: Scammers use fake emails or texts to get you to share valuable personal information — like account numbers, Social Security numbers, or your login IDs and passwords. To do so, scammers often use familiar company names or pretend to be someone you know. Other scammers have used real information to infect computers with malware. The FTC recommends you protect your computer by keeping your software up to date and by using security software. Your cell phone should also be set to make security updates automatically, and you should use multi-factor authentication for your important accounts.
  • Robocalls: Scammers are using illegal robocalls to pitch everything from scam Coronavirus treatments to work-at-home schemes. The best advice here is to just hang up. Don’t press any numbers. The recording might say that pressing a number will let you speak to a live operator or remove you from their call list, but it might lead to more robocalls, instead.
  • Misinformation and rumors: Scammers, and sometimes well-meaning people, share information that hasn’t been verified. Before you pass on any messages, and certainly before you pay someone or share your personal information, do some fact checking by contacting trusted sources

You should also be aware of the following scammer tactics.

  • Imposter Scams: Bad actors attempt to solicit donations, steal personal information, or distribute malware by impersonating government agencies (e.g., Centers for Disease Control and Prevention), international organizations (e.g., World Health Organization (WHO), or healthcare organizations.
  • Product Scams: The U.S. Federal Trade Commission (FTC) and U.S. Food and Drug Administration (FDA) have issued public statements and warning letters to companies selling unapproved or misbranded products that make false health claims pertaining to COVID-19. Additionally, The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has received reports regarding fraudulent marketing of COVID-19-related supplies, such as certain facemasks.
  • Investment Scams: The U.S. Securities and Exchange Commission (SEC) has urged investors to be wary of COVID-19-related investment scams, such as promotions that falsely claim that the products or services of publicly traded companies can prevent, detect, or cure coronavirus. FinCEN has received reports regarding suspected COVID-19-related insider trading. This often involves a pump and dump scheme, where scammers attempt to con investors into driving up the price of a stock, so that they can then sell their own stock at a profit.

Most of us are doing all we can to get through these difficult times. We hope that you and your loved ones are following the instructions of your local health authorities in order to keep yourself and your community safe. And sadly, there are those who are trying to illegally profit from this crisis. We ask you to please be on the lookout for scams, and only rely on trusted sources such as the CDC, WHO and FTC, to keep you informed.

This material was prepared for informational and/or educational purposes only. AM 1129073,/h6>

Watch Out for Coronavirus Charity Scams

We all want to lend a helping hand, and many folks across the country are pitching in to help their communities get through the challenges brought on by the coronavirus. But at times like these, it is more important than ever to make sure any charitable donations you make are going to the right organizations.

Scammers are pouncing on the opportunity to take advantage of the pandemic and are reported to have already registered addresses that include covid19, or coronavirus in their name. It is important that all of us remain vigilant against these fraudulent schemes. You should never give money through a link that someone emails you or provides via social media, no matter how much you may trust that person. He or she could have been scammed too. Also be wary of email attachments that claim to be links to charitable organizations. They could contain malware that can infect your computer.

Here are some more tips on avoiding charity scams:

  • Do your homework when it comes to donations, whether through charities or crowdfunding sites.
  • Avoid organizations using names that closely resemble better-known, reputable groups — for example, givetotheredcross.org, rather than redcross.org.
  • Be wary of groups that won’t provide proof that a contribution is tax-deductible.
  • Watch out for those who thank you for a pledge you don’t remember making.
  • Avoid those who pressure you to donate immediately without giving you time to think about it or do any research.
  • Never give to anyone who asks for donations in cash or asks you to wire money.

Other charities, including local ones, may also be reputable but simply not well-known. To learn about them, check with organizations that vet charities. But remember, a charity recommended by one organization might fall short by another’s standards. Therefore, check with at least two rating groups before you make a gift.

Here are four vetting sites that can help:

Charitywatch.org — a site run by the American Institute of Philanthropy — has a good record of discovering charity scams and weaknesses, and it has letter grades for many charities.

CharityNavigator.org uses a star rating system to vet numerous charities.

Guidestar.org has a list of expert-recommended charities involved in relief efforts.

Give.org is the Better Business Bureau’s charity-checking site, allowing you to verify which ones meet its accreditation standards.

If you encounter a charity you suspect is fraudulent, notify the Department of Justice at disaster@leo.gov, which tracks and attempts to shut down scams. And thank you for supporting those charities that truly are working to make life easier for those who need our help.

This material was prepared for informational and/or educational purposes only. AM 1129073

The Top Five Bear Market Questions (and Answers)

By Wei Hu, VP Financial Research, Financial Engines and
Bill Tracy, Portfolio Manager, Financial Engines

We’ve been getting a lot of questions about the market volatility associated with COVID-19. Here are answers to five of the most common bear market questions clients are asking.

Q: What is a “bear market?”

A: A bear market is a period where stocks (often represented by the S&P 500 Index, a collection of large U.S. companies) fall 20% or more from their most recent peak. Going back to the mid-1950s, a bear market in U.S. stocks has occurred about every five to five-and-a-half years.

Q: How long can I expect it to last?

A: When it comes to the time required for the market to get back to its pre-bear market peak, the range is quite wide, and the characteristics of each bear market environment don’t tell us much about how long it will take. On average, it took the S&P 500 Index 773 calendar days to move back to break even following past bear markets. But that’s on average. In one instance, the snap back happened in just 83 days. For one bear market in the 1970s, it was a 2,114-day journey. Investors often need patience to ride out a bear market.

Source: Bloomberg, S&P Dow Jones Indices, Edelman Financial Engines.

 

Q: Is a big market drop a fantastic buying opportunity for stocks?

A: Not necessarily. If you look at the 5-year returns of the S&P 500 after it bottomed out in each of the bear markets, there’s no relationship between the size of the drop and future returns. Investing in stocks should be a long-term, forward-looking decision, not based on what has happened in the past. Also keep in mind that no one knows until afterwards when the bottom of the market was reached.

Note: 5-year return calculated beginning the month after the market bottom.
Source: Bloomberg, S&P Dow Jones Indices, Edelman Financial Engines.

 

Q: What should I do during a bear market?

A: History shows us that we can’t predict when the market will bottom out. And we can’t predict how long the recovery will take. Instead, focus on what you can control. Continue contributing to your retirement accounts, particularly if you are getting a company match.

Also, stay invested in a diversified portfolio that supports your overall retirement goals. If you’re young or mid-career, what happens today will likely have a minor impact on your long-term retirement success.

Q: What if I’m planning to retire soon?

A: The data show that market downturns can last for more than a couple of years. But it’s important to understand that some exposure to stocks is still a good idea as you head into retirement. You want your assets and income to keep growing to help offset any effects inflation may have on your purchasing power. Even if you are hoping to retire within a year, your retirement income may need to last 30 years or longer. So you should maintain a long-term outlook when making investing decisions.

Another action that can affect your retirement income is deciding when to start taking Social Security benefits. If you take Social Security early, your lifetime monthly benefit will be lower than it would be if you waited until your full retirement age to claim your benefits. Your benefits will go up about 8% a year for each year you delay beyond your full retirement age, until age 70. Deciding when to take benefits can get complicated for married couples. Use our free Social Security optimization tool to see if you can boost your overall retirement income.

An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.

©2020 Edelman Financial Engines, LLC. Financial Engines® is a registered trademark of Edelman Financial Engines, LLC. All advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor. Results are not guaranteed. See FinancialEngines.com/patent-information for patent information.

Financial Engines Advisors L.L.C.; Attn: Investor Services; 4742 N. 24th Street, Suite 270; Phoenix, AZ
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When Should You Take Social Security?

You Can’t Rely Solely on the Math.

It’s an important question: “When should I start claiming Social Security benefits?”

Years ago, the answer was simple. All it would take was a quick calculation. But Social Security rules have changed over the years, making the issue quite complicated.

The youngest age at which you can begin to receive Social Security retirement benefits based on your own work record is 62—but you’ll get only 75% as much as if you waited until Full Retirement Age. And even your FRA amount isn’t the highest benefit you can receive. Indeed, wait until you’re 70 and you’ll get 132% of your FRA amount.

So the question is: Should you take a smaller check at 62 or wait for a larger check at FRA or delay even further to age 70?

The answer: It depends!

You’ll need to consider the following questions:

  • How long will you live? (Good luck answering that one)
  • How long will you work?
  • Is yours a dual-income family?
  • Do you have a blended family?
  • Do you have multiple sources of income?

Personal factors can outweigh the math—your age, your spouse’s age, work history, life expectancy, survivor needs, taxes, give-backs and projected income returns. It’s just too simplistic to decide to wait a year before you start collecting your benefit just because you’ll get more money by waiting. What if you die in the meantime? What if you really need the income now?

There are other considerations as well—spousal benefits, survivor benefits, child benefits, and even divorced spouse benefits. Given all these complex factors, you might consider working with an independent fee-based financial planner to determine what is best choice for you.

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Q&A: Take Social Security Now or Later?

The question has gotten harder to answer in the last few years.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I’ll turn 66 years old in a few months. I could sign up for Social Security now and would receive only $13 per month less than if I waited until I’m 66 and can earn as much as I want without affecting my benefits. I’m earning about $70,000 a year, and I’ve been frugal my whole life. I’d like to start my benefits now so I could have a little more to spend. Should I?

Ric: Your question used to be much easier to answer. In my book The Truth About Money I tell you to take the money as soon as you’re eligible — as young as 62, even though you get only 80% of the benefit at that age. The argument for this: You don’t know how long you’re going to live. You could wait until you’re 70 and get more than 100% of your stated benefit, but you might not live that long — or you might need the money now. So even though you could receive more money later, that doesn’t do you any good if you have bills to pay today.

Today, however, the answer is far more complicated because of nuanced rules within the Social Security system. The goal, of course, is to maximize the income you will receive from Social Security — but that depends on your age, current income, marital status, spouse’s income, and the age disparity between you and your spouse.

Therefore, there is no one-size-fits-all, rule-of-thumb answer that I can give you. Besides the aforementioned factors, the best answer for you has to do with how much steady income you need, how much other income you have and the sources of that income. It depends on whether your pension or retirement plan incomes are placed where they are maximally taxed. It depends on your Medicare and Medicaid eligibility. It affects the taxes you’ll pay on investment income — all this can get absurdly complicated.

Offhand I’d say sure, take the money now. You’ve been working your whole life, delaying your gratification. You’ve been a frugal, responsible and mature adult. Who cares if taking the money now isn’t the optimal approach?

In other words, if taking the money now enables you to enjoy yourself a little bit more and a bit sooner, if you can afford it and doing so doesn’t adversely impact you or your spouse over the rest of your lifetimes, then sure, go ahead! But I’d much rather you reached this answer after a full review by an independent financial planner.

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Q&A: Should I Treat Pension Income and Bond Income the Same?

There is a key difference between the two – liquidity.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I recently retired and am fortunate enough to have a pension. It, along with Social Security, is enough to meet all my needs. The pension is not guaranteed, but it comes from one of the largest health care corporations in America, so I believe it’s safe. We own our house and have virtually no debt. What role should the pension play in determining the allocation of stocks and bonds I choose for my portfolio?

Ric: None. What you’re really asking is whether the pension will allow you to accept more risk in your investments because you have a safe pension to rely on.

We’ve never felt that was a good idea. To suggest that pension income is the equivalent of bond income doesn’t make sense. First of all, a bond is liquid. You can sell it whenever you want for its current market value if you need the cash. You can’t cash in a pension; all you can get is this month’s check — then you must wait a month for your next check.

If you pretend that your pension check is the equivalent of getting bond interest and therefore the equivalent of owning bonds, you’ll conclude that you don’t need to actually own any bonds — and the result will be that you’ll allocate too much money to stocks. That can drastically increase your investment risks.

Do not adjust your asset allocation based on the presence of Social Security or pension income.

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Q&A: How Much Money Is Needed to Retire With the Lifestyle You Want?

By reverse engineering this question we can give you a good approximation.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I’m almost 55 years old, and I want to retire in 10 years. How much money will I need to invest now in order to generate a net yearly income of about $60,000 in that much time?

Ric: Congratulations for asking the one question that matters: How much money do you need to have in a piggy bank to retire with the lifestyle you want?

You’ve identified the amount of income you need — $60,000 — and the amount of time you have to achieve that goal — 10 years. That’s exactly the way to approach it.

With that key information, we as financial advisors can use the financial planning process to back you into that number. I need more information than you’ve given me — for example, I need to know how much you’ve already saved — but I’ll tell you basically how it works.

We’d start with how much you’ll get from pensions and Social Security. Let’s assume they total $20,000; now you must come up with another $40,000. How much do you need in savings and investments to produce that? If you’ve saved nothing at all, add a zero to your annual desired income and then double it.

In other words, to produce $40,000, add a zero — that’s $400,000 — and then double that, resulting in $800,000. That is roughly the amount you’d need in total investable assets when you retire. This money can be in a combination of 401(k) accounts, IRAs, brokerage accounts, mutual fund accounts, etc.

How will you generate $800,000? If you’ve saved nothing so far and earn 4% per year, you’d need to save about $5,500 a month. But if you have already saved, say, $150,000, and we can increase your return to 7%, you need to save only $2,900 per month. And if you’re willing to delay retirement by just two years, you’d need to save only $2,000 a month.1

So, we need to talk further about how much you’ve saved, how much more you can put away each month, whether you are willing to alter your goal and where best to invest to help you achieve that goal. And let’s not forget taxes. Most likely you will need more than $800,000 so you can end up with $60,000 net of taxes.

1Assumes a hypothetical 4% and 7% annual return. There is no assurance that such returns will be earned. This is a hypothetical illustration meant to demonstrate the principle of compound interest and is not representative of past or future returns of any specific investment vehicle. AM1101559