The coronavirus is officially a pandemic. The bull market is officially over. None of us knows what comes next.
It’s hard to make rational financial decisions when there’s so much uncertainty. We asked readers of the Your Money newsletter what most concerns them right now. Dozens sent questions, which we condensed and answered here:
Q: I’m retired. Should I move more of my portfolio into cash?
A: Harold Evensky, a longtime financial planner in Texas, had a blunt answer: “Going to cash could mean you will end up eating cat food five years from now.” Even in these times, most retirees still need a balanced portfolio of stock and bonds so their nest egg will keep up with inflation, and maybe even grow.
But holding enough cash for basic needs is important, too. Mr. Evensky recommends thinking in terms of two cash buckets: The first can hold a year’s worth of living expenses. The second is for the big payments you’ll need over the next five years, like helping with a grandchild’s college tuition.
With the money in those buckets already put aside, you may be able to ride out a shaky market more peacefully, using the returns from your investment portfolio to replenish the buckets as you use the cash you really need.
Q: When’s the right time to buy into falling markets?
A: We don’t know when the market will hit bottom, so hedge your bets: Invest a portion of your money over time. “Our brains do not respond well to panic and we will not be able to make rational decisions when everyone else is freaking out,” said Michael Batnick, director of research at Ritholtz Wealth Management. “You need to have a plan.”
Let’s say you have an extra $5,000 you want to put to work. Set up an automatic investing schedule to take emotion out of the process — maybe you invest $500 every other Wednesday, for example. And if the market sinks further, try not to fret. Most of us are investing for the long term anyway.
Q: Should I refinance my mortgage now that rates have sunk?
A: It depends. You might be able to shorten your loan term to 15 years from 30 and pay off your loan quicker. Your monthly payments would likely rise, but you would have more budget flexibility in retirement or even sooner.
Or you could stick with a 30-year mortgage and lock in a lower rate. This would reduce your monthly payment, though you could end up paying more interest over time.
Getting your hands on more cash might be your goal. You might keep your payment the same, start the 30-year clock over and walk away with some money for whatever is coming next. But lenders are overwhelmed, so prepare to devote many hours to loan shopping and closing.
Q: I wish I had a pension. Should retirees be considering annuities?
A: Maybe. If it’s pension-like income you’re craving, then something called a single-premium immediate annuity may help. You pay an insurance company a pile of cash, and in return, they send you a guaranteed monthly paycheck for the rest of your life (or some other period). Experts suggest figuring out what your basic fixed costs are — housing, food, taxes — and then buying enough of an income stream to cover the portion of expenses that Social Security does not.
But the income received is tied to long-term interest rates, which have fallen to new lows. As a result, so-called payout rates have also fallen sharply. One workaround is to spread your purchase out — for example, by using a portion of your money to buy one annuity annually over five years.
Another negative: Once you give that cash to the insurance company, you can’t access it. (You can buy a death benefit for your heirs, but that will reduce your income stream.)
Q: I need to sell my home, but I’m worried about timing. I need to live on the income from the sale. Now what?
A: The supply of houses in most markets is tight and mortgage rates are low, which bodes well for sellers. That could shift, though, as the coronavirus spreads.
Redfin (RDFN), a brokerage, said home-buying demand has dropped in Seattle, which has been hard hit by COVID-19, but it hasn’t seen a falloff yet in the rest of the country. The National Association of Realtors put out a “flash survey” of its members March 9; 11 percent reported lower home buyer traffic and 7 percent reported lower home seller traffic.
But the virus’s impact is changing so rapidly that we simply don’t know what’s coming next.
Q: I’m closing on a house and need cash from my stock and bond portfolio. Where should I pull it from?
A: First, a wag of the finger. Cash needed for a down payment or other near-term expenses, like college tuition, should not be in risky securities like stocks. Generally, investments should be used for long-term goals like retirement, because you have time to ride out market dips. Money needed in less than 10 years should be somewhere safer. “It should not have been there in the first place,” said Elissa Buie, a financial planner in San Francisco.
But since it’s too late for that, she said — and assuming there’s no other source for the cash — it likely makes most sense to draw from the bonds. Stocks have obviously plummeted in recent weeks, so you can give them some time to recover. Pull from bonds. Their prices, which move in the opposite direction of interest rates, have lately been rising.
Q: I’m in my 60s, behind on saving and worried this market will never bounce back enough for me to retire. Should I move more to bonds?
A: Look at things dispassionately: Bonds are relatively expensive now, while stocks are cheaper than they were a few weeks ago. This is not an optimal time to buy bonds and sell stock.
But if you want to retire soon on the money already in your portfolio, it might be reasonable to safeguard more of it, or even consider adding a cash buffer (see the first question). High quality bonds can be a haven.
Q: I’m in my 40s and saving the maximum amount permitted in my 401(k). But I feel like I should stop or save less for a while. Is that wise?
A: If you truly need the money to live, do whatever you have to do. That said, if your employer matches your contributions at some level, try to get that free money.
You’ll be better off down the road if you keep salting away as much as you are permitted in that tax-sheltered account, assuming it is invested in a diversified way. So unless you face a real emergency, try not to stop saving entirely.
But if the market plunge has taught you that your risk tolerance isn’t as high as you once thought it was, dialing back your stock allocation may help you ride out storms like these.
Q: I need help! What kind of professional can I trust?
A: Be especially careful during periods of market turbulence. Many professionals who call themselves financial advisers are glorified salespeople, peddling stuff you don’t need.
Start by asking this question: “Will you act as a fiduciary?” That means the adviser must put your interests ahead of his or her own. The pros most likely to serve as fiduciaries are certified financial planners, who are also registered advisers.
You want someone who charges an hourly rate or another type of flat fee. Avoid advisers who only earn money when they sell you something. Many pros who work that way can be found here: XY Planning Network; Garrett Planning Network; The National Association of Personal Financial Advisors.
Q: Should I keep my cash in a saving account instead of a money-market account? What if there’s a run on the banks or a freeze-up, like in 2008?
A: Money-market mutual funds were always widely assumed to be safe places to store cash. But during the financial crisis, one fund told investors its shares were no longer worth $1, but a few pennies less. Investors panicked, and the government stepped in to stop a run on the funds.
Bank and money-market experts said they believed that isn’t likely to happen again. Want an explicit guarantee? Stick with a traditional bank account (or a money market deposit account, which is different from a money-market fund) that is backed by the Federal Deposit Insurance Corporation, which means your money is insured by the federal government, up to certain limits.
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