Sound Financial Planning Prepares for More Than Just RetirementTrevor Gerszt
Millions of Americans actively plan for retirement and arrange their finances with that end in mind. But as daunting as retirement and the loss of steady income can seem, for most people that won’t occur for decades. The more pressing reality, one which most Americans will face and which few are prepared for, is job loss. In many cases, the loss of a job occurs suddenly and unexpectedly. That’s why it’s important that your financial planning prepare you just as well for periods of unemployment as for retirement.
Stock Market Crash Is Around the Corner
Stock markets have been on a tear in recent months, with both the Dow Jones and S&P 500 seeing gains of nearly 40% over the past year and a half. But everything that goes up must eventually come down. The stock market boom has no correlation to anything happening in the broader economy. While GDP growth remains lower than the trend, job growth remains decent but unspectacular, and wage growth remains depressed, yet stock markets have still shot through the roof.
This growth in stock market indexes has come about because of easy money policies pursued by central banks. The trillions of dollars pushed into the system over the years have finally made their way into the stock market after a relentless search for yield. Once the Dow hit 20,000 points earlier this year, subsequent gains were fueled by a mania that thought the bull market was here to stay.
Once reality sets in that markets are in a bubble and that the flow of easy money is coming to an end, markets will start to tank. The bubble that has been blown by central banks will collapse, possibly initiating a financial crisis that will make 2008 look like a cake walk. That will result in many companies going out of business and hundreds of thousands, if not millions, of people losing their jobs.
No one wants to think that they’ll lose their job, but it’s still something that will occur to many people. The amount of time that you’re out of work could easily be over a year, especially if we face another financial crisis. Over 61 percent of workers ages 25 to 70 have had at least one year-long span without job income, and 96 percent have had at least four instances in which they’ve lost a job by the time they turn 70. For most people, it’s a matter of when not if. Thankfully, many of the same principles that help people save for retirement can also help protect them financially in the case of job loss.
Always Have Savings
At a minimum, you should have savings equivalent to three months worth of expenses. Six months is even better, and if you have a year’s worth of savings built up you’re way ahead of the curve. You can always trim your expenses when you lose a job, but you won’t be able to boost your income.
Those assets should be liquid: checking accounts, savings accounts, money market accounts, maybe some short-term CDs. They need to be something you have recourse to immediately, or within a few days at most so that they’re there right when you need them. Having your savings only in stocks or bonds is harmful, as in case of the double whammy of a stock market crash and job loss your savings are depleted right when you really need them. Cash may be a poor investment over the long-term, but it’s a lifesaver when you’re out of work.
Think About Health Savings Accounts
If you don’t already have a health savings account (HSA), you might want to consider establishing one, particularly if you’re older or think you may have to spend some money on healthcare. In order to establish an HSA, you have to qualify to create one. In general, that means that you’re covered by a high-deductible health care plan and aren’t enrolled in Medicare. The exact qualifications are available from the IRS.
HSAs allow you to use pre-tax dollars to pay for qualified medical expenses. That enables your money to go further, as you’re not having to use post-tax dollars to pay for medical care. And the money you save in an HSA can be rolled over from year to year.
Fund a Roth 401(k) or Roth IRA
Roth IRAs and 401(k)s are retirement accounts that are funded with post-tax dollars. Traditional IRAs and 401(k)s are funded with pre-tax dollars, meaning they grow tax-free and are then taxed when you cash them out in the future. Roth IRAs and 401(k)s, because they are funded with post-tax dollars, are tax-free when you cash them out at retirement, subject to certain limitations. Roth accounts are generally established by people who think that they’ll be in a higher tax bracket at retirement than they are during their working career.
Because Roth accounts are funded with post-tax dollars, you can also take loans from them during your working career, as long as you pay them back and fulfill all the requirements for those repayments. While you don’t want to take money out of your retirement accounts if you can help it, borrowing from a Roth account could be a last-ditch resort if you really need it, and it’s easier than borrowing from a traditional retirement account.
Keep Your 401(k) Funded
If your employer offers matching contributions to a company-sponsored 401(k) account, take them up on it. That’s free money that you’re leaving on the table if you don’t. You never know when you’ll end up needing it. Keeping your 401(k) funded with the aid of an employer match also frees up the rest of your salary to build up liquid emergency savings, pay for other expenses, etc. Borrowing from a traditional 401(k) should only be a last-ditch resort if you really need money and have no other savings.
Tap Into Your Home
If you own a house and lose your job, you might consider tapping into the equity you’ve built up. This is also a last-ditch resort, as you’d have to repay the loan you take out with interest. But if the choice is between taking out a home equity loan and starving, you might just have to bite the bullet.
Own Precious Metals
Gold and silver have acted as safe havens for investors for centuries. They have acted as stores of wealth and helped many a person weather tough economic times. They also benefit from gaining value during financial crises.
With the development of gold and silver IRAs, it’s easier than ever to invest in and gain the protective benefits of gold and silver. If your gold or silver IRA is a self-directed Roth IRA and qualifies for tax-free distributions, you can sell portions of your holdings if you need to in order to come up with ready cash. Because precious metals markets are highly liquid, there’s always demand for gold and silver. If you’re out of work and need money, having gold and silver on hand can help you cover any expenses you haven’t already budgeted for. Having access to an asset that gains value while you’re out of work can be a priceless advantage.