Financial Spring Cleaning: 4 Key Areas and What to Do in Light of Coronavirus

Tuesday, Jun 16, 2020

The Coronavirus has left many of us wondering, “What should I do?” Here is a guide outlining four key financial spring cleaning areas you should be thinking about given the events of 2020 so far: investments, insurance, real estate, and estate planning.

Family taking a walk together

Financial Spring Cleaning Area 1: Investments

If you are like many Americans, you may have money invested in the stock market, mutual funds, exchange traded funds, or something similar. These can be done through your retirement plan at work or through privately established accounts. What you do now should depend more on your age and timeline, rather than current events. Below is different advice depending on age, the first being a dual income family near age 40 and the second a “pre-retiree” age 60.

Dual income family, age 40

You should be thinking that you will stay the course. When the market is volatile, it is tempting to remove your money from that volatility. This can be a big mistake because just as negative volatility is very bad, positive volatility is very good. In fact, in the stock market’s most volatile times we can experience some of the strongest single performance days. It is important that, as a younger investor with a long time to retirement, you catch those very positive days that often tend to occur right after very negative days in volatile times. This is why it is so important to resist selling during volatility. Many studies have been done where if you miss the five best days over a 10-year investment period (3,650 days), your return can be cut in half or more over the entire period! See one study HERE.

In addition, when the market is down it is a great time to add funds to your accounts. Can you bump up your 401k contribution? Can you afford to add a chunk of funds to your investment account? If so, a down market can be your friend as a great price entry point. You can take advantage of the 20 years you have left to go before stopping work. It is usually advisable to make consistent monthly contributions, but don’t resist buying in a little more when prices are very attractive.

Pre-retiree, age 60

If you are within a few years of retiring, you should begin to think where your income will be coming from after you are done with work. Most people will have some form of income from social security at some point in their retirement. Others will have additional income through a pension or military benefit. But, will this income cover all of your desired expenses? If the answer is no, you should be thinking about what the annual gap between your income and your desired expenses is. When you determine that number, consider putting about 5 years’ worth of that gap number into something that is more conservative like cash and cash equivalents. By doing this, you are effectively “locking in” your income for the first five years of retirement since all of the needed funds in the first five years will come from these cash and cash equivalent funds and your income sources. The assets that are left over can be invested more for growth since you have established your short-term needs. This allows you to feel secure in your income plan while also protecting against inflation and keeping some of your funds invested for growth. Here is a hypothetical example:

John and Jane have $1,000,000 in a 401k and project to have $60,000 per year in income from social security. They would like to spend $80,000 per year total in retirement. Since they have $60,000 from social security, they still need $20,000 per year to fill the gap. Typically, 401k plan distributions are taxable (unless Roth) so they will need a little more than $20,000 each year from the 401k to cover the taxes. Let’s assume they expect to pay 20% tax on the distribution. They will need $24,000 each year to get their $20,000 and pay the $4,000 in taxes. In order to “lock in” their next 5 years, they would need to put $120,000 ($24,000 x 5 years) into cash and cash equivalent investments. They could then invest the remaining $880,000 in a series of investments with more growth potential, in order to keep up with inflation, and rest easy knowing that the next five years are taken care of. As the years pass, there will likely be positive gains during some years in the invested $880,000. When these gains occur, they can move some money from the “in the market” account into the cash or cash equivalents accounts to always secure the next 5 years of income secure.

Now that the market has recovered somewhat from the March 23rd low point, it may be a good time to consider moving some money out of the market in a strategy similar to the above, if it’s right for your specific situation. The goal is to have this in place the next time the market declines, and you will sleep much better when that time comes around.

Depending on your age, timeline for when you will be using your funds, and how much you will need – you should be making decisions accordingly.

Little Girl Under Umbrella

Financial Spring Cleaning Area 2: Insurance

Insurance protection is always something that is difficult to pay for as you are covering for a risk that has not happened yet and may never happen. Protecting your financial plan from unexpected disasters is important and further secure one’s financial future. There are many different types of insurance for you to consider protecting your plan. As the world becomes more digital, many old insurance policies may be advantageous to consider replacing with newer, sometimes cheaper policies with similar coverage. This is due to the insurance company’s cost of doing business reducing over the past years by working primarily online with less overhead cost. In addition, certain insurances like auto insurance could see a dramatic reduction in claims as the result of many people not driving as much in the year 2020. Many auto insurance providers also offer other insurance like home and umbrella coverage. It is likely they could consider lowering rates in competition with each other in the coming months.

It wouldn’t hurt to give your insurance agent a call to see if rates have decreased. Be sure to use a broker who can access insurance coverage of many insurers so they can compete the quotes against each other. You just might see a slight reduction in your out of pocket costs when it is needed most.

Family outside out their house - real estate investment

Financial Spring Cleaning Area 3: Real Estate

There are two opportunities to consider in real estate currently, selling and refinancing.


The real estate market has become a seller’s market overnight again. When Coronavirus stopped showings for real estate in many states due to social distancing concerns, many people decided to not list their house. This reduces inventory available for buyers and creates serious competition for the houses that are available. If you are thinking about selling your house and want to do it fast, it may be a great time to consider selling. Don’t be surprised if you get multiple competing offers on day one of your listing. You may even find you can sell your property for more than you thought you could.


When crisis has occurred in the past 20 years, Americans have become used to interest rates declining. Controlling the federal funds rate is one lever that the Federal Reserve has available to help prop up the economy in difficult times. The Fed lowers rates, making accessing funds for individuals and businesses less expensive in hopes of stimulating the economy. What does this mean for you? Take a look at the interest rate on your mortgage. You may be able to exchange debt at a high interest rates, like 5%+, for a lower interest rate, like 3.5% (see below). You will have to pay closing costs on the loan. Often times you will break even quickly due to your monthly payment being lower. This simple move could end up saving you many thousands of dollars over the life of the loan, see below. Again, make sure you work with a lender that has access to many bank’s loan programs so that they can shop and compete many loans for you.

Real Estate Refinance - Financial Spring Cleaning

Click here for a free mortgage calculator.

Estate Planning - Financial Spring Cleaning

Financial Spring Cleaning Area 4: Estate Planning

Estate planning can be defined as preparing one’s assets to transfer to someone else at death. Many people don’t realize that their assets will be taxable to the recipient even if the person who dies is below the estate tax exemption limit, currently $11,580,000. If a person has less than $11,580,000 in their estate at death, they will avoid paying additional estate taxes. However, they may still owe income tax on their assets if held in pre-tax qualified accounts or non-qualified variable annuity accounts. When markets decline, it can be an opportunity to prepare your estate for transfer in the future, even if that transfer is many years down the road. One should always consult an estate tax attorney to ensure other state death taxes do not apply in addition to the federal death tax.

Pre-tax accounts

Accounts like IRAs that have pre-tax funds in them generate income that is taxable when a retiree takes money out of the accounts. When that retiree dies, and passes the IRA to their heirs, that tax liability does not go away and can even increase. This is for two reasons: First, the typical heir is around age 60 as their parents pass away in their 80s. A person in their 60s tends to be in their highest income earning years of their career. This creates a tax issue when, say, the heir is earning $200,000 per year and then inherits a $500,000 IRA. The heir is likely going to be in a higher income tax bracket than their parents were prior to their death. This means that the heir will pay more tax on the $500,000 than the parents would have. Second, a recent law change on December 20, 2019 called the SECURE Act requires that the person inheriting an IRA take the full amount of that IRA out within a 10-year period instead of over the heir’s lifetime. This requires that a larger amount of an inheritance be claimed as income per year by the heir than before. It should be noted that in rare cases some beneficiaries can still use their life expectancy and spread the tax over their lifetime.

Of course, more money (even when taxed) is more money than you had before – so the issue is not that it is bad to inherit money. But, if you think about it from the parent’s perspective, they had an opportunity while alive (assuming they were in a lower tax bracket) to move that money out of the IRA, pay the taxes, and position that asset in an account that their heir would inherit tax free. Many don’t realize that non-qualified assets (money outside of retirement accounts) generally receive a step up in cost basis on the date of death, essentially making the inheritance tax free to the heir.

Non-qualified variable annuities

A variable annuity is a financial product that can be held in an IRA or in a non-qualified account.Usually assets held in a non-qualified account will receive a step up in cost basis at the owner’s death, meaning that the heir would not owe any tax on the gain accrued in the previous owner’s lifetime. However, variable annuities do not qualify for this great tax benefit. In fact, the gains in a non-qualified variable annuity are taxed as income to the recipient, not even as capital gains which would be more attractive. So, for similar reasons mentioned above regarding pre-tax accounts, non-qualified variable annuity owners may want to remove the gains at their tax bracket while alive if they will be giving those funds to an heir. If the gains are removed from the contract, the cost basis of the annuity will pass tax free to the heir. The removed gains could be invested into a regular non-qualified account and subsequently get the preferred step up in cost basis. (Note: Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits.)

How does all of this relate to recent events? When the market is down, you can remove more shares from your IRA than when prices are higher and pay the same amount of tax. So if you are in retirement and have funds in an IRA or non-qualified variable annuity that you will likely be passing to the next generation, the time is now to consider doing some estate planning from a tax perspective with those assets.

Senior lady on mobile phone and steaming clothes

As the world changes, so should your approach to your financial plan. These financial spring cleaning ideas could help make your plan a little more efficient given the recent events of 2020.

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