Magazine

How the Pandemic Might Change Your Financial Plan

By Rachel Sanborn Lawrence

COVID-19 came seemingly out of nowhere and completely disrupted our way of life. The job and financial markets are in turmoil, and most people’s finances have taken a significant hit.

Events of this magnitude not only are distressing in the moment; they can also knock off track the financial plan that you, your private wealth financial advisor, and your financial planner have created together. Here are some things to consider as you look to weather this crisis and get your plan back on track.

If your income has been affected

First things first: If you’ve lost some or all of your income, you’re going to need a plan for covering your expenses in the short term. Hopefully, you have at least some money set aside in cash that you can use; otherwise, it might seem like an easy solution would be to sell some of the investments in your portfolio for cash, but typically, this should be one of your last resorts.

Unless you’re selling strategically in order to manage your tax bill, a downturn is not usually the best time to pull money out of your investment accounts. When you do, you “lock in your losses,” as they say, and don’t give your portfolio the opportunity to recover.

So if you don’t have the cash reserves to help float you through at the moment — whether you used them recently or were hesitant to keep enough to cover emergencies in cash — work with your financial advisor to look for other sources of cash first. For example, you might be able to tap into some low-cost, secured debt, like a home equity line of credit (HELOC).

A disruption to your income could also mean you need to re-evaluate your short-term goals, like if you’d been planning to renovate your home, pay cash for a child’s college education, or start a business, for example. You might need to make some tough decisions about prioritization — whether it makes sense to fund these goals with cash or non-liquid assets, or if you should postpone them. Your financial advisor or planner can help you out there, too, but your personal values can be a powerful tool when it comes time to make difficult tradeoffs. It might be worth taking some time to sit down to make a list of personal values that feel most important to you, rank them, and then match them up against the goals in question.

If you lost your job

Losing your job can affect your financial plan in ways beyond just disrupting your income.

Retirement

Parting ways with an employer means you’ll lose the ability to contribute to any employer-sponsored retirement plans you may have had with them. If your next job doesn’t offer the same benefits, and assuming you’ve maxed out any IRAs you’re eligible for, you might need to put (possibly a lot of) your future retirement contributions into other account types that don’t come with tax benefits. Plus, if you were receiving employer contributions, you won’t be able to count on those anymore either. All that will affect how much you can expect to have earmarked for retirement down the line.

Also, now might be a smart time to roll over the 401(k) from your old employer into an IRA managed directly by your financial advisor — that way, they’ll be able to rebalance and diversify your portfolio more effectively. Just note that if a 401(k) contains stock in your former employer, there can be tax implications to move it; those shares may need special consideration before you decide to roll them over.

Options and equity

You may also have stock options from your former employer. If they’re fully vested, you have to decide whether you want to exercise those options and buy the shares before your window of opportunity passes (usually this is 30–90 days after you officially end employment, but this timeframe can sometimes be negotiated in a severance package). You’ll want to talk with your financial advisor and your accountant before you (quickly) decide whether that’s the right move for you.

On the other hand, if you had options or restricted stock units (RSUs) that weren’t fully vested yet but you were counting on adding them to your portfolio someday, you might need to make some adjustments to that financial plan. Unless your severance package specifically includes them, you probably won’t be entitled to them anymore.

Benefits

If you had health insurance and other benefits through your employer, you’ll want to replace them quickly (particularly in the midst of a pandemic). If you’re married to someone who also has access to employer-sponsored health insurance, losing your job is usually considered a “qualifying life event,” so you should be able to enroll in their plan. Otherwise, COBRA should cover you for a little while, and look into private plans once that expires. You’ll need to include that cost when you’re evaluating your cashflow needs.

You may also want to replace other insurance policies, like life or long-term care, if you were getting those through your job. Some of these policies might be “portable,” meaning you’d be able to take them with you if you reach out to your insurance providers in time. Otherwise, you can talk to an insurance specialist to see what the best way to go about replacing those might be.

Severance

If you were given a severance package, there are likely a lot of things to consider. Beyond paying you a lump sum, your severance might include things like immediate vesting of any RSUs or stock options, whether the company will pay COBRA premiums that continue health insurance coverage, and the ending terms of your other benefits. It might also include a provision for whether and when you can work for a competitor in the future, so I recommend reviewing that agreement with an attorney before signing it.

As far as that lump sum payment goes, you’ll need to decide where to hold it. Since it’s meant to replace your income for a certain period of time after your employment’s end date, cash could be the right way to go. That way, your money will be easily accessible and not subject to investing risk.

FDIC insurance on savings accounts (and some money market accounts) maxes out at $250,000. So if you decide to keep your cash reserves in the bank and have more than that to deposit, consider spreading the money across several accounts. We don’t typically recommend keeping funds earmarked for short-term use or emergencies in a money market fund — those aren’t cash, they aren’t FDIC-insured (probably just SIPC-insured), and they carry risk.

If you already had enough cash reserves to get you through the next nine to 12 months, then your financial advisor can help you decide what the best use of your severance funds might be.

Job searching

For high-earning clients I’ve worked with in the past, the job search has sometimes been a lengthy process; the higher the level you’re working at with regards to seniority and salary, the fewer roles there usually are to fill (and that’s likely to be especially true during this pandemic, when so many businesses are on pause). That doesn’t mean you won’t find a new job, but it’s one of the reasons why those cash reserves I talked about are so important.

It’s common after moving out of a high-level position to want to take time to reflect and work through your next move. If that’s something you’re considering, it too will affect your financial plan, especially if you don’t have enough in cash to cover your costs while you reflect. If you’re planning to begin your career search right away, tell your network that you’re looking for new opportunities, consider reaching out to a recruiter for help, and ramp up your outreach. Social distancing may alter the way we can network, but it doesn’t have to prevent it — why not propose a virtual coffee, for example? Ask if you can lend your expertise to help someone with a project they’re pursuing; take on a few mentees; see if any of your favorite non-profits are looking for board members.

Finally, it may be worth it to engage with an executive coach, who can help you get clarity on what kind of work you might want to do next and offer support as you pursue those opportunities.

If you’ve had a major sale or funding event fall through

Finally, you might have been looking forward to a large transaction, like the sale of your house. Or perhaps you own a business that was about to be acquired or funded with an injection of venture capital, but those plans are now canceled or delayed.

If that’s the case, the first step is to take stock of all the other things that had been riding on the assumption that the transaction would go through. Were you counting on raising funds to help cover payroll for your staff? Was the sale of your home going to fund the purchase of another one? Evaluating the ripple effects of that pause or cancellation will help you figure out how you can address each, and your financial planner and advisor can help you think through it.

Next, look at your other options, again doing your best not to liquidate your investment account. The PPP loans funded by the recent stimulus package were intended to help business owners; if you haven’t taken advantage of that yet, move fast — see if you qualify and consider initiating a relationship with a bank that regularly does Small Business Administration (SBA) lending so that your application can be processed more quickly. Otherwise, you might need to shift your business strategy and look at other funding options. Are you in a position to help float the business with your own money? Could you take on business debt? Consider all your options before deciding on a course of action.

The good news is that you’re not alone here, and you don’t have to make all these plans alone — that’s what your financial advisory team is there for. At the end of the day, managing your money during this pandemic is all about finding and understanding the options available to you, and then looking at them within the context of your broader financial plan.


Disclosures

Planning to work past the age of 70½?*

Once an individual reaches age 72,* the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).

If you continue to work past the age of 72,* however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is d_blank"ifferent from an IRA, where you’re required to start making withdrawals starting at age 72,* whether you’re working or not.

*Recently, the SECURE Act made major changes to the RMD rules. If you reach the age of 70½ in 2019, the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72.

Filing for bankruptcy?

If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.

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All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

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Comparing important factors when considering a 401(k) or 403(b) rollover:

Fees and Expenses
In general, both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. “Investment-related expenses” may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. (Ellevest does not charge loads or commissions.) “Plan fees” typically include plan administrative fees (ex, recordkeeping, compliance, trustee fees) and fees for services such as access to customer service representatives. In some cases, employers pay for some or all of a plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up, and custodial fees. (Each of the fee types listed here may or may not apply to your portfolio managed by Ellevest; please see your Client Agreement for details.)

Click here to read Ellevest’s Form ADV.

Required Minimum Distributions
Once an individual reaches age 70½, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 70½, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.

Penalty-Free Withdrawals
If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.

Rachel Sanborn Lawrence

Rachel Sanborn is the Director of Advisory Services at Ellevest and a CFP® Professional. She oversees Ellevest’s coaching teams and works with Ellevest members to help them be the boss of their money.