By Janice Gough:
Liquid assets are a major component of a healthy financial plan. It is important to have the cash you need to hedge against disasters?
Income stocks, produced as a result of the pandemic, have had a somewhat purifying effect on financial planning. Before COVID-19, many consumers were dismissive of the idea that strong portfolios need to contain substantial amounts of cash. However, with the COVID-19 lockdowns, most Americans now realize the critical role of liquid assets in surviving the unexpected.
Accumulating emergency funds is now the topic of conversation for working families. As Advisors, we can play a pivotal role in assisting our clients in setting emergency fund goals and executing those goals, even in a negative-interest-rate environment.
The “Six Month” Rule Has Changed
The pandemic has turned the usual “save three to six months of living expenses savings” into a new dynamic. As advisors, we must help our clients set aside emergency funds based on proximity to retirement, the variability of earnings, employment status, and the number of people in their household.
Those who did not customize their emergency plan to their unique situations have found their savings quickly depleted as the lockdowns dragged on.
Gig and contract workers are more at risk for lengthy work interruptions than permanent workers. Thus, as advisors, we want to encourage you to build more considerable emergency funds than the current benchmark. Similarly, “highly-paid” workers or those with specialized careers probably need more extensive cash reserves. When these workers are laid off, it generally takes them much longer to find a replacement position. Households with two or more earners may get by with less in their emergency funds, especially if they work in different careers. It is much less likely that all earners will encounter job loss at once. Advisors must help our clients determine the best place for storing emergency money. Often nonretirement brokerage accounts are used as a holding place for short-term cash needs; there are more creative storage options for cash.
The following are some solutions that can get your cash out of the Coffee Can:
1. Roth IRAs: All people can benefit from using a Roth IRA to hold their contingency funds. In the event of a crisis, you can access the contributions into a Roth without penalties. Converting a portion of savings in a qualified account (401K or IRA, etc.) to a Roth IRA is a great solution in a lower tax environment, especially for those needing great funding for retirement and who are concerned about higher taxes in the future.
2. Permanent Life Insurance: Strategically designed whole life and other permanent life insurance types can be excellent places for parking emergency funds. An advantage of this strategy is that there is the possibility of receiving modest gains on your policy's cash value while providing easy liquidity and control of funds withdrawn on a tax-free basis.
3. Health Savings Accounts. Besides their use to pay for medical expenses, HSAs can also serve as retirement or investment accounts. For those who are 65 or older, one can use funds they have accumulated in an HSA for non-medical expenditures without penalties. For 2021, contributions to HSAs are $3,600 for individual-only coverage and $7,200 for family coverage.
4. Certificates of Deposit and Money Market Accounts: These remain one of the choices for those worried about losing even a penny of their money. With the Fed maintaining historically low-interest rates for the near future, money put into these accounts will gain little to no growth.
5. Annuities: Several insurance companies allow annuity owners to withdraw as much as 10% of the account’s value and accumulate a 20% penalty-free withdrawal in 2years without incurring a surrender charge. Some contracts also waive surrender charges for terminal illnesses or confinement to a nursing home. Annuities can be a good solution, especially those who want to be conservative in volatile times and those near retirement who have a low tolerance for riskier investments.
Clearly, the COVID-19 pandemic has had significant repercussions for our economy. The pandemic’s fallout continues to change how we, as advisors, assist our clients in the planning process, especially emergency plan design. Persistently high levels of unemployment, economic volatility, and uncertainty about the future mean that you must have efficient ways to plan life’s inevitable emergencies.
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