Creating Your Financial Safety Net

Creating Your Financial Safety Net

As America begins to reopen, we can set our sights on what we need to do to get our financial situation back in order. What should be at the top of your list? In my mind, creating your financial safety net should be a high priority.

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Create Your Financial Safety Net

Some Disturbing Numbers

America is starting to reopen. Hopefully that means we will all be able to get back to work soon and begin your own financial recovery. But as you begin to focus on what you need to do, what should be your top priority?

The best place to start: your financial safety net. By this we mean focus on building a cash reserve and eliminating debt.

When we look at the some of the numbers we see some very disturbing statistics.

Lack of Savings…

According to gobankingrates.com:

  • Over 2/3 of Americans don’t have $1,000 in a savings account.
  • 45% have no savings at all.

Massive Consumer Debt…

According to NerdWallet, Americans owe more than $14 trillion
  • $466 billion in credit card debt
  • $9.5 trillion in mortgage debt
  • $1.3 trillion in car loans
  • $1.5 trillion in student loans

The “Average American” has no safety net!

Financial Safety Net

A Major Financial Crisis

When 30 million people lose their jobs, and millions more see their pay reduced, it is going to cause real problems very quickly.  This time, the government stepped in to provide some relief.  Many banks and lenders have been very understanding too.  But the next time you face a financial crisis, you may not be able to depend on the same measures.

Having cash allows us to keep the lights on, food on the table, and a roof over our heads.

Eliminating debt means we have less money going out each month. And this means the money we do have can go for what we truly need.

How Do You Do This?

We need to focus on how to avoid these problems if or when there is a “next time.”

How do you do this?  It’s simple, but not necessarily easy.

1. Take a hard look at how you spend money.

The past few months should have revealed what expenses are truly essential.  You will need to make some hard choices and big changes in the expenditures that aren’t.

2. Make saving a higher priority.

As things return to normal, make it a point to save something from each paycheck.  Aim to have at least $1,000 in a savings account to start.

3. Create a plan to eliminate your debt.

Focus on your car loans, your credit cards, and student loans.  One of the best ways to do this is to use the debt snowball created by radio personality, Dave Ramsey.

Your Financial Safety Net

Be ready for the "next time"

We don’t know when the next financial crisis will happen, and it may only be YOUR financial crisis.  Your financial safety net will mean a whole lot less stress and a lot less pain.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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4 Ways The Pandemic Could Impact Social Security

4 Ways the Pandemic Could Impact Social Security

Social Security is the cornerstone of retirement income for many Americans.  Have you wondered if the Coronavirus outbreak will impact your benefits? Here are four ways the pandemic could impact Social Security.

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The Covid-19 Pandemic and the Economy

The Covid-19 virus has turned the world and the economy on its head. The financial impacts are being felt far and wide. We have record unemployment claims, with nearly 22 million people out of work–so far. And Pew Research estimates 27% of American workers have seen their pay reduced.  Government response has also been extreme.  All of that will impact the future.

Most of the media focus has been on how this outbreak has impacted current workers. But it can also affect retirees. Here are four ways the pandemic could impact your Social Security benefits.

pandemic social security impact

Social Security does provide an inflation-adjusted income stream. But over the past several years those average increases have not been all that great. In some years, it hasn’t been enough to cover the increase in Medicare premiums. 

According to the Federal Reserve Bank of Cleveland, the current 10-year inflation expectation is less than 1.2% per year. If those projections hold, it means small benefit increases. In some years, it could mean your net check decreases due to rising Medicare costs.

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Pandemic Impacts Social Security

Depending on how long the economic shutdown lasts, many older workers could be forced to retire earlier than they expected. For many, this forces them to start Social Security earlier than their normal retirement age. And those discounts could be close to 30%.  

Social Security Impact pandemic

Social Security uses Average Indexed Wages to compute your Social Security benefits. The economic downturn means total wages earned in 2020 will be less. They could be a lot less.

This could impact how they compute your Social Security benefits. The end-result could be a smaller monthly payment. This will most likely impact those who are close to age 60.

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Pandemic Impacts Social Security

Right now, fewer payroll taxes are being collected. This places an extra strain on an already stressed system.

Prior to the pandemic, Social Security looked to be solvent until 2034. This means they had enough to pay the promised benefits. But the reduced tax collections could mean the problems could happen a year sooner.

Unless there are major changes, when Social Security reaches this point, benefits will have to be reduced.

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Far Reaching Impact

The coronavirus pandemic has affected more than our health. It has had a significant impact on many areas of our economy. And this includes your Social Security benefits.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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What the Heck is a V Shaped Recovery?

What the Heck is a V-Shaped Recovery?

With many states creating plans to reopen the economy, we keep hearing about the recovery. Experts continue to weigh in on what it may look like. But it leaves people wondering, “What the heck is a V-shaped recovery?” 

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If you hadn’t noticed, the American economy has come crashing down. Some people are estimating this will be one of the worst quarters since the Great Depression.

Now, the investment experts and economists are starting to focus on the recovery. And when they get on TV, you start to hear them say things like a V-shaped, or U- shaped recovery. I’ve even heard some talk about a “W” shape or an “L.”

What the Heck is a V-Shaped Recovery?

If you visualize the letter “V”, you see a steep decrease that comes to a point, followed by a steep increase. Think of this as a graph representing important economic data, like GDP, sales, or corporate profits. We’ve seen a rapid decrease in those data points.

V shaped recovery

Many hope that these numbers recover and improve just as quickly as they fell. And we’ll look back at those key statistics and see a “V” shape. This is the most optimistic scenario.

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The U-Shaped Recovery

A U-shaped recovery would see a sharp decrease followed by a gradual bottom. On the other side, the recovery would start slowly and accelerate as time moves on.

Recovery V Shaped

This would make the graph of those data points look more like a “U”. Not as good as a whole, but still not awful either.

A W-Shaped Recovery

V Recovery shape

You have some people worried about a “W” shape. And this wouldn’t be ideal. This would happen in this scenario. We reopen the economy, and things begin to recover quickly. As a result, we see the virus infections spike, which leads to another shutdown. And then the economy would restart at some point in the future.

This would not be ideal, but there is a risk of this happening.

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The L-Shaped Recovery

V shaped recovery

Perhaps the worst possible outcome is an L-shaped recovery. We’ve already seen the rapid decline. But in this scenario, the economic recovery would be long and very slow. A recovery like this could take years to return to where we were before this all started.

What Do I See?

I believe a U-shaped recovery is the most likely scenario at this point. The elected officials are going to reopen the economy at a very measured pace. People are going to be hesitant to spend, and it will take a while for demand to recover.

As much as I would like to see the V-shaped recovery, I don’t see it happening at this point. I am hopeful that we won’t experience a W-shaped curve. In that scenario, the governors would be a lot slower to reopen the economy a second time. And the damage from that would be even worse.

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What Do You Think?

What do you think?  We’d love to hear from you.  Leave your comments down below.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. 

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Should I Take Money From My 401k Plan

Should I Take Money From My 401k?

“Should I take money from my 401k to help me get through these tough times?” That’s a question we received from a listener.  The CARES Act made some changes to these distributions.  But there are still some things you should consider. Let’s dig into the answer. (Read more below)

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It’s a tough time right now. We’re all trying to stay healthy. That has led to some very extreme measures. And those measures have created some financial hardships for people.

Mark sent us a question. He asked, “should I take money from my 401k to help me get through these tough times?”

How the CARES Act changed 401k distributions

Recently the federal government passed the CARES Act. It is a $2 trillion stimulus designed to help Americans weather this storm created by the Covid-019 virus.

One of the provisions of this act was to provide some tax relief for distributions from 401k plans and other retirement accounts like IRA’s.

Should I Take Money from my 401k

Normally, if you are under age 59 1/2 there is a 10% penalty for early distributions. The CARES Act now waives this penalty for those early withdrawals up to $100,000.

The act also allows you to spread the taxes from any of those distributions over 3 years.

Lastly, you can return those distributions to your IRA or 401k inside the three-year period as well.

Check Your With Your Employer!

Not every 401k plan allows for in-service distributions. Please check with your employer.

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But, should you take money from your 401k?

Now, this doesn’t answer Mark’s question. It shows that it is an option. Should you tap into your 401k (or IRA) to help you through these tough times?

Here are some things to consider?

Should I take money from my 401k

Your distribution is taxable…

The distributions are still taxable. Even though you can spread the tax bill over three years, and there is no penalty, there are still taxes due. Think of it this way, for every dollar you take out, at best you’ll only keep 85 cents.

You’re selling at lower prices…

The stock market is down significantly. Selling now, means you’re going to lock in those losses.

There is a future cost…

You worked hard to save it. Taking those funds from your account not only has a current cost, it has a potential future cost as well. You’ll miss out on the future growth. Over time that could be significant.

A last resort…

Withdrawing from retirement accounts should be a last resort. Unfortunately, a lot of people could reach those extreme situations. The government has at least provided a little relief if it gets that far.

Make sure you dig into your numbers before you make these tough decisions. If you need some guidance, talk to a financial planner.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    

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Is the Coronavirus a Long-Term Threat to Your Retirement Savings?

Is The Coronavirus a Long-Term Threat to Your Retirement Savings?

Is the Coronavirus a long-term threat to your retirement savings?  This question weighs on the minds of many as the news dominates the headlines.  We try to add some perspective in this week’s episode of Monday Morning Money.

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The Coronavirus is a Big Deal

According to the World Health Organization, the Coronavirus outbreak has reached pandemic levels. Over 20,000 have contracted it.

At times, the stock markets have reacted harshly to the news. On January 31, The Dow dropped by more than 600 points. It was the biggest drop in months, and it was easy to blame the virus for the fall.

The Big Question: Is the Coronavirus a Long-Term Threat to your Retirement Savings?

This isn’t the first major viral epidemic we have seen. In 2003 it was SARS. The bird-flu hit the headlines in 2005. We saw an outbreak of the swine flu in 2009. And then we faced the Ebola scare in 2014. All had their own short-term impact on the financial markets.

This outbreak will have a short-term impact as well. But, history tells us the hype will likely be far worse than the actual impact to the world’s economy.

Always a Reason for Doom and Gloom

There is never a shortage of excuses to sell stocks. When you look back over the past 20 years or so, you can find many reasons for doom and gloom. We have seen virus outbreaks. Lehman Brothers and General Motors filed for bankruptcy. We endured government shutdowns and massive one day drops in stock prices. And for some, the election of President Trump was their reason to abandon stocks.

But the impact of any of those excuses was temporary.

The SARS virus first made headlines in February 2003. Now 17 years later, the stock market has increased by 441%. That includes the returns from dividends.

Coronavirus long-term threat to retirement savings
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Short-Term Interruptions

Our experience shows things like the Coronoavirus outbreak are short-term interruptions to the long-term growth of stocks. So the impact to your savings from this outbreak will most likely be short lived.

But don’t worry, the financial media will have another reason for doom and gloom shortly.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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