We have witnessed unprecedented events this year: market volatility where we saw the fastest shift from a bull to bear market in history, unemployment rates not seen in decades, and economic challenges reminiscent of the 2008 global financial crisis.
As a financial planner, I’ve reflected on how the current crisis has magnified the importance of some of the basics. Here are my five priorities:
1) Taking care of your health
First and foremost, the coronavirus pandemic is a health crisis. We’ve seen that this virus affects those most vulnerable and with underlying conditions the hardest. Although some underlying conditions may be out of our control, we must appreciate the importance of leading a healthy lifestyle.
As we age, we need to pay particular attention to our health. A primary concern of investors entering retirement is the cost of ongoing healthcare. Being proactive by taking preventive measures and reducing the chance of chronic illnesses throughout our lifetime, may not only affect our healthcare costs, but improve our quality of life.
2) Having cash on the side
This pandemic has led to a historic economic slowdown as we work to flatten the curve through social distancing protocols which required closing stores and businesses and canceling various activities and travel. We’ve all had to adapt and adjust to the new circumstances. Through no fault of their own, many people have found themselves unemployed or with less household income. Though conditions are still fluid, this situation highlights the importance of having an emergency reserve.
An emergency reserve, or access to funds outside of our retirement accounts, acts as our own personal safety net. It helps us to get through periods of uncertainty, most especially job loss, so we don’t need to use credit cards or raid our retirement savings just to make ends meet. We recommend setting aside an amount in a savings or money market account that could cover three to six months of expenses. This coronavirus crisis has illustrated that circumstances may occur that are outside of our control. Having cash on the side also gives us the freedom and flexibility to make changes in our lives.
3) Developing a financial framework
Along with the abrupt change to daily living, we may have experienced changes with how we spend our money. Expenses related to commuting, eating out, travel, and social and entertainment activities may have decreased, while in-home entertainment options and online shopping have likely increased. Spending more time together as a household may have also provided us with the time to reflect and discover what is truly important to us, both financially and otherwise.
Now may be the best time to reevaluate or develop a budget, especially if you’ve experienced financial challenges. A budget, spending plan, or financial framework is the foundation we use to track how we’re spending our money and to make sure we’re spending our money in line with our values. It helps us incorporate our savings goals and includes debt repayments. It is the tool that helps us make financial decisions and evaluate trade-off considerations.
4) Maintaining a long-term perspective
Many of us have been focused on managing our new day-to-day routines: navigating a new way of working, supporting our kids’ home-school needs, and findings ways to stay engaged with our loved ones and the community. At the same time, we saw volatile stock market activity that could make even the most experienced investor a bit anxious. Some may have let their emotions get the best of them by making a rash financial move, but many of us have “stayed the course” and kept our long-term investing programs intact.
It’s important to adhere to your long-term investing strategy even through short-term bouts of market volatility. That means maintaining an asset allocation—a mix of stocks, bonds, and cash—that will help you achieve your financial goals in line with your time horizon. Generally, for retirement goals, exposure to stocks is an important investment component. Stocks have generated higher returns over longer time periods than bonds or cash. If you’re decades from retirement, we suggest you emphasize stock in your portfolio. As you move closer to retirement, shift to a more balanced approach of stocks and bonds. Aim to save 15% of your income (including company contributions) for retirement. If 15% is too difficult, start at a lower amount and plan to increase each year.
If you made an emotional decision to sell stock, had to suspend saving programs, or used money from your retirement accounts to get through these challenging times, plan to get back on track once the uncertainty of your situation subsides.
5) Visualizing your retirement
For many of us, the line between work and life has blurred. While working from home, I have found that my husband and I share many more conversations with each other throughout the day than we ever have. This is great—except when I’m trying to work or preparing for a conference call! Sharing the same space at the same time has required us to work together to accommodate both our schedules.
We’ve also been given a glimpse of what retirement might hold—a trial run of sharing the same space at the same time. My husband has already stopped working and is used to his daily routine. I’ve realized that I will need to find ways to fill my time once I retire. What will we do together? What will we do separately? Will we stay in our home, relocate, or downsize? This experience has helped us focus and provided us time to hone our vision of retirement and gain a better understanding of the lifestyle we may need to support financially.
Living through this pandemic has reinforced the importance of many fundamental principles—financial and otherwise—as well as encouraged us to learn new ways to adapt. As the market recovers and life returns to what’s likely to be a new normal, it’s important to take these lessons with us, being prepared for life’s uncertainties while fully appreciating time with our loved ones.