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More cases, more deaths, and more federal relief. As the coronavirus crisis wears on, millions of Americans are increasingly worried about their income, their savings, and their retirement.
A month ago, the White House urged individuals and businesses to follow strict social distancing guidelines. More recently, those guidelines were extended through the end of April, and top health officials began recommending that people wear masks in public places. These are the steps that individuals can take to help protect themselves and their families from the coronavirus.
Recently, the Federal Reserve unveiled new plans to provide up to $2.3 trillion in loans to households and businesses to help get through this pandemic. The move came just weeks after the Fed had already cut short term interest rates to zero and announced unlimited quantitative easing. While the first emergency package did a little to calm Wall Street, the second round triggered a stock market spike.
The Fed’s massive response, and the CARES Act, became the largest relief package in American history.
I believe we’ll see more steep downturns in the weeks and the months ahead, possibly culminating in another major market correction on par with the last two, or possibly even worse. In the meantime, we may continue seeing short term spikes as the market overreacts to ongoing relief efforts by the government.
With 22 million new unemployment filings in the last four weeks alone, it is estimated that the unemployment rate is now 17%. I predict that it will exceed 20%.
Eleven years of job creation gone in one month. When we do get back to work, not all industries are going to be able to bring all their employees back. Also, getting back to work doesn’t mean people are going to feel comfortable spending right away.
The coronavirus relief bill included a provision that suspended RMDs for 2020. Let’s break it down. By suspending 2020 RMDs, the government is giving up short term tax revenue to provide relief to retirees. It also speaks to market volatility. Suspending RMDs enables retirees to leave their investment portfolios alone – with the hope of a recovery over the next year.
Unfortunately, there are some flaws with that rationale. As with everything IRS-related, this is more complicated than it sounds. There have been many questions about what the RMD 2020 suspension means for those who already took out their RMDs, as well as its impact on taxes and inherited accounts. Those questions are best answered with the help of the right qualified financial advisor, ideally one who specializes in strategies geared toward retirement income. An Income Specialist can help you not only understand any possible changes to your distributions but can also help you make sure your asset allocation is right for taking RMDs.
Getting back to the flawed rationale, RMD suspension assumes that portfolios largely tied to the stock market will have recovered all or most of their losses by next year. However, bear in mind that historically it takes the stock market six to seven years to recover to its previous peak after a major correction. It’s also based on the assumption that most people satisfy their RMDs by taking systematic withdrawals from a mutual fund.
One of the most important things for investors to understand is the difference between individual bonds and bond mutual funds. The coronavirus crisis has put a spotlight on why that distinction is so important. Understand that a financial advisor with a conventional Wall Street business model might tell you that bond mutual funds are the conservative options that he or she offers in a standard portfolio.
In reality, though, that option isn’t really much less risky than common stock. The truly conservative option is a more actively managed portfolio of individual bonds. Why? Because with individual bonds, you’re investing by contract and you have two important guarantees that you don’t get with bond mutual funds. First, an interest payment that’s guaranteed at a fixed dollar amount for the life of the bond, and second, the return of your principal if you hold the bond to maturity, assuming that there are no defaults.
Bonds provide you with greater transparency and control; a fixed income and a contract assuring that your initial investment will be returned at maturity. Therefore, any loss in value on your statement is only a temporary paper loss. The only real risk with individual bonds is the possibility of a company going bankrupt or defaulting. However, in an actively managed bond portfolio, account managers are able to lower that risk through ongoing analysis and strategic portfolio adjustments.
On the flip side, with bond mutual funds, you have no contract. Instead you’re in a murky pool of holdings with no transparency and far less control, which is especially concerning in a recession or a time of economic crisis like now. Further, without having a contract, you may never recoup all of your principal as Bond Mutual Funds never mature. That is the important distinction between bonds and bond funds.
Too late to de-risk? Absolutely not. The market was down almost 40% just a few weeks ago. Now it’s down only 15%. It’s not too late to take some of those winnings off the table, because that last 15% really only erases the last years’ worth of gains. Consider the small rallies a gift, but an unreliable one. Making any mistake now could be more costly than ever before.
As you continue to take the right steps to help protect your physical health, make sure you’re doing the same when it comes to your financial health. Now is the perfect time to educate yourself about other investment strategies geared toward greater protection and income.
Click here to schedule a complimentary call with an Income Specialist from The Retirement Income Store® who can help explain the best strategies for you based on your particular situation.