Imagine setting aside twenty billion hundred dollar bills

As many of you may have heard, the government is going to be depositing money into your account or possibly your neighbor’s.  The government is setting aside 2 trillion dollars to help stimulate the economy.  This is the third stimulus bill, and the government is already working on the fourth to help get us through this difficult time.  Given the size of this bill and the general speed at which things are changing, I thought it would be a good time to take a quick inventory of some important tax changes.    

When are my taxes due?

• The due date to file and pay your 2019 Federal and Oregon taxes (keep in mind each state is potentially different) is now July 15th.  While we now have more time to file and pay this tax, you might not want to wait.  Here is why:

  • It’s likely you will be getting a refund from Oregon if you paid Oregon tax in 2018 due to the large kicker this year.  You must file to get this money back. 

  • Keep in mind you can file your returns at any point and still wait until July to pay if you owe Federal.  There may even be an opportunity to use your Oregon refund to pay some of your Federal tax if you owe and can get it back in time.   

  • You will also have until July to decide on IRA and H.S.A. contributions for 2019. 

• Quarter 1 2020 Federal estimates are now due July 15th. However, Oregon did not extend this deadline.  You are still required to pay Quarter 1 2020 Oregon estimates by April 15th. 

• Quarter 2 2020 estimated payments are still due June 15th for Federal and State.

Am I receiving a stimulus check?

• Cash payments are $1,200 ($2,400 for married couples), with an additional $500 cash payment for each child.  These payments would not be subject to tax. 

• Full payments are available for Americans making up to $75,000 ($150,000 for married couples).  The payment is then phased out by $5 for every $100 over that limit.  The stimulus would be based on your 2018 or 2019 tax return.  If you have filed 2019, we are assuming the IRS will use that year. 

• It’s likely too late to try and manipulate this by filing or not filing.  However, to be safe, if you have not filed 2019 and income could be phased out, it might make sense to hold off until you receive a check. 

• If you made too much in 2018 or 2019, you may still be able to get some stimulus in the form of a refundable tax credit when you file your 2020 return. 

Can I make changes to my retirement account?

• If you’re a retiree, you are no longer required to take a Required Minimum Distribution for 2020.  This creates an opportunity for you to potentially realize some capital gains in the zero percent tax bracket or convert to a Roth IRA for tax-free growth. 

• They have eliminated the early withdrawal penalty of 10% for withdrawals up to $100,000 from qualified retirement accounts for retirement plan participants who qualify for COVID-19 relief.

  • Individuals could "re-contribute" the funds to the plan within three years without regard to contribution limits. While the law allows for these types of penalty-free distributions, individual plans can set more restrictive policies. 

  • Income tax on the distribution would still be owed but could be paid over a three-year period.   You would need to pay the tax for two years but then presumably get it back in the third year if you decided to recontribute. 

• They have increased the amount that can be taken as a loan from a qualified retirement plan from $50,000 to $100,000 for 2020.

Has charitable giving gotten more favorable?

• Yes. There is a new charitable deduction you can take for up to $300 in cash, even if you do not itemize on your 2020 tax return. 

• Prior to the CARES act, you could take up to 60% of adjusted gross income as a charitable contribution.  For 2020, you can now donate up to 100% of your income.

With all the changes going on, we will continue to update you as much as possible.  Please feel free to reach out if you have any specific questions

Sources

https://www.natlawreview.com/article/president-trump-signs-law-coronavirus-aid-relief-and-economic-security-cares-act

https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know

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Don’t worry, they look like they’re six feet apart

In these days I am reminded on a regular basis of the challenge we’re facing and the mountain we are all being asked (or expected) to climb. Whether we’ve been practicing the right skills or not seems to be a bit of a pointless question at this exact moment as the time is now. Right now, it’s go time. But what does that even mean?

Lifting up our employees

As the person charged with Human Resources for our “under 25 employees” small company, I’ve asked more self-reflective questions than any person might if not for living smack dab in the middle of a global pandemic. I’ve been inspired by all the heroic first responders. I’ve wondered what to start, stop and do more of. I’ve leaned on the many agencies churning out updated work/job-related information relating to this current crisis. Agencies like the Department of Labor (DOL), Wage and Hour Division (WHD), the Bureau of Labor and Industry (BOLI-OR) and the Internal Revenue Service (IRS). Our vendors and providers are also working tirelessly to keep us connected, plugged in and functioning. So instead of resharing information that is coming directly from these various sources that have helped my firm,  I wanted to share three specific insights I’m learning as I seek outside my usual “Resources” to help buoy up myself and my “Humans.”

1. What were your daily routines?

As I experience the ups-and-downs of it all I’ve been more intently drawing upon what I’ve practiced in pre-pandemic times. These practices include both spiritual and physical exercises. I’ve encouraged my team to do the same. It’s daily, it’s sometimes hard, but it’s good and it’s a good starting point. I’ll share a bit from my experience today. I listened to a morning message and was reminded of courage. I’ve certainly been seeing and hearing about it in the news. Great feats of courage revealing the true human virtue that it is. This morning I decided to stop and spend a few minutes pondering courage. And even thinking on the word brought me inspiration which lead to new motivation for the day. Author Melanie Greenburg, PH. D gives some great highlights and quote’s around courage. If interested, check out her article, “The Six Attributes of Courage,” where she presents several elements of courage and a courage building exercise.

2. W.I.N

Next, I thought I’d share what I learned from a recent webinar I listened to. The webinar, titled “Mental Skills for the COVID crisis” caught my eye on my Instagram story feed so I signed up to listen and learn! One of the things I learned (and a great takeaway) was from the pratice’s co-founder Dr. Jonatan Fader, who shared the acronym WIN: What’s Important Now. I loved this for several reasons: it’s short, I can remember it, and it’s totally applicable right now. I wasted no time in sharing WIN with my team and continue to draw on it daily for both inspiration and focus. If you’ve got time or need a break from what’s in front of you check out the full webinar at Mental Skills for the COVID crisis.

3. FIND inspiration from the Least Expected places

And lastly, a simple story of personal inspiration. This week is the start of spring term for my 2 college kids. They are both home, both in creative majors requiring studio’s and currently sharing what we now call ‘dorm room north.’ At about 6:30am I heard the coffee pot brewing and then the sound of a sewing machine getting warmed up. It was my son’s industrial sewing class. No Zoom meeting offered and with little direction he proceeded to make something from nothing. Trying to keep our sense of humor I looked over and mentioned what a great job he did to hear him say with a note of wit “welcome to my forte.”  And then came 2pm and my daughter’s painting class. While we don’t have an easel or a separate studio, other than the front entry that also doubles as a workout area, she began mixing her colors as if she were crafting a new recipe. I’ve seen (and felt) their disappointment, discouragement and then coming to terms with the fact that their art classes would be at-home in makeshift locations.  They have pressed on past their current limitations, not without gratitude, but certainly with a level of grit and courage. As I looked up at each of them over my morning coffee, I took inspiration to also push past my fears today and get started.

So my question to you is what’s in front of you today that might inspire you in some new way? Keep watch for that daily inspiration, especially aware of the usual and mundane. You may find yourself inspired by regular life as much as you’ve been inspired by the most courageous on the front lines. And as my 81 year old mom says – take what helps and leave the rest and take heart.

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@drew_beamer

Over the last few weeks, our nation has been greatly impacted by the COVID-19. Work for many Americans has changed. Companies have had to make difficult and necessary choices to stay in operation. Many have transitioned to a WFH (work from home) policy. While many companies have had to make the painful decision to cut employee’s working hours, or worse lay employees off.

Our nation is experiencing the worst spike in unemployment the country has ever seen. The Department of Labor announced that 3,300,000 Americans filed for Unemployment Insurance during the third week of March. This figure is nearly five times the previous record of 695,000 in October of 1982. With such figures, it is likely you or someone you know has had their employment disrupted by COVID-19.

Unemployment Insurance Initial Weekly Claims; Source: DOL.gov

So, what’s next for those who are trying to navigate a loss of work or reduced hours during this difficult time? Thankfully there are systems like Unemployment Insurance to help get someone back on their feet. For Oregonians experiencing hardship, we have assembled the following resource to guide you through filing for Unemployment Insurance.

Expanded Unemployment Insurance Eligibility due to COVID-19

In response to COVID-19, the Senate has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act has expanded Unemployment Insurance to those impacted by COVID-19. You are eligible to apply for unemployment benefits if you meet one of the following criteria:

• have been laid-off due to COVID-19 

• have had your hours been cut due to COVID-19 

• have been furloughed due to COVID-19 

• have had your place of employment temporarily closed due to COVID-19 

• is self-employed, without sufficient work history for Unemployment Insurance and undergoing financial hardship due to COVID-19 

• have been unable to work due to themselves or someone their household/care having been diagnosed with or experiencing symptoms of COVID-19 

Where to Start?

1. Act now: Millions of Americans are applying for Unemployment Insurance benefits; thus, processing times may be slower. Act fast, apply as soon as possible. 

2. File a new claim application: A new claim will need to be filed online or by phone. The preferred method is to use Oregon’s online claim system - here, or call unemployment claims 1.877.345.3484 (1.877.FILE.4.UI). When filing a new claim, be prepared to provide information such as:

   • Personal info: social security, phone number and mailing address.

   • Work History and Income over the last 18 months.

   • Previous employer information: employment dates, names, and contact info.

   Additionally, there are required questions about your eligibility and willingness to work. To assist those impacted by COVID-19 in the response to these questions and navigate the new claims application, the Oregon Employment Department has created the following video - here.

3. File a weekly claim: Once a new claim application is filed, a weekly claim must be filed to receive benefits. To file an initial weekly claim, wait until the Sunday after the new claim application has been submitted. Continue to file for weekly benefits every week that you’re unemployed to request payment. Weekly filings can be completed Sunday through Saturday for the previous week. Note: Another benefit of the CARES Act, Unemployment Insurance benefits, has been extended from 26 weeks to a total of 39 weeks.

4. Receive payments: Weekly payments can be received via Direct Deposit or via a Debit Card (delivered by mail).

SAMPLE CLAIM EXPERIENCE

How much can you expect to receive?

The current nationwide average weekly benefit is $385 per week. Thanks to the CARES Act, those eligible for unemployment will receive additional unemployment assistance of $600 per week for four months. Annualized, that adds up to an annual income of someone making over $50,000 per year. The intent of the CARES Act is:

“Most will get their full salary, or very very close to it,” Senate Minority Leader Chuck Schumer, D-NY

Your weekly benefit amount is calculated as 1.25% of your total base year wages. An employee’s base year consists of the previous four quarters before the initial claim. Note: During your base year you must have earned $1,000 in wages and worked at least 500 hours.

For example, an employee who earned $15 per hour, working 40 hours per week for the past year would generally receive $390 per week (+$600 per week over the next four months) of benefits.

If you want to calculate your expected Oregon Unemployment benefit, here is a useful tool (does not include an additional $600) -

Final Thoughts

As a reminder, we are all in this together. I recommend being both persistent and gracious when claiming your Unemployment Insurance benefits. The state employees in the unemployment office have gone from historically low unemployment numbers to the highest ever in a matter of weeks and are most likely overwhelmed.

What we have experienced over the last couple of weeks is so much more than market volatility and numbers on the ticker tape. Please let us know if there is anything our team can do for you and your family, financial or otherwise.

Sources:

https://www.dol.gov/ui/data.pdf

www.oregon.gov

https://govstatus.egov.com/ORUnemployment_COVID19#workplace_C19

https://www.cbpp.org/research/economy/policy-basics-unemployment-insurance

https://www.oregon.gov/employ/Documents/OAR%20471-030-0070-temporaryrule.pdf

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@haroldrmendoza

This week the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a massive stimulus bill targeting the economic turmoil caused by the coronavirus pandemic. The 883-page bill aims to help Americans through these financially trying times. While as of this writing the CARES Act had yet to pass the House, all indicators point to the bill passing and being signed by the president.  

Specific to 401(k) plans, the CARES Act includes provisions around hardship distributions, 401(k) loans, and RMDs (Required Minimum Distributions) for 2020. Additionally, the Families First Coronavirus Response Act (FFCRA) was also passed and expands paid-leave coverage to employees affected by coronavirus. We are working closely with our ERISA consultation team and industry partners to determine the specifics of how plan sponsors should adapt administrative practices to accommodate these special 2020 provisions.  

 Hardship Withdrawals  

• The 10% early withdrawal penalty has been waived for distributions up to $100,000. Eligible participants under the age of 59 ½ may be able to request a distribution due to financial distress related to coronavirus through the end of 2020.  

• It is left to the plan sponsor’s discretion to determine that the request is for a qualifying coronavirus-related reason (such as adverse financial consequences due to being quarantined, furloughed, having work hours reduced, or not being able to work due to childcare coverage).  

• The taxes due on the withdrawal amount may be paid out over a three-year period.  

• Participants have the option to repay the distribution amount back into their 401(k) accounts within three years. 

 401(k) Loans 

• Participants with a new or existing 401(k) loan can delay any repayments due in 2020 for one year. 

• This covers loans due in full in 2020 – the CARES Act allows the repayment to be delayed for one year from the original due date. (Participants who terminate employment in 2020 will thus have additional time to repay their loan prior to it being considered a deemed distribution.)  

• The maximum loan amount has been increased to the lesser of $100,000 or the maximum account balance available.  

• The same risks regarding 401(k) loans still exist.  

Required Minimum Distributions 

• Retired participants and owners 70 ½ and older may waive 2020 required distributions from their 401(k) and other retirement savings accounts such as an IRA. 

• Individuals may find this beneficial as the 2020 RMD is calculated on account balances as of December 31, 2019 but due to recent market declines, a retiree could be withdrawing from an already reduced account balance.  

• Participants should speak with their financial advisor or tax consultant in determining whether to waive their 2020 RMD.  

 FFCRA 

• The DOL issued guidelines this week on the new Families First Coronavirus Response Act (FFCRA) which expands paid leave for specific reasons related to COVID-19.  

• Some employers may be exempt, such as those with fewer than fifty employees, but in general, employees must be provided with up to ten weeks of paid leave for specific coronavirus-related reasons.  

• Additional guidelines for employers can be found here.   

 Your Human Investing 401(k) Team is here to be a resource for you and your employees. We will be sure to share additional updates and guidance as they are provided. Please don’t hesitate to reach out to us with any questions in the meantime!  

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I just wrapped up a call with a non-profit client who has been part of my life for over fifteen years. The 501(c)3 is stewarded by many bright and caring individuals, who serve the needs of the poor, isolated, and elderly. Under normal circumstances, they, like many of us, can make ends meet. However, in times like these, where unemployment is rising, and a recession looming, contributions go down, and their ability to meet the needs of the marginalized is diminished.

We are encouraged, through the wisdom of great leaders of the past, that each of us should have "just enough." To be sure, we should take care of our own needs, but also the needs of others. This is not a political statement. Instead, it's an observation about a client and non-profit that we need to be mindful of others—particularly now. As I've raced to make sure my company, employees, family, and clients are in good shape, I've failed to think beyond that, to the non-profit community and to the many vulnerable individuals and families they serve—shame on me.

For some of us, the current needs may be significant, and the shortfall great. For others, the gap to fill may be small. However, for each of us, to whom much has been given, much is also expected, and now is our time. I learned a lot today. I became aware of the massive funding gap that many non-profits are facing, and the growing need of those in which they serve. I write this in the hope that each of us can look beyond our comforts to consider the needs of others. There is a massive need (and current funding shortfall) for most non-profits. Please contemplate an extra contribution, big or small, so that each of us (particularly the least amongst us) has “just enough.”    

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A global pandemic and dislocated markets can teach us a lot if we take the time to listen and observe what our clients are saying.  Today was a day full of trying to explain the concept of diversification.  Where, in a single account, we can own both stocks and bonds— with each having a distinct purpose.  Given the prolific stock market sell-off, if a client has any amount of equity investments in their account, they are down, almost universally.  If a client has one million invested and one-half of those funds are in stocks that are down thirty percent, their overall portfolio is down $150,000 or 15%, even with the other fifty percent of their account in CDs or Cash.  For some, this is overwhelming, and more than they can handle.  But should it be? 

“All my investments are at risk.”

Today, I learned from this situation, that a client thought the 15% loss meant that all of their investments in their account were risky.  In reality, one half of their account is in FDIC insured CDs and U.S. Treasuries—collectively, some of the safest investments in the world.  While at the same time, just half of their account was causing the loss, and the "risky" portion of their account was half in blue-chip, dividend-paying companies.  So, what was I missing or, the client not getting?  Why were they freaked out by the volatility when they had TEN YEARS worth of cash and bonds on hand?  Enter the theory of mental accounting and the concept of categorization or labeling.

The Decisions That Comes From Mental Accounting

Mental accounting posits that people treat money differently—particularly when looking at its intended use.  For this client (and probably many of us,) it would have been better to put their bonds and safe investments into one account and their riskier and more volatile investments in another.  Even though they would have no more or less invested in bonds or stocks, the mere fact that they are separated allows for them to categorize or label those accounts "safe" and "risky" and know there is a moat between the two of them. 

Fortunately for this client and me, I was able to explain that although not in separate accounts, the investments were, in fact, different, with one portion of the account safe, and the other part of the account earmarked for drawing on many years from now.  Regardless, I learned a valuable lesson about the cognitive dislocation, and bias, of mental accounting.  And, how regardless of whether I have accounted for the proper mix of stocks and bonds in a client account, if they don't get it, they may force my hand and require that I sell because they view it all as risky.  Noted.

Understanding the Role of Your Retirement Accounts

Similarly, I was speaking to another client that was concerned about their 401(k) account and the recent volatility.  They asked if we should change things up given; we had "lost money." They were suggesting these funds should feel more like their cash and bond accounts.  After checking to make sure I wasn't losing my mind and seeing that they were invested 75% in equities and didn't need to access the money for twenty plus years, I wondered what I was missing.  What I was missing was another bias that is part of the theory of mental accounting.   

Wealth accounts and "money hierarchy" was first explored by behavioral pioneers Dr. Hersh Shefrin and Dr. Richard Thaler (1988).  In their analysis, they suggest there is a money hierarchy whereby funds can be placed in locations in order of how tempting it can be to gain access.  Practically, a checking and savings account are easily accessible in "in-reach," therefore, they should be invested conservatively. While at the same time, a 401(k) or IRA is for later in life and relatively inaccessible and "out of reach" and, as a result, should be invested more aggressively than checking and savings.

For this client, I was able to explain that although their equity allocation was more significant than other accounts, the reason was that this was a long-term account.  Further, I shared that these funds should be out of reach, given the taxes and stiff penalties for early withdrawal.  Thaler's research (1999) suggests that an individual's propensity to spend money from cash and savings accounts was high, while their desire to spend from retirement accounts was near zero.  Although 401(k) loans are more common today than they were twenty years ago, retirement accounts are still the least liquid and "out of reach" funds for most clients. Therefore, most commonly, retirement accounts should be invested more aggressively than other, more short-term accounts.  The resulting investment volatility can be far higher than an individual might experience in their cash or savings accounts, but that does not mean the funds are invested poorly. Instead, it helps to underscore Shefrin and Thaler's work from 1988 and assigns a hierarchy to client capital and subsequent investment experience/expectations.

Being there for the behavioral aspects of investing

We (advisors and clients) grossly underestimate the behavioral aspects of investing.  Bias exists on everyone's part.  Understanding bias (such as mental accounting) can help both clients and advisors make healthy choices with lasting benefits.  I learned a lot today—and was able to work with several clients to make sure that what was learned, resulted in good decisions and positive outcomes for today and well into the future. 

Reference

Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision making, 12(3), 183-206.

Shefrin, H. M., & Thaler, R. H. (1988). The behavioral life‐cycle hypothesis. Economic Inquiry, 26(4), 609-643.

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@blankerwahnsinn

Your team at Human Investing is here to serve you. Though our physical workplace has changed for the short-term, our company’s missions remain as strong as ever: to faithfully serve the financial pursuit of all people.  

We are entering a financially burdensome time. Many individuals and businesses are projected to suffer financially. The impact will look different for everyone.  

If you are seeking ways to change your spending habits, something you will certainly need is time.  Said differently, cash outflow is unlikely to change unless we take the time to research, contemplate, and change current routines. 

Here is a list of ten ways you can help cushion financial burdens that have either occurred already or are expected in the future:  

1. Check your credit card points.  

   When is the last time you used credit card points? If you are in a financial crunch, now might be a wise time to cash out your credit card points. Not all credit cards include cashback rewards, but examples of companies that offer cash back cards include Chase, CapitalOne, and Discover.  

   Regardless of the cashback options available to you now, take the time to review whether you utilize the benefits of your existing credit cards. While you are reviewing your credit cards, this site is a helpful tool to figure out which credit card fits best with your lifestyle and spending habits: Nerdwallet - Credit Card Comparison  

2. Eat the food you buy for quarantine.  

   This sounds obvious. But for some households, this will be challenging since we have purchased an allotment of random items. Was the store sold out of spaghetti?  Did you instinctively grab the only noodles left? If so, make it a fun activity for your family to express some creativity or try new recipes in the kitchen.  

3. Consider refinancing your mortgage.  

   Do you have a mortgage? Rates have come down considerably this year and refinancing your mortgage is worth a looking into. Refinancing your mortgage can lower your monthly mortgage payments, offering both short-term and long-term savings. If you are interested in learning more about refinancing your home, see our recent post by Will Kellar: “How to refinance your home.”

4. Save the money you would be spending.  

   We all have had to cancel upcoming plans. In many cases, that means extra savings. Put aside those dollars and use the money as needed. 

5. Create or monitor your emergency fund.

   We realize many people do not have an emergency reserve. Traditionally a family should have three-to-six months of expenses saved in an emergency fund (three months for dual-income families and six months for single-income families). We encourage individuals to create an emergency reserve regardless of the economic forecast, but it becomes especially important during turbulence.  If you do have an emergency fund and are experiencing financial hardship, now is an appropriate time to use it. 

6. Shop and spend mindfully.  

   Personally, I love the 24-hour rule. It’s a practice of self-restraint. If you feel the urge to purchase something (new shoes, a different laundry basket, extra-spicy BBQ sauce), wait 24 hours before you make the purchase. The time-lapse often mitigates a compulsive purchase.  

   Due to the economic uncertainty of tomorrow, we must be willing to make drastic changes to our spending habits. We are all compromising our normal routine in some way, shape, or form. With that said, it’s important to be cognizant of how these changes are impacting our cash outflows.

7. Consider selling unnecessary household items.  

   I predict that people will spend more time selling their unused or unwanted household items. Take some time to go through your storage or extra items. Craigslist, Facebook Market, Poshmark, and Nextdoor are all great resources for buying and selling things second-hand. One man’s trash is another one’s treasure. 

8. Create a budget.  

   A budget can provide financial awareness and reassurance. Now is a great time to revisit your budget or create one if you have yet to do that. Here is a budget template to get you started - Budget Template There are also online budgeting tools available such as mint.com, YNAB.com, or everydollar.com.

9. Unsubscribe.  

   Out of sight, out of mind. Take this time to unsubscribe to unnecessary social media accounts that tempt you to splurge or spend extra money. To minimize your current expenses, it may also be worthwhile to unsubscribe from unused memberships like online streaming services or gyms.

10. Create ‘no-spend days’.  

    Since many Americans are working from home, ‘no-spend days’ are a good family challenge. It’s important to vocalize the game to your family so everyone can participate and be mindful of not spending money.  

Please feel free to share with others and let our team know if you have other examples of financially savvy savings that we can add to this list. We are open to new ideas and challenges!   

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After starting my career as a financial advisor in the mid-'90s, I learned pretty quickly how crucial wise counsel could be in times of crisis.  About this time 20 years ago, the "dot-com" bubble burst sending the Nasdaq Composite stock index down nearly 80%.  Around that same time, September 11, 2001, happened, which changed cockpits on planes and screening at airports forever.  In the days after September 11, we waited anxiously for the markets to re-open (which they finally did the following Monday.)  Finally, I rode shotgun with the rest of the world through the financial crisis, which took the markets down over 50%, with some industries getting hit much harder than others. 

What I learned during these times of crisis, is to take a levelheaded "barbell" approach to manage decisions for clients, my company, and my family.  So, what does a "barbell" approach look like?  On one end of the barbell, is your job, your checking and savings account.  On the other end of the barbell is life back to normal and managing long term accounts such as college savings and retirement.

Examples of Advice we are Sharing with Clients

As an example, we work for a family whose breadwinner is a surgeon.  They have six months of savings in their checking account, but virtually no income planned from work for the next six months.  So, what do we recommend?  For them, we will raise enough cash to get them through the year with all bills paid, and a lifestyle they are accustomed to living. They are going to delay making college savings payments with a plan to catch-up later. They are also going to delay making any non-critical purchases until the dust settles on the current pandemic.  We are not recommending making any changes to their accounts outside shoring up their short term cash reserves because their job and income have changed—as such, raising cash is a necessary step. 

In another example, I spoke with a client in underground construction.  His wife is in the medical profession.  He sees his income staying the same as there is a need for their work regardless of external circumstances. On the flip side, her salary is in question for the next six months.  So, what are they doing and what are we recommending? First, because they are nearing retirement, half of their portfolio has been in bonds and cash.  They have six months of cash-on-hand and another decade worth of safe investments.  Their short- and medium-term cash needs are taken care of, so now we are looking at the question of retirement. For now, doing retirement planning does not make sense, given we are unclear as to how long the current financial crisis will be at play.  What we do know is that we will have much better information six months or even a year from now, and at that point, planning for the long term will make sense once again.

Lessons learned from past crisis management

The best advice we can offer right now is to make sure you take a barbell approach to manage your financial affairs.  The only short term market-related decisions we are recommending are ones that take care of creating a buffer to supplement disruptions in cashflow and job-related income.  If you need to raise cash, think about how much you spend monthly, and cover yourself for a year.  If, on the other hand, your job is stable, and cash on hand is plentiful, do not touch your accounts, sit tight, be thankful for the position you are in right now. 

As new information comes out about COVID-19, we will be offering our advice and counsel through our blog here.  We have a great team of certified financial planners, CPAs, and other subject matter experts that are actively posting financial guidance and recommendations for Human Investing clients—of which we are happy to share with the public in these challenging times.    

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@scottwebb

Is it time to refinance your home? To make sure this is a prudent decision for your family we want to share some considerations and outline the process.  

What is a Mortgage Refinance?

A mortgage refinance replaces your current home loan mortgage with a new one. Homeowners will typically look to refinance when there has been a drop in interest rates.  That said, a drop in interest rates is just one of many reasons someone would refinance their home.

Why is refinancing your home worth your time and focus? Because a mortgage is often one of the biggest expenses in a lifetime, it’s an important expenditure to get right.  According to the US Bureau of Labor Statistics, Americans spend almost 32% of their income just on housing compared to the 0.71% spent on all nonalcoholic beverages (i.e. coffee). With regards to personal finance, it can be easy to blame our financial situation on the little things like the cost of your morning coffee. Rather than worrying about the little things like a cup of coffee, overextending ourselves financially with housing costs can hurt cash flow and diminish financial flexibility. A mortgage refinance can help adjust how much is spent on housing to provide a net positive impact on households both short term and long term.

Make a Plan

Set clear financial goals regarding your mortgage refinance. Here are a few reasons why someone would consider refinancing their mortgage:

1. Lower Your Monthly Payment – Refinancing your home can reduce your monthly mortgage payment, providing more financial flexibility for years to come. There can be many advantages to extra money each month retirement savings, college savings, using monthly savings to pay more to the principal each month.

2. Reduce Your Loan Term – This may be an opportunity to shift from your 30-year mortgage to a 15-year mortgage. Reducing the term of your loan can be advantageous for those who would like to be debt-free sooner. A reduced mortgage term means you are likely to pay less interest over the term of the loan. Rates for 15-year mortgages are typically lower than those for 30-year mortgages.

3. Tap into Your Equity – Do you need to consolidate debt or take out equity for home improvement? Refinancing can free up your home equity for these needs.

Do Your Homework

It is important to “Know Before You Owe.” - Consumer Financial Protection Bureau (CFPB). The CFPB was established to protect and educate consumers in response to the Financial Crisis of 2007-08.

 As you educate yourself, here are a few factors worth your consideration as you apply to refinance your mortgage:

1. Determine How Much Home Equity You Have - Refinancing a home can be more advantageous depending on how much equity you have. Your equity is determined by your home’s value in excess of the remaining balance of your mortgage. To assess your home’s value, utilize an online valuation tool or ask your real estate agent since they may have better tools and knowledge of your neighborhood. Additionally, a refinance can be a great opportunity to get out from under the monthly cost of PMI; to do this 20% of home equity is needed.

2. Know your Credit Score - Your credit score measures your creditworthiness to lenders. An ideal credit score is greater than 760, the higher the credit score the better rate you will qualify for. Similar to your initial home loan application, your credit score will be reviewed during the refinance process. Make sure that if you have previously frozen your credit that you unfreeze it by contacting all three credit bureaus, Experian, Trans Union, and Equifax. – To learn more about freezing your credit see our post on How to Prevent Identity Theft.

3. Understand your Debt to Income Ratio - Lenders use the following ratios to measure your ability to manage the monthly payments.

   • Monthly housing payments should not exceed 28% of gross income.

   • Monthly overall debt payments should not exceed 36% of gross income.

4. Shop Around - Shop around with multiple lenders to find the best refinance rates and request loan estimates for comparison. It helps to speak with several lenders on the same day as rates can/will change daily. Requesting a loan estimate will allow you to compare rates, total loan costs, and mortgage features. Be prepared to share the following documents with the lenders: Paystubs, W-2s last two years, Recent Bank Statements, List of debts and amounts, Current Mortgage Statement, Declaration page of homeowner’s insurance policy, Name and Phone of Insurance Agent, and Proof of other income. (Submit Loan applications, within a few weeks as not negatively impact your credit score.)

5. Understand your Break-Even Point – Once you know what types of rates are available to you, use a mortgage calculator to assess your break-even point. When deciding to refinance, it is important to know the point at which the cost of refinancing will be covered by your monthly savings. This break-even point will help decide whether the refinance process is worth it based on how long you expect to stay in your home.

   Example: If your refinance costs you $3,000 and your saving $200/month over your new loan, it will take 1 year and 3 months to recoup your costs.

6. Will Your Taxes Be Impacted - Mortgage interest can be deducted on a tax return to help reduce income taxes owed. Since refinancing a mortgage often results in lower interest, your tax deduction may also be lower. This can also move a taxpayer from itemizing their taxes to taking the Standard Deduction. Consult your CPA or tax professional to discuss how refinancing could impact your tax situation.

Move Forward (Duration: Can take up to 45 days)

1. Decide on a Lender – Let your loan officer know of your intent to proceed with the mortgage application.

2. Lock-in Rate – Let your lender know that you would like to lock in your new mortgage rate. Rates will be locked for a fixed period, typically 30, 45, or 60 days. This protects you from rates increasing while you are waiting for the loan approval, processing, underwriting and loan closing.

3. Prepare for Appraisal (Duration: 2-3 weeks) – This can mean taking care of quick fixes, doing a deep clean and sprucing up the landscape. Spend your time and resources on things that NEED attention. Let the appraiser know if you have made any changes to the property.

4. Underwriting (Duration: 3 Days) – The mortgage company will verify that all information is correct. During this period you may receive additional questions or requests.

5. Review Closing Disclosure - At least three days before your closing you should receive a Closing Disclosure, which includes the details about your loan. Review and make sure this matches your loan estimate previously provided.

6. Prepare for Closing Costs – Be prepared to bring the full “Cash to Close” amount with you to your closing.

7. Sign and Close – This is the final step; go to the title and escrow office to sign all final loan documents for your refinance.

Conclusion

For many homeowners, a refinance can make sense at some point during their lifetime. When refinancing your mortgage it is important to set clear financial goals, do your homework and understand the process to help avoid pitfalls. We hope these considerations and outline can be a guide to you as you decipher whether a refinance is right for you. As always feel free to call or email at any time, let us know how Human Investing can help.

SOURCES:

https://www.consumerfinance.gov/know-before-you-owe/

https://www.myfico.com/loancenter/mortgage/step1/getthescores.aspx

https://www.bls.gov/cex/2018/standard/multiyr.pdf

https://www.zillow.com/mortgage-calculator/refinance-calculator/

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My older daughter Norah (2) speaks part English part “Daniel The Tiger”. Walking around our house she will randomly shout statements like, “ I don’t meow, have to meow” (we are obviously doing great as parents) or something easier on the ears like, “I love you just the way you are Daddy”.

The volatility we are seeing in the markets, as it relates to day to day swings, has not been seen since the late 1920s. Between the volatility, we are seeing in the markets and the effects of the Coronavirus socially and on local businesses, it seems like we are in for quite a ride. Today I found myself humming a timely Daniel The Tiger tune. Ultimately reminding myself to control the controllables and relax.

“Give a squeeze, nice and slow. Take a deep breath, let it go”

Whether you are working from home right now, finishing up at your place of work or are now forced into a home school teaching role, we all have a lot of thoughts going. Here’s how I’m processing mine:

Controllables:

This can apply to how we interact with others in the world however, I’m applying it to investing. As of the close today, the S&P is down 30% off its highs with individual companies we are all familiar with down much farther.

At our firm, we have strict rules and guidelines around rebalancing. After reading others’ research and conducting our own, rebalancing based on time (semi-annually, annually, etc.) and threshold (if a position becomes underweight or overweight compared to the rest of the portfolio) can greatly improve the risk/return characteristics of an investment strategy. It also incorporates a “buy low” “sell high” attitude and can feel like you are taking action in volatile markets while not succumbing to market timing.  Note that the use of an Investment Policy or a rebalancing policy is a must.

Lastly, rebalancing isn’t solely about buying low and selling high. Another key feature is managing your risk over long periods of time, especially if you are taking withdrawals. Michael Kitces has done multiple posts about this. The below chart tracked withdrawals over a 30 year period. You can see how during down markets the lack of rebalancing diminishes the portfolio.

Crisis:

A timely podcast from Patrick O’Shaunghnessy came out this week titled “Investing Through Crisis”. I wanted to be careful before using the word “crisis” in this post, but the definition seems to fit the times. The paper, written by the Dan Rasmussen the interviewee of Verdad Capital, was published in the Winter of 2019 and looks back on past periods of crisis and if there were any silver linings that could be taken from it. Here are some bullet points that I think we can help us today:

• There is the expansion of the breadth of rational beliefs during times like this: Rasmussen goes on to point out that there is massive uncertainty around the worst-case scenarios and best scenarios and often the world can’t disprove either. This is a key metric in volatile markets.

• Bear markets have more predictable movements than Bull markets: Human behavior (fear, worry, etc.) drive bear markets. What’s worked (the rationale behind a bull market) will vary case by case.

• Market timing requires three unknown data points: Being correct on all three of the below data points is highly unlikely. 

  • You must decide what’s going to happen in the future

  • You must decide when to get out

  • You must decide when to get in

Charity:

I read this post that inspired me to take a step back and be grateful for what I have as opposed to what is uncertain. In Portland there are/will be many groups specifically impacted by the Coronavirus. After talking with a few local leaders, they substantiated that donating to these causes can have a profound impact:

-          Oregon Community Foundation

-          Oregon Food Bank

-          Meals on Wheels

-          American Red Cross

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@soymeraki

I was asked this week, "How do you make sense of how or why the market is responding the way it is?"

When something such as COVID-19 disrupts trade and travel there is less economic activity.

When there is less economic activity there are less future earnings.

When there are less future earnings there are lower stock prices.

When there are lower stock prices an investor’s account values decrease.

When an investor’s account values decrease, investors have a choice to make.

The choice to buy, sell or hold can be an incredibly difficult one to make. This is especially true when:

• There are more zeros at the end of one's account balance.

• An investor with a short time horizon and a need to access funds from their accounts.

• Someone worked hard to build their account balance up to $10k and now it is worth $7.4k.

The type of investor we are is determined by the decisions that we make, especially considering our current market situation. As the esteemed American Neurologist and financial author William Bernstein puts it there are three groups of investors:

Group 1: The average small investor, who does not have a coherent asset-allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities, often recommended to him or her by a broker or advisor. He or she tends to buy near bull market peaks and sell near bear market troughs.

Group 2: The more sophisticated investor, who does have a reasonable-seeming asset-allocation strategy and who will buy when prices fall a bit (“buying the dips”), but who falls victim to the aircraft simulator/actual crash paradigm, loses his or her nerve, and bails when real trouble roils the markets. You may not think you belong in this group, but unless you’ve tested yourself and passed during the 2008–2009 bear market, you really can’t tell.

Group 3: Those who do have a coherent strategy and can stick to it. Three things separate this group from Group 2: first, a realistic appraisal of their true, under-fire risk tolerance; second, an allocation to risky assets low enough, or a savings rate high enough, to allow them to financially and emotionally weather a severe downturn; and third, an appreciation of market history, particularly the carnage inflicted by the 1929–1932 bear market. In other words, this elite group possesses not only patience, cash, and courage, but also the historical knowledge informing them that at several points in their investing career, all three will prove necessary. Finally, they have the foresight to plan for those eventualities.

For most who fall into Group 1 & 2, it is not the intention that prevents someone from landing in Group 3 but rather a lack of planning and/or perspective. Having perspective can make it easier to make wise decisions, especially in the midst of chaos. I don't wish to diminish what we are experiencing with "don’t worry its all going to be ok." However, as we think about COVID-19 in historical context it's hard not to witness the ongoing resiliency of mankind and our economical system. See below for how the markets have weathered the last several years (1/1/08 - 12/31/19).

Source: First Trust Advisors L.P.

There is more to be said about resiliency when we scale back to 1900. (see below)

Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management.

The reality is that whether your retirement timeline is near or far, most of us will be impacted in one way or another by COVID-19 and COVID-19’s impact on our global economy. We all have choices to make. If you are making decisions to protect your health look to CDC for guidance. If you are making decisions with regards to your investments, gain some perspective and talk to your financial advisor. Let us know how we can help, contact us at Human Investing or call at 503.905.3100.

“Job one for the investor, then, is to learn as best she can, to ignore the day-to-day and year-to-year speculative return in order to earn the fundamental return.” – William Bernstein

SOURCES:

Rational Expectations: Asset Allocation for Investing Adults by William Bernstein.

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On Monday I wrote this blog post sharing our firm's thoughts on the current state of market volatility. If you haven’t read the blog I’d highly encourage you to do so. Candidly, writing that feels like 3 months ago as opposed to 3 days ago.

What’s Changed:

• WHO declares Coronavirus a pandemic

• President Trump declares a travel ban in the EU

• Many Sporting Events are canceled or postponed

• For Oregonian’s, Governor Brown cancels events over 250 people

• Universities and School Districts go online or close for periods of time

• A well-known celebrity, Tom Hanks tests positive for Coronavirus

• Lastly, the stock market has gone from being 18% off its highs on Monday to 26% off its highs as of the market close today (Thursday, March 12th). Along the way, it suffered it’s worst single-day loss since 1987.

When speaking with a co-worker Wednesday night it seemed like there was a social tipping point for many Americans regarding the potential seriousness of the virus. It felt closer. Add in what’s happening with the price of oil and interest rates and you get the fastest move from a market high to being in a “bear market”.

What’s Stayed The Same:

A quote I’ve been thinking about this week is, “There’s an art to taking action and an art to justifying inaction”. Another piece of information that was shared today in our office was “In volatile times like this its necessary to be more disciplined not less discipline.” The same principles still apply to being a great investor today as they did a month ago. It’s simply harder to execute when chaos is occurring around us.

As hard as is it is, most likely inaction is the best course during times of increased volatility. It’s common for some of the best days of the market to be close in close proximity to some of the worst. Here’s what happens when you miss out on some of those days.

Going to cash and getting back in when it feels better is harder than it sounds. This quote from Josh Brown a CNBC pundit and CEO of Ritholtz Wealth Management provided this perspective from March of 2009 (the bottom of the financial crisis) and what it looked like to get back in:

“The great answer is that you won’t know when the dust settles. There’s no airplane writing the “all clear” in the sky above your neighborhood. And when the dust settles, do you think stocks will be at their lows? Or will they have already rallied furiously, in anticipation of this? Let me give you an example. Imagine it’s March 9th. About eleven years ago, in 2009, the stock market stopped going down. There was no reason. The dust had settled, without fanfare or any sort of official announcement. If you had polled people that day, or week or even month, most would not have agreed that we had seen the worst. The economic headlines were not improving. But there it was. And by June 12th, about 3 months later, the stock market had climbed 40% from that March low. And even with that having happened, the majority of investors still weren’t clear that the dust had fully settled.“

Do you what you need to do to make it through times of increased volatility in the market. I heard the term “social distancing yourself from your 401(k)” and it provided a much-needed laugh. Having discipline and staying the course on your plan is much easier when you have a plan. Whether it’s using your own tools or entrusting a fiduciary to partner with you, knowing that you did the planning work upfront makes all the difference in when 3 days feels like 3 months.

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