Pandemic Put Spotlight on Some Important Financial Lessons
|By: Jasmina Tadic CFP®, CDFA®|
Dealing with the pandemic was emotional in so many ways and taught us so much about ourselves and each other -- from learning what things are most important in our lives to how little it turns out we know about our friends and family as we “all get through this together.”
Never before COVID have we all been in the same boat with so many different ways of safely getting back to shore, including how we manage our finances.
I had clients who wanted to retire due to fear of being exposed to the virus. And others who chose to work an extra year because, “What else are they going to do with their time?”
The savers found themselves confidently retiring early. While others learned the impact of working another year. Every extra year of work is like two years with financial planning; it’s one more year you are saving instead of tapping into investments, and one less year of funding retirement from those investments!
If you found yourself with extra money before payday during the pandemic, increase your savings now before you fall back into your pre-COVID spending routine. The more you can save, the better options you will have in case of future challenging times.
Tax rates currently are at historic lows and there most likely will be an increase due to debt incurred during the pandemic.
Current rates are expected to go up when they expire in 2025 per the Tax Cuts and Jobs Act, if not sooner. Saving on taxes now may mean paying more later in retirement if you only save in a tax-deductible IRA or 401(k). You should consider making contributions to a Roth 401(k), a post-tax 401(k) or Roth IRA, if available.
In these vehicles, you won’t get a tax deduction now but you also won’t have to pay taxes on distributions in retirement. And because you are not getting a tax deduction for adding to these types of accounts, you also can withdraw your contributions before turning 59½ without penalty.
A combination of assets in both taxable and nontaxable accounts can provide you with liquidity in case of emergency, and control taxes in retirement when you may find yourself in a higher tax bracket than you are now.
Retirement plans dictate who inherits our assets when we die. And in most states, you can add a beneficiary to most of your other assets. Those often overlooked are savings and checking accounts, safety deposit boxes, vehicles and even your home.
This is even more important for unmarried people, as spouses are typically the default beneficiary. And setting up a financial and health care power of attorney before a crisis makes an already tough situation a little more manageable.
Jasmina Tadic CFP®, CDFA®
Senior Financial Advisor
Featured in the Crain's Cleveland: 5.15.2021