Americans are following the sage advice of Sir Winston Churchill, who said, “Never let a good crisis go to waste.” After flirting with financial disaster in 2020, many Americans are counting their lucky stars, vowing to take a more proactive approach to secure their financial future.
With millions of Americans out of work and many others underemployed, COVID is wreaking havoc on our economy and personal finances. However, some Americans have been able to skirt the pandemic’s disastrous financial effects, working from home or reporting to work in their front-line jobs.
Some dodged another financial bullet that could have spelled ruin for their savings. The cliff-like drop in the stock market that we saw in March 2020 was a massive wake up call to complacent investors who got used to the bull market climbing continually upwards over the last decade. Some investors saw their portfolio value shaved by a third in a matter of days and their retirement dreams dashed. March was a painful reminder that there is more risk in the market than expected, and not paying attention to your money can be dangerous. Fortunately, the market rebound in the latter part of last year made up for these losses, and scared investors licked their wounds and vowed to take a more proactive approach to investing and saving for their golden years.
At Francis Financial, we have many new clients reaching out to us to get started planning for their future. After the scares of the last year, they are determined to shore up their financial situation in the face of an uncertain 2021,and if the first two weeks of the year are any indicator, 2021 is going to be a challenging year. The best defense is to have a solid financial roadmap and a well-cushioned emergency fund and investment portfolio to carry you through.
Have a robust financial roadmap
According to financial-planning and investment expert Paul Stagias, a Certified Financial Planner™ with Francis Financial, “Many people do not have a clear idea as to how much money they will need to live in retirement. There is a real lack of good investment income planning and grossly inadequate savings for the future, in our society.” A report by the Transamerica Center for Retirement Studies backs up Stagias’s thoughts. The study found that 4 in 10 workers who provided an estimate of their retirement savings needs last year said they “guessed” the amount required.
To get a more accurate picture of your retirement number, Stagias recommends meeting with a fee-only financial advisor or following some basic guidelines. He suggests saving 15 percent to 20 percent of your income if you plan to retire at 65, which is more than double what most people are actually saving. According to Stagias, “All is not lost if you are behind the eight ball. Just get started. The sooner you start saving, the more you will benefit from the power of your money working in the market for you.”
Working longer will also allow you to add to your retirement savings and even keep building those assets in tax-advantaged retirement plans offered by your employer. According to a report by the National Bureau of Economic Research, delaying retirement for just three to six months has the same impact as saving 1 percent more of your salary over 30 years. Another upside of staying employed is the ability to defer taking Social Security, giving you a much larger monthly check when you do claim it.
Cushion your emergency fund
If you do not have an emergency fund, it’s time to get serious about building one. This fund will be there to support you if you have an unwelcome financial surprise – and there were a lot of those in 2020.
Your emergency fund should have enough cash to cover three to six months’ worth of necessary living expenses. However, the average American is falling short of this goal. According to a GOBankingRates survey, more than half of Americans, or 57 percent, have less than $1,000 in their savings accounts. Singles without children may be able to get by with three months’ worth, but couples or anyone with kids should aim for six months’ worth of expenses. The more people you support, the more likely you are to have unexpected or unplanned costs.
Review your investment portfolio and supercharge your savings
Stagias recommends, “Once you have built out your emergency fund and paid off high-interest debt, increase your savings for retirement and review your investment allocation.”
Avani Ramnani, Director of Financial Planning and Investment Management at Francis Financial, divvies long-term investing into three different buckets, based on your retirement target date: 5 to 15 years, 15 to 30 years, and more than 30 years away. Ramnani suggests a portfolio of 40% to 50% in stocks and the rest invested in bonds for investors with the shortest timeline. The most aggressive investors with the longest investment horizon may allocate up to 75% to 80% in stocks.
According to Ramnani, “These are helpful guidelines, but you have to do what is right for your financial future. It is essential to choose a portfolio allocation that will ensure you reach your goals, and a mixture of stocks and bonds that you are comfortable with, so that you stick with your investment strategy in good times and bad.” Ramnani cautions that the biggest investor mistake is pulling out of the market and going to cash when times get shaky. Ramnani warns investors, “By going to cash, you are locking in your stock market losses and sabotaging your ability to ever recover. This is a recipe for disaster!”