FAQ From Our COVID-19 Series

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Thank you to everyone who submitted questions. Below you will find some questions we didn’t get to during the presentation, as well as some answers provided by our money coaches.

If you have submitted questions that are not answered here, please schedule an appointment with a Money Coach in order to have a confidential call to discuss your situation and have your specific questions answered.

BUDGETING QUESTIONS

With interest rates being so low, should I look to refinance my credit card debt with a home equity line of credit?
Using a home equity line of credit (HELOC) to pay off debt can have advantages and disadvantages. Fully evaluate the pros and cons to see if it would be a viable solution for you. A HELOC can provide flexibility in terms of having a revolving line of credit based on your home’s equity. One benefit of using a HELOC to pay off debt can include the ability to consolidate debt at a lower interest rate. One of the main disadvantages of a HELOC is that it is a type of mortgage (a lien against the property), which allows the lender to foreclose for non-payment. If your income is uncertain, or you’re already struggling to make debt payments, this may be risky.The interest rate on a HELOC is usually variable, and the payment required is interest-only. It can be tempting to simply pay the minimum, which would result in no payment of principal and a much longer term. If interest rates rise, it could mean your payment will also increase. A HELOC is one of many options to address debt that (when used with discipline) can help consolidate debt at a lower interest rate than other forms of consumer debt. Make sure you talk with one of our MSA Money Coaches to explore solutions that work for your situation.

I have received my stimulus check, and I was wondering if it would be better to eliminate debt with it or put it straight into savings?
This depends on your individual situation. If you believe your income will remain stable and you have 3-6 months of living expenses in emergency savings, then you may have more flexibility to pay down debt. If your employment is uncertain or you expect a decline in income in the near future, you may want to allocate funds toward savings. Assess the potential impact this pandemic may have on your income and analyze how the stimulus could lessen the effect.

Would you recommend taking cash advances on low interest/zero transfer credit cards to invest in stocks?
No. Borrowing to invest can be risky. Cash advances will need to be repaid. There is no guarantee of profits in the stock market. We recommend having sufficient savings and designating funds specifically meant for investment purposes. One investment strategy that does not require you to take on debt to invest is called dollar-cost averaging: this involves investing consistent dollar amounts into the market at time intervals that are appropriate for you and purchasing shares with each deposit.

Is this the best time to buy a house, now, because the interest rate is zero?
While mortgage rates are at historic lows, they are not at zero. It’s important to research competitive rates in your area and get your finances in order before applying for a mortgage loan. The interest rate on your mortgage is influenced by your current debt level, credit history, income, and loan amount. It is best to ensure that your overall financial picture is in the best position to qualify for the lowest possible interest rate.

Also keep in mind that there are many factors to consider in the decision to purchase a home, including your financial readiness and your timeline to stay in the home. Just like the stock market, the housing market can have fluctuations in value. The longer the time horizon, the greater the chance of recovery if the market experiences significant drops in housing values. Talk with a Money Coach who is a Mortgage Specialist for extra guidance and tips.

How should I properly manage my money now that we have less income in the household?
It’s best to start with an assessment of your cash flow: measure the total amount of income you have now, then separate your fixed expenses from your discretionary expenses. Does your reduced income cover your fixed expenses? If not, what can be deferred or reduced? Determine how much is available to set aside in emergency funds. Identify which discretionary expenses can be reduced. Don’t forget to explore your eligibility for programs such as unemployment due to reduced income. If you need help, talk to a Money Coach who can provide budgeting forms to help you assess your current position and discuss your options.

What is Form 8822, and how can I send it to the IRS so that they receive it quickly?
Form 8822 notifies the IRS of a change in address. This can be important if you have changed your address since you last filed taxes. If you are expecting a stimulus check and have not notified the IRS of your direct deposit information, you would use this form to notify the IRS to send your payment to the correct address. To obtain this form, go to https://www.irs.gov/pub/irs-pdf/f8822.pdf and download the PDF form. The second page of the form indicates where to mail the form. (The appropriate IRS office depends on your old home mailing address).

Where can I check the status of my stimulus payment, confirm my payment information, and enter my direct deposit information for the IRS to send my stimulus payment?
Here is the website to update that information: https://www.irs.gov/coronavirus/economic-impact-payments
It is important to note that the website will not be fully operational until mid-April.

Are most mortgages federally backed? Why is that important?
You can use the following website to check if your mortgage is backed by a federal agency, such as Fannie Mae or Freddie Mac:
https://www.makinghomeaffordable.gov/get-answers/Pages/get-answers-find-out-mortgage.aspx

To inquire about mortgage assistance programs or options, please visit the following website:
https://www.makinghomeaffordable.gov/get-answers/pages/get-answers-learning-FAQs.aspx

It is important to know if your mortgage is federally backed in order to know which mortgage programs you qualify for. Federally backed mortgages offer different options than mortgages backed by other agencies. We recommend homeowners first determine who their loan servicer is and then proceed to seek a relief program if needed. Even if you don’t have a federally backed mortgage, contact your mortgage servicer. Many banks and credit unions have programs in place to assist you with mortgage options if you are struggling to make a payment.

Who is eligible for the Economic Impact Payment?
U.S citizens or resident aliens who have a valid Social Security number, can not be claimed as a dependent of another taxpayer, and have adjusted gross income under certain limits. Legal permanent residents or green card holders are expected to receive a stimulus check as long as they meet the qualifications.

I have a 24-year-old and a 20-year-old. Both were students in 2019, so we claimed them as dependents, but they both filed their income taxes. Will they be getting stimulus checks?
Individuals are not eligible for a stimulus payment if they can be claimed on the federal return of another taxpayer. To receive the additional $500 for dependent children, the child needs to be under the age of 17. If your child can be claimed on another tax return, they will not receive a stimulus payment.

What would you recommend as an essential savings practice if very limited money is left-over after bills are paid?
Save whatever you can. Small amounts add up over time. You may want to look at your budget to determine if there is any consistency in the amount remaining that can go towards savings. See if you can commit to making that amount automatic. Evaluate if you can cut any non-essential expenses and reallocate that money towards savings. Making automatic contributions and taking a second look at non-essential expenses can help build the habit of creating sufficient emergency funds.

What part of my stimulus payment is subject to taxes? Will I have to pay back the stimulus check during the next tax season?
None. The 2020 stimulus payment is not a part of your taxable income for the year. It is a temporary refundable credit. A refundable credit reduces your 2020 tax bill dollar-for-dollar. It will not affect your refund for 2020 or 2021. If your adjusted gross income is higher for 2020 than 2018 or 2019, and the credit that a taxpayer qualifies for is less than it was for the previous returns, it will not need to be paid back.

Any guidance for how much cash to keep on hand in this environment? For example, is it better to build cash right now instead of paying off a 3-5% interest debt?
Three to six months of living expenses is typically recommended for emergency savings. If your employment is stable and your emergency funds are sufficient, this could be a good opportunity to tackle debt by incorporating a strategy that works best for you. If you expect that your household income may decrease or stop altogether due to the current crisis, you may want to aim for six to nine months of emergency funds.

With so many Americans losing their jobs and shutting down businesses, do you expect the economy to make a long, slow recovery or quickly bounce back?
Every change in the economic cycle has different determinants and different outcomes. The influence of COVID-19 is no different. It is impossible to predict the timing of outcomes and the impact of how financial markets will recover. We do know that historically the stock market has produced long-term growth, so it’s important to view the market downturn and rebound with that perspective. It is also important to understand that past performance does not indicate future results.

The types of actions one should take during this crisis will be dependent upon the time horizon, investment goals, risk tolerance, and financial goals. Some considerations to have in mind:

  • What is a sufficient amount of liquidity for your situation?
  • Is there any risk to your employment income?
  • What is your investment time horizon?
  • Is it time to reassess your risk tolerance or rebalance your investments?


INVESTING QUESTIONS

Can you give general information on annuities?
An annuity is a contract between an individual and an insurance company that typically guarantees some form of income to the individual for either a defined period of time or a lifetime. There are many ways the contract can be structured, but the most common types are fixed annuities or variable annuities, which relates to the rate of return and investment selection. Annuities are often used to supplement or protect retirement income. There are multiple ways to fund and receive payouts from an annuity. Keep in mind that most annuities come with fees, surrender charges, and specific conditions that may place a limitation on how the annuitant receives the funds. It’s important to do a full financial evaluation to determine whether an annuity may be right for you. Depending on the type of annuity and the tax characterization of the deposits that fund the annuity, there may be some significant taxes to consider. Talk with a tax specialist to review your circumstances and understand the potential tax consequences of annuities.

Is now a good time to contribute more to our retirement plan if we are able to?
If your budget allows you to contribute more to retirement without falling behind on bills or taking on debt, then every dollar you can save may help you better prepare for retirement. As a first step, run a retirement calculator to see if you are on track for funding your retirement. There are many widely available either through your retirement plan provider or on the internet. If you are at risk of not being able to fully fund your retirement and you are able to increase contributions now, your contributions will purchase more shares (due to lower asset prices). Keep in mind that the market may continue to be volatile. You will want to make sure your retirement investments are in line with your risk tolerance and time horizon.

Should I pause my 401(k) contributions due to the current market volatility?
First, consider your overall retirement strategy. Market volatility means that prices will fluctuate. On some days, the market will be up; at other points, it will be down. Take your time horizon until retirement into consideration. When you pause your contributions, you could forego potential growth that could lead to more retirement funds. If you are nervous about the financial markets, it may be time to review your asset allocation, rather than discontinuing or decreasing contributions. Don’t forget that if you stop your contributions, you may also give up any matching fund contributions made by your employer. It’s best to run a calculator to estimate a comfortable retirement contribution strategy for you and stick to the strategy. Most calculators will estimate an average rate of return to arrive at a figure to fund your retirement while factoring in that some years will have a higher rate of return and others may not.

I moved the money in my 401(k) from stocks and bonds to cash, due to the recent market volatility. Would this be a good time to put it back into the investing account?
Attempting to time the market can be very difficult, if not impossible. Most investors are unsuccessful in doing so. Keep your risk tolerance in mind, as well as the time horizon until your retirement. You may also want to complete a risk tolerance questionnaire to help you determine the balance of investments that is right for you. The longer the time horizon, the higher the probability of experiencing market volatility; thus, with this strategy, you may find yourself reallocating more than once. You may want to look into alternatives to the constant reallocation of the portfolio, such as working with a financial adviser to determine an appropriate asset allocation for your time horizon or looking into target-date funds that reallocate the investments based on the year you expect to retire.

You may also want to consider putting smaller amounts back into the market, rather than picking the “right time” to place funds back into the market. By adding amounts each pay period or monthly, you will spread out the risk and purchase fewer shares when market prices are high and more shares when market prices are low.

For someone who is new to investing, it can be a little overwhelming and confusing. Maybe a table of terms and definitions could be helpful for those who haven’t had much exposure to this before?
This would be a great opportunity to talk with one of our money coaches and get one-on-one help. Feel free to either get a referral from your Employee Assistance Program or call us directly through your My Secure Advantage benefit to schedule a call with a coach to walk you through the definitions, pros and cons of investing.

Can you explain the concept of dollar-cost averaging?
Dollar-cost averaging occurs when you invest a given amount (for example, $50/month) over a consistent period to purchase an investment. An example is when you make contributions to your 401(k) with each paycheck. During periods when the market is trading at higher prices, you will purchase fewer shares. When the market is trading at low prices, you will purchase more shares. The resulting benefit for most investors is a lower average cost per share. When you do not have a large initial investment to enter the market, dollar-cost averaging can be helpful to build wealth in smaller amounts for the long term.

Are money market accounts safe during times of great financial strain on the market?
Money market accounts offered by banks are typically FDIC or NCUA insured. Money market funds offered by mutual fund companies are typically not FDIC insured. In times of financial strain, you are protected up to $250,000 per person, per account if your funds are held at a bank. Money market funds are typically invested in relatively safe vehicles over short periods of time (typically no longer than 13 months). In terms of investment risk, both types of accounts are considered to be relatively safe.

What percentage of my paycheck should I contribute to my retirement plan?
First, start with your budget to analyze what is manageable for you. The recommended guideline is between 10%-15% (or more) of your gross income; however, this will depend on how much you have already saved and the number of years until you retire. If you continue to invest now, you will buy more shares at lower prices. The other side of that is your ability to tolerate more volatility as the market navigates the current period.

Is this the right time to rebalance my investment? What should I watch for if I do?
If you choose to rebalance your investments during this time, it’s important to keep in mind your risk tolerance and time horizon for your investments. If the current period of market volatility is above your risk tolerance, you might consider rebalancing to an asset allocation more suitable for you. If the time horizon for your investments is long-term, you may want to consider the long-run trend of the market and examine the possibility of your investments rebounding over the long-term.

The toughest thing about rebalancing during a time of crisis is you may lock in your losses, you add the responsibility of rebalancing again in the future when you believe the market has bottomed out, and you will find yourself doing this more than once if this is for the long-term (i.e. more responsibility for you).

Since the IRS has changed the tax filing deadline, does that mean the IRA contribution date has also been extended?
Yes. You can make contributions to your IRA, for a particular year, at any time during the year or by the due date for filing your return for that year. Therefore, because the due date for filing Federal income tax returns has been postponed to July 15, the deadline for making contributions to your IRA for 2019 has also been extended to July 15, 2020.

Can you briefly summarize rebalancing vs. reallocating?
Reallocating investments refers to changing the percentage of assets invested in different asset classes to better fit the investor’s risk tolerance and investment goals. Rebalancing refers to buying or selling funds in your plan so that the asset allocation percentages remain consistent.

A common question for investors during a period of market volatility is whether to move investments to more conservative choices in order to minimize losses. There are multiple ways to do this, which includes either rebalancing or reallocating. It’s important to choose the right strategy for you and the type of investment account.

What is the difference between a Money Coach and a financial advisor? If you have a retirement plan but you’re late in the game, which would be better?
A financial advisor may have the ability to make specific investment recommendations given your financial goals and risk tolerance. A Money Coach will guide you through the pros and cons of various options under consideration. Our goal as money coaches is to give you the tools to make the best financial decision for yourself. If you would like specific recommendations on asset allocation and investments, consider working with a financial advisor that best suits your needs.

Should I refinance my mortgage? What immediate actions should investors consider during this economic slump?
There are pros and cons to refinancing your mortgage. The good news is that mortgage rates are low. Ultimately, you will want to consider how much you will save, how long you plan to stay in the property, and if you can afford the closing costs. Please note that many mortgage owners are seeking refinance options, currently, so bring patience with you if you decide to engage in this process.

We completed a risk tolerance questionnaire about two years ago, but due to the times, should we do another questionnaire?
Yes. Risk tolerance can change over time. If you find that this current period of market volatility is too much for you, it may be a good time to reexamine your risk tolerance. You may also want to revisit your investment philosophy and criteria you have established for yourself. Consider the returns you want to achieve, the diversification you wish to establish, and the criteria under which you will make changes to your investment portfolio.

Should I reduce the amount I am contributing to my 401k if I am struggling to pay my monthly bills?
Consider your time horizon until retirement and your cash flow. If you have experienced a decline in income due to the crisis and need to improve your current cash flow, you may want to temporarily reduce or stop contributions until your situation improves. Remember, discontinuing contributions now will impact your retirement savings. Plan for when contributions will begin again and whether you are able to increase your contribution rate to make up for what has been foregone due to the crisis.

We understand that you have questions. The good news is that you can talk with a Money Coach about your specific situation and the financial issues that might be keeping you up at night. Call today.