No matter what financial hurdles you're facing, chances are some of your big money decisions have changed over the last few weeks. Here's how to navigate.
With 36 million Americans filing for unemployment since coronavirus began, and others facing new financial challenges, many people are being forced to make decisions they didn’t imagine they’d have to make at the beginning of the year – everything from how to find money for emergency expenses and avoid borrowing money against their 401(k)s, to dealing with unexpected childcare changes and roadblocks to their retirement plans. They’re also rethinking how they make money. We’ll start to see people pursue new income opportunities, and some may finally make big career changes they’ve been considering for years. The reality is, this pandemic has placed a greater responsibility on individuals to make, save and invest more money. Here are some changes you may be experiencing this year, and what you can do to take charge of the situation.
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If you lose your job…
If you lose your job, unemployment benefits can help. But it’s also a moment to reassess (or possibly recommit to) your chosen career. Are there other ways you can earn money, either temporarily or permanently? If you’re financially solid, this could be a good time to consider a whole new career, or start your own business. You may want to use this time to take some online classes that can help with the transition. Building up a side gig, even part-time, can help diversify your income when you do get a full-time job so you aren’t totally dependent on income from a single employer. If you do start your own business, you can invest for your retirement in a SEP or solo 401(k), which helps you build tax-advantaged savings on your own.
If you lose your health insurance…
When you lose your job, you usually lose your employer’s health insurance, too. But you have several coverage options, which can be particularly important during this healthcare crisis. If your spouse has coverage, you may be able to join that plan in the middle of the year. Or, you may be able to continue your employer’s health insurance through a federal law called COBRA. This coverage can be expensive though – you have to pay both the employer’s and the employee’s share of the costs – but you keep the same in-network doctors and hospitals. Another option: You have up to 60 days after losing employer coverage to get an individual policy on your state health insurance marketplace or Healthcare.gov. If your 2020 income is less than $49,960 if you’re single, $67,640 for a couple, or $103,000 for a family of four, you may qualify for a subsidy that can reduce your premiums significantly. Go to Healthcare.gov for calculators and links to your state’s marketplace. If your policy has a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage in 2020, you may be able to contribute to a health savings account. The HSA is a powerful tool because it gives you a triple tax break – your contributions are tax-deductible, the money grows tax-deferred in the account, and then can be withdrawn tax-free for eligible medical expenses at any time. Think of this as an IRA for healthcare.
If your employer stops matching your 401(k) contributions…
Companies that are struggling financially because of COVID-19 have been looking for ways to cut their expenses. Rather than laying off workers, some are discontinuing their matching contributions to employees’ 401(k)s. But your 401(k) is still a truly valuable benefit. Automatically investing a set amount with each paycheck takes the emotion out of investing and gives you the opportunity to benefit from a volatile market — buying more shares when the prices are low. Pre-tax 401(k) contributions don’t lower your take-home pay as much as you might think — if you’re in the 22% tax bracket, contributing $200 per paycheck only reduces your take-home pay by $156. Without an employer’s match, you may want to split your contributions between a 401(k) and a health savings account, if you have an HSA-eligible high-deductible health insurance policy. You can withdraw money tax-free from the HSA for medical expenses now or in the future, and your employer may match your HSA contributions.
If you need to access cash…
It can be devastating to lose your job or have other unexpected expenses during a crisis, but you have several options to access to quick loans or cash in an emergency, and some extra opportunities now because of coronavirus legislation. It’s best to have an emergency fund that can cover at least one year’s worth of essential expenses so you don’t land in expensive credit-card debt or have to pay late fees (and hurt your credit score) by missing deadlines. But a lot of people don’t have that much money in a savings or checking account. The Coronavirus Aid, Relief and Economic Security (CARES) Act lets eligible individuals withdraw up to $100,000 from their retirement plans (including IRAs) without a 10% early-withdrawal penalty and gives them up to three years either to pay taxes on the withdrawals or put the money back into the account. Raiding your 401(k) should be a last resort. If you do have to tap the account, try to put the money back in so you don’t jeopardize your retirement savings. You may have other sources of emergency cash, too, such as a low-interest loan from a credit union or bank, or a home-equity line of credit.
If you have childcare challenges…
Even if you still have your job, you may be dealing with disruption to your child-care plans. You may have to teach your child at home before schools open back up, or your daycare facility or summer camp may have closed. Take advantage of tax-smart ways to pay child-care costs. If you have a dependent-care flexible-spending account at work, you can contribute pre-tax money to pay child-care expenses for children under age 13 while you and your spouse work. Or you can claim the child-care tax credit when you file your tax return for a portion of the cost of daycare, a nanny, preschool, and even summer day camp for children under 13 while you and your spouse work (or look for work). For more information, see IRS Publication 503, Child and Dependent Care Expenses at irs.gov.
If you’re worried about investment volatility…
Make sure your investments match your timeframe and risk tolerance. Don’t react and sell your stocks just because the market is down. As we’ve seen over the past few months, one day’s downturn can be followed by big gains the next day.
If you need to get back on track for retirement…
If you aren’t able to save as much or your retirement savings has lost money, you may need to reassess your decision as to when to stop working. Working a few extra years — even just part-time, or on a freelance basis — will put off tapping your retirement savings and may enable you to save more for retirement, and delay taking Social Security benefits, which could impact your annual payouts for the rest of your life (use the calculators at SocialSecurity.gov to compare payouts at different ages).
If you need help with financial planning…
Sometimes it can help to collaborate with a qualified financial planner who has just the expertise you need. Look for a fiduciary advisor (fee-only) who puts your best interests first and doesn’t earn a commission for steering you towards certain products.
MORE ON HERMONEY:
- Need Cash From Your Retirement Savings? Tap Into a Roth IRA First
- The She-cession Has Begun. What To Do If You’re Worried About A Layoff
- Laid Off? How To Update Your LinkedIn Profile To Stand Out From The Herd
- Should I Stop Contributing to My 401(k) (And Other Investing FAQs)
- The New Rules of Borrowing Money from Your 401(k)
- Podcast: How Your Portfolio Can Weather the Financial Storm with Fidelity’s Jeanne Thompson
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