Your Emergency Financial Planning Guide, Pandemic Edition

(Bloomberg Businessweek) -- We do many things to try and ward off future pain: Get annual physicals. Save for retirement. Buy insurance. Drawing up plans to combat the financial devastation from a global pandemic hasn’t been one of them.

With careers and nest eggs suddenly seeming more fragile, many financial planning issues pushed to the side during a bull market take on new urgency. “A lot of people have been going through life without a good pulse on their finances, because everything has kind of been working out,” says financial planner Mitchell Kraus of Santa Monica, Calif.-based Capital Intelligence Associates. “They’re now questioning what they thought they knew and looking for unique solutions or for more details, because solutions aren’t as easy as they used to be.”

Among the questions bubbling up: What are options for quickly building or beefing up an emergency fund? What costs could be cut or trimmed if household income has been slashed—and cash flow was already stretched to cover college tuition and a mortgage or two? What can be done now to better prepare for an uncertain future?

New federal measures offer temporary help with putting off certain bills or tapping tax-qualified savings. For those in dire need, these options may be a lifeline. But if you have the luxury of enough cash flow for now, weighing the longer-term consequences of those moves is time well spent, as is exploring other ways to boost financial flexibility.

Borrowers with federally held student loans are getting immediate relief. Payments are automatically suspended and interest waived until Sept. 30. You’ll still owe the same principal, so you’ll have to pay it later. You can choose to continue to make payments, however, if you want to pay off the debt faster. The relief doesn’t extend to private student loans. Some private lenders are allowing forbearance periods, with caveats, but interest accrues.

The government stimulus plan also lets investors of any age take as much as $100,000, across accounts, from IRAs and workplace retirement plans this year without incurring the 10% early withdrawal penalty. (With workplace plans such as 401(k)s, it’s up to the employer whether to allow such distributions.) The reasons for taking the money must be related to the disruptions caused by the outbreak, but the rules are loose. With traditional tax-deferred IRAs and 401(k)s you’ll owe tax on the money withdrawn, but it can be paid over three years and you can get it refunded if you put the money back into the account within three years.

For workplace retirement plans such as 401(k)s that allow loans, the limit on borrowing has been raised from $50,000 to $100,000 through Sept. 22. (Again, it’s up to your employer to allow this.) Payment dates for loans due in the rest of 2020 can also be extended for a year. One advantage of taking a loan rather than a withdrawal is that you generally have five rather than three years to pay it back and avoid taxes. Having to pay it back to your own account, with interest, may also give you an added nudge to replenish your savings as soon as you can.

The potential fly in the ointment is that 401(k) loans have to be repaid more quickly if you lose or leave your job. A borrower who doesn’t pay it back would eventually see the loan classified as income and face a big tax bill and penalties.

Using IRA and 401(k) money early can really hurt your retirement security. It’s best avoided unless you are in a very tough spot, so Kraus advises clients to wait and see if they really need it. “Many people are panicked, because they’re in a situation they never expected to be in and want to grab as much cash as possible, as quickly as possible, and put it in the bank,” he says. But Kraus points out that the option to access retirement savings early isn’t going away until yearend. And you have until autumn to decide if you need the bigger loan.

A less consequential way to increase cash flow is to stop contributions into a retirement account for a while. The key, of course, is restarting contributions as soon as possible.

Another logical place you might look for liquidity is from your home equity, although that’s getting tougher. For those with at least 30% to 40% equity in their home, getting a home equity line of credit (Heloc) could be a good, cheap insurance policy, says Brent Weiss, co-founder of Baltimore-based Facet Wealth. The more equity you have in your home, the larger the loan you can get and the lower the rate.

Lenders including JPMorgan Chase & Co. and Wells Fargo & Co. announced recently that they have temporarily stopped accepting applications for new Helocs, however. Trying a community bank, online lender, or a credit union may be your best bet. Be aware that the loans will take longer to get today, and you may not get the same amount you would have six months ago.

Once you get a Heloc, you may want to draw on the full amount and then bank it. “The bank can’t require you to pay it back, but they can freeze the limit,” Weiss says. That means paying interest, of course, and the best deals available today are at about 5%.

If you are in a tougher situation and the issue is making current bill payments, you can apply for mortgage forbearance with your loan servicer. The share of mortgages in forbearance has risen from 0.25% of servicers’ portfolio volume for the week of March 2 to almost 7% as of April 19, according to the Mortgage Bankers Association.

The Coronavirus Aid, Relief, and Economic Security (Cares) Act allows those with loans owned or backed by government-backed agencies or entities such as Fannie Mae, Freddie Mac, and the Veterans Administration, to apply for a reduction in, or suspension of, payments for 180 days for pandemic-related hardship. After that, borrowers can apply for an additional 180 days. Some states are developing programs to offer mortgage relief. While the Cares Act says these forborne or reduced payments are not supposed to be reported to credit bureaus as missed, you should be sure to check. (With mortgages from private lenders, skipped payments in forbearance are reported.)

The thing with forbearance: You have to pay eventually and interest keeps accruing. So it’s crucial to be clear on how you’ll repay—options could include a balloon payment, a loan term extended to include missed payments, or higher monthly bills. If you can’t resume payments, you could be heading down the path to losing your home.

There are also smaller steps you can take to ease your monthly budget burden. One is to adjust how you pay smaller monthly bills. Rather than paying life insurance or property casualty insurance premiums annually, pay monthly or quarterly. That may add 4% to 5% to the price, but you can switch to paying annually when cash flow isn’t an issue, says Weiss of Facet Wealth. You may also be able to lower premiums on auto insurance—you’re likely not driving as much. Refinancing a car loan may also free up money. Ashley Gragtmans, a financial planner with Parsec Financial in Asheville, N.C., recently switched her and her husband’s car loan to a credit union and got a lower interest rate as well as 90 days of no payments and no interest.

You can also try negotiating with cable companies, internet providers, utilities, and, if you rent, your landlord. Gragtmans has friends who asked their credit card company for a temporary waiver on interest payments and got it. Being stuck at home has helped some people with another helpful financial practice. “As bad as this is, it’s an opportunity to reevaluate lifestyle spending and tighten up,” says Gragtmans. “The whole point of having an emergency fund is that you never know—the certainty of uncertainty is so real.”
 
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