Retirement Planning in the Middle of a Pandemic

The following first appeared on Money & Markets.

If you’re reading this, I hope you’re still employed or that your business hasn’t been too badly disrupted. I’ve been impressed by the ability of millions of Americans to carry on business as usual despite the stay-at-home orders and closure of offices. It’s a testament both to modern technology and to the get-it-done spirit of America’s business owners and workers.

I’ve lost count of the number of business calls I’ve been on with crying babies, barking dogs or screaming Peruvian mothers-in-law in the background (OK, so that last one might be specific to me as I’m stuck in Peru). But business is still getting done even under those conditions, which is commendable. Unfortunately, there are still a lot of people hurting financially and looking for liquidity where they can find it. And some are naturally looking to their retirement accounts for lack of other options.

I don’t like to give our fearless leaders in congress and the White House credit for much. In fact, I’m generally happy to throw all of them under the bus. But they did throw us a few bones in the CARES Act that directly affect retirement planning. The longer this crisis lasts, the more relevant some of these options will be.

Let’s jump into some of the highlights.

Retirement Planning Amid the COVID-19 Pandemic

No RMDs in 2020

If you are over 70 ½, as part of your retirement planning you should already know you’re required to take required minimum distributions (RMDs) from your IRA or 401(k) plan.

Well, the CARES Act waives RMD requirements for this year. So, if you don’t need to take an RMD this year because you have liquid savings in a bank account or regular taxable brokerage account you can live on, it’s really better if you don’t. Every dollar you take out of your IRA is a dollar you have to pay taxes on. Keeping the cash in the retirement plan for another year kicks the tax liability into a later tax year.

Ultimately, you’re still going to pay the taxes. You know Ben Franklin’s quip: The only two certainties in life are death and taxes. But as far as I am concerned, a dollar in taxes postponed to a later tax year is a dollar saved.

Retirement Plan Emergency Distributions

If you don’t need to take distributions, great! But not everyone is in that situation. If you’re out of work or your business is shuttered due to the coronavirus closures, you may be looking for cash anywhere you can get it.

The CARES Act allows us to withdraw $100,000 per taxpayer without the customary 10% penalty that is levied if you’re younger than 59 ½. And if you pay back, or “recontribute” the funds in your retirement plan within the next three years, there are no tax consequences either.

The criteria here is pretty loose. In order to qualify for this hardship distribution, you have to have a member of your immediate family diagnosed with COVID-19, or you have to have suffered a financial setback due to virus and associated closures. I don’t claim to speak for the IRS, but I’m guessing they’re not going to check all that hard. If you claim to be suffering hardship, that’s likely evidence enough.

Additionally, you can potentially borrow more from your 401(k) retirement plan. Previously, the limits were the lesser of $50,000 or 50% of the account balance. The limit is now the lesser of $100,000 or 100% of the plan’s balance.

But Should You?

Here’s the rub. While you might be eligible to take funds out of your retirement plan, it doesn’t necessarily mean you should.

Remember, IRAs and 401(k) retirement plans are generally untouchable by creditors in the event of bankruptcy. The worst thing you could do would be to liquidate your retirement plan to support your business, only to have it fail in another three months if conditions don’t approve.

Should you be forced to declare bankruptcy – and let’s face it, a lot of people will be in that situation through no fault of their own – it’s better to keep your retirement accounts off limits.

Furthermore,  remember that you’re not the only person suffering right now. If you’re having a hard time making rent or payroll, try negotiating with your landlord or bank. They might not like it, but you won’t be the first person to ask them for help. It’s better to leave your retirement plan intact and deal with an angry landlord or banker than liquidate it and still deal with the same angry landlord or banker a few months later.

There’s also the government. The Paycheck Protection Plan (PPP) hasn’t gone as smoothly as we might like, and it’s already out of money. But it’s a foregone conclusion that the program will be restarted. If you think you might quality, call your bank and start the paperwork now so that you’ll be ready once the plan is given fresh funds.

And if, after all that, you still need to dip into your retirement account … well, do what you need to do. It’s rough out there.

Just make sure you keep this as your absolute last resort. You’ve worked too hard for it to risk exhausting it now.

This article first appeared as Retirement Planning in the Middle of a Pandemic.

Missing Out on the Recovery? Your Plan to Get Back Into the Stock Market

The following first appeared on Money & Markets.

I had a good chat this week with a basketball buddy of mine.

I realize this immediately raises two questions. And to answer the first one, yes, I am a 40-something white man of average height and sub-average knees, and I play basketball. I’m not claiming to play well, mind you, and I’m comfortable admitting that I’m a sad, frail shadow of what I used to be.

But I can still hit the three, dammit. And the exercise gets me out of the house and staves off my eventual and inevitable life-ending heart attack by at least a few years.

To answer the second question, no. Under current social distancing guidelines, we are no longer playing. I’ve been bunkered down on a South American ranch for the past month, and he fled to rural Canada.

At any rate, my buddy was really kicking himself. He’s been sitting in cash and completely missing out on the recovery in stock prices over the past few weeks. The S&P 500 is up a shocking 30% from its March panic lows.

But here’s the thing. Rather than kicking himself, he should be patting himself on the back. He started to feel like the market was getting frothy back in January and had started taking his chips off the table. He travels a lot for work and was one of the first people I knew to legitimately worry about the outbreak. After seeing what was happening in Europe, he reduced his stockholdings further in February. And by early March, before the bottom fell out, he was completely in cash.

He largely avoided one of the worst market sell-offs in history. Yet he was still kicking himself for missing out on the recovery.

I broke down the numbers for him and showed him that he was far ahead of the game. The market is still a good 20% from its old highs, and it remains to be seen how much damage has been done to corporate earnings. He may still get a chance to buy low.

We’ll see. In any event, you may also be kicking yourself if you’ve been sitting in cash throughout this move.

Don’t do that. Getting upset will only cloud your judgment and probably lead you to make additional mistakes.  Instead, make a plan. We’ll go over a few steps today.

Missing Out on the Recovery? Here’s a Game Plan to Get Back In

Step No. 1: Get your allocation down

Before you do anything else, figure out how much of your portfolio you want in stocks under “normal” conditions. If you’re young, it might be 80% or more. If you’re near or in retirement, it might be closer to 50%. Figure out what sounds right for you, and set that as your baseline. You don’t have to get there tomorrow. But this at least gets you a road map.

Step No. 2: Average in

Regret avoidance can be paralyzing. You don’t invest because you are afraid of buying at the top, losing money and probably worst of all, looking and feeling like an idiot. And then when the market goes up without you, you still end up looking and feeling like an idiot.

I struggle with these emotions, too. We all do. The  best way I have found to deal them is to average into my positions over time. I make an initial purchase of 20% to 50% and then trickle into the rest of the position in even increments over the course of a few months.

It’s not particularly scientific of me, and I don’t claim that it’s optimal. But it helps me manage my emotions and avoid regret.

Step No. 3: Take the win

It’s important to remember that you don’t have to be invested at all times. Like my basketball teammate, you can take the win, sell high and walk away for a while.

Of course, this gets us back to minimizing regrets. It’s painful to sit in cash and watch the market rip higher without you.

This is the beauty of rebalancing. I rarely sell my entire portfolio and sit in cash. But I do regularly rebalance, selling off pieces of my winners and rotating the proceeds into bonds, cash or nonstock alternatives. That way I always have at least a little skin in the game, but I’m also taking profits along the way.

Take the win!

What Coronavirus Sales Boosts Will Actually Stick After the Shutdown?

The following first appeared on Money & Markets.

Last week, I asked what changes once the coronavirus scare passes, and what doesn’t. Today, we’re going to expand on that theme, looking at company earnings.

We’re obviously not going to live under lockdown forever. Though I can tell you it’s starting to feel that way, and after weeks of not shaving and generally letting myself go, I’m starting to resemble Tom Hanks from Castaway. My children don’t see the humor in talking to their soccer ball and insisting on calling it Wilson.

At any rate, the virus lockdowns have been windfalls for several companies, including major retailers with a strong web presence like Amazon.com (AMZN) and Walmart (WMT). As I mentioned last week, both companies are picking up market share at the expense of less web-savvy retailers and those deemed to be less “essential.” Those earnings may dissipate over time to some extent, but probably not anytime soon.

But let’s dig deeper.

Company Earnings: Coronavirus Winners and Losers

Disposable Items

We’ve seen photos for over a month now of empty grocery store aisles where toilet paper and cleaning supplies would normally be. We haven’t seen earnings releases yet for Procter & Gamble (PG) or Kimberly-Clark Corporation (KMB), makers of the Charmin and Scott brands, respectively, and the largest manufacturers of branded toilet paper.

We can assume they got a bump to earnings last quarter due to hoarding. But no one in their right mind could argue that bump will be durable or permanent because we’re not actually using more toilet paper than usual. We’re just stockpiling it for reasons that still aren’t entirely clear to me, which means that excess purchasing today are simply reducing our future buys tomorrow.

But compare that to, say, Clorox (CLX), which makes bleach, disinfecting wipes and other assorted cleaning products. There was a rash of panic buying of these too. But the difference is that we really are cleaning more than before, and that’s not super likely to change in the coming months. Every school, office, or retail property on earth will be scrubbing every square inch of space for months to come … just in case. No one wants their place of business tied to another virus outbreak.

So, as you look at stocks for post-coronavirus trends and earnings trends, ask yourself the following question: Was any increase in sales due to one-off situations that won’t be repeated? Or are the conditions likely to stick around for a bit?

The Cloud

When I hear colleagues or acquaintances talk about losing data due to hard drive failure, I just sort of shake my head. I made myself disaster-proof over a decade ago, putting all of my data in the cloud before “the cloud” was a popular expression.

Were my children to jump on my laptop and crush it (purely hypothetical situation, of course …) I could buy or otherwise acquire another computer and be up and running again in 10 minutes. In a pinch, I could even access my files on my phone. It’s baffling to me that there’s still anyone out there who’s not in the cloud.

Every company, school, governmental organization and even church or synagogue just got a major reminder of why they need their operations to be disaster-proof and in the cloud. This means that the major tech themes of the past several years such as software as a service (“SAAS”), moving critical data and systems to cloud servers, etc. is only going to accelerate. No one wants to get caught with their pants down again.

This obviously helps the big boys in this space like Amazon, Microsoft (MSFT) and Google (GOOGL). And upstarts like Zoom (ZM) have also seen a surge of use.

Not every communications app is a winner, and there is always the risk that someone new comes along tomorrow with a better mousetrap. But sector wide, the coronavirus bump in communications and tech spending — and company earnings — isn’t likely to be a flash in the pan.

A Post-Coronavirus Retirement Action Plan

The following fist appeared on Money and Markets.

We’ll never know the exact numbers, but I suspect a lot of Boomers will be delaying retirement for a couple years following the coronavirus bear market. While the S&P 500 is sitting at March 2019 levels, shares of the sorts of high-yielding stocks loved by retirees – equity REITs, mortgage REITs, energy stocks, preferred stock, etc. – have taken brutal losses that won’t be as easily recovered.

I’m wildly bullish on REITs, by the way, as I mentioned last week. But I expect that a lot of investors panicked, sold near the lows, crystalizing losses they may never fully recover from.

At any rate, the coronavirus might be shutting down the economy and keeping us in our homes. But the clock doesn’t stop ticking, and we all still have retirements to plan for. So today, we’re going to make a post-coronavirus retirement action plan.

Assess your job stability

There were 6.6 million jobless claims filed last week. Hopefully, you weren’t one of them. But even if you’re still employed, you need to take a sober look at your job stability. There’s a lot of solidarity today, a sense that we’re all in this fight together. And many companies, either through a sense of duty or fear of public backlash, are trying to keep as many people employed as possible. But once the dust settles and employers get a better gauge of what demand will look like once the virus scare passes, many more rounds of layoffs may be coming. Don’t hesitate if you need estate planning for adults without children because there are legal companies that can give you the best advice.

If you think there is even a modest chance of losing your job, start hoarding cash. Now. Cut out expenses you can cut and stockpile every dollar you can.

Yes, if everyone does what I am suggesting, it becomes a self-fulfilling prophecy. I get that. But you have to look at your situation and take care of yourself.

Assess your access to cash and credit

This next part will be controversial, but hear me out. It could be particularly relevant to small business owners.

If, because of coronavirus and the lockdowns, you think that your business or job may no longer by viable, you’re still going to want to tough it out for a few months to see. You put your heart and soul into it, so you owe it to yourself to do whatever you can to keep it afloat.

All the same, don’t mortgage your house, liquidate your retirement savings or completely deplete your cash. Try to borrow what you can, ideally from the federal government’s Small Business Administration. Depending on the situation and loan program, the loans may be partially or entirely forgiven. For example, Paycheck Protection Program loans are forgiven if the proceeds are used to maintain payroll and certain other expenses.

But if you reach the conclusion that your business simply cannot survive, even with government help, it’s better to walk away early and let it fail. Do what you can to keep the liabilities contained to the business itself and try to preserve as much of your outside assets as possible. You’re going to need them to launch your next business once the time is right. The worst thing you can do is use up your precious capital or take out personal loans to save something that cannot be saved.

Also, remember that 401(k) and IRA balances generally can’t be seized by creditors, and, depending on the state, neither can home equity. Remember your rights, and don’t be pressured into liquidating assets to pay debts you may not be legally obligated to pay.

If you can, try to max out your 401(k)

Ok, let’s say that your job or small business is secure. You’re confident that you’ll ride out this storm just fine.

In that case, make a real effort to get as much cash as you can into a 401(k) or other tax-advantaged account.

Let’s face it. Taxes are going to be higher down the road. The government is throwing budget constraints out the window throughout this crisis. That’s fine. I don’t blame them, and I don’t see that they really have much of a choice at this point. But once the crisis abates, debts have to be repaid, and budget deficits have to be brought to a heel. That means less spending and higher taxes. So, every dollar you can legally hide from the taxman in your retirement account is a dollar they can’t get their grubby hands on later.

In 2020, you can put up to $19,500 into a 401(k) plan or $26,000 if you’re 50 or older. If you are self-employed, the number is even bigger at $57,000.

I’d like to think the worst is now behind us, and I really think it’s possible that it is. But we don’t know that, which is why having a plan is more important today than ever before.

Is the Market Actually Cheap?

The following is an excerpt of “Is the Market Actually Cheap?“, which first appeared on Money & Markets.

It’s not so clear that this is the generational buying opportunity some of the bulls seem to think it is.

Let’s take a look at market valuations. This is where the cyclically-adjusted price/earnings ratio (“CAPE”) comes in handy. The CAPE was made famous by Yale professor Robert Shiller, though Benjamin Graham – Warren Buffett’s mentor and the father of value investing – suggested a similar methodology as far back as the 1930s. Rather than compare stock prices to current-year or expected next-year earnings, the CAPE compares prices today to a 10-year average of earnings. The idea is that any stretch of a decade has likely seen a boom, a bust and everything in between.

The S&P 500 started February with a CAPE of 33, putting it roughly at the level of the 1929 pre-Depression top. The CAPE has only been significantly higher once in the entire history of the American stock market, and that was at the peak of the 1990s tech bubble.

The bloodletting we saw in February and March took a lot of the speculative froth out of the market and knocked the CAPE down to about 23. It’s since recovered to just shy of 26 as I write this.

A CAPE of 26 looks a lot better than a CAPE of 33. But it’s far from cheap.

To put it in context, the CAPE was sitting at roughly these levels at the 2007 top. The CAPE bottomed in 2009 at 13, literally half of today’s levels.

Data site GuruFocus ran the numbers and found that a starting CAPE value at today’s levels suggest annual returns of just 0.9% over the next eight years.

Take this with a grain of salt, of course. Interest rates and inflation are both lower today, meaning that stock prices should be higher, all else equal. (Lower interest rates reduce the time value of money). And it’s also worth noting that the S&P 500 is dominated today by high-margin tech companies with quasi-monopolies. Again, all else equal, this suggests that stock prices should be higher today than the historical average.

But even allowing for some generous wiggle room, it’s hard to really call the market cheap here.

Does this mean that the market has to retest its lows or plummet to new depths?

Absolutely not. The market doesn’t have to do anything. But it does mean that the S&P 500’s annual returns will likely be below average over the better part of the next decade.

To read the full article, see Is the Market Actually Cheap?