In 2020, we saw a pandemic cause world-wide city shutdowns, market volatility, deaths, derail plans for travel, celebrations, family visits and even retirement.
Many Americans can agree much of what occurred this past year was unexpected, but there are still lessons to learn from 2020 — including how to prepare for the future.
The pandemic itself has changed the way people approach their lives in general. Americans are re-evaluating their priorities, finding a fresh start for their finances, and changing the way they work. Loved ones are spending more time talking to each other on the phone or video chat, some people are taking better care of their health and wellness and others are finding meaningful ways to connect and support their local communities.
Retirement may have looked a little different this year too. Some people went ahead with their plans to retire this year, while others may have had to hold off for financial reasons. The total impacts of COVID-19 are still unknown, including the impact on Social Security, income replacement ratios and overall lifestyle in the coming years.
Still, there are simple moves and financial resolutions that can be made for the new year. Here are four:
Have a plan
Although the events of 2020 completely disrupted some plans this year, having at least an outline of what to do with your money is beneficial. To get organized, have a list of assets and liabilities — what money you have stashed away in investment portfolios and bank accounts, what debts you owe, any insurance policies you may have — and update the list relatively frequently.
A financial planner can help you create a plan, especially if you have big money goals, such as buying a home, starting a family or funding a lofty retirement. They’ll be able to walk through investing strategies, share assumptions for interest rates and market returns and come up with target savings rates to meet goals, regardless of unexpected events and emergencies.
Not everyone can afford a financial planner, even if they only meet with one to create a plan and do an annual checkup. Others are more interested in the do-it-yourself approach. There are plenty of financial calculators, including one from MarketWatch, to break down what it would take financially to finally retire. These calculators allow you to adjust your assumptions for interest rates and investment returns, too. There are also tools to make sense of when to claim Social Security, in an attempt to maximize the benefit and supplement retirement savings.
Stick to the plan
One of the hardest tasks may be staying the course when you have a plan but the stock market is reacting to world-wide chaos. “Markets will always face volatility,” said Mark Reyes, a financial adviser at Albert, a financial services app. “We witnessed this.” In March, at the beginning of the pandemic in the U.S., cities were locking down, restaurants were closed and companies were laying off their workers. The stock market dropped in response — but has since recovered.
“Studies show doing nothing and sticking to your plan during downturns yields you better long-term growth,” Reyes said. The alternative, which would be to drastically shift investments or sell part of a portfolio, could actually lose you a significant portion of your nest egg for the future. “Ride out the volatility,” Reyes said.
There are times when tweaking investment portfolios may make sense, but that would be in extreme circumstances — such as being only a few years away from retirement and having a portfolio entirely in equities. Even then, investors should not make quick decisions regarding their portfolios.
There are various ways to protect your assets, including: not timing the market, knowing your risk tolerance — the amount of risk you’re actually comfortable with, and having a diversified portfolio, said Nick Holeman, a financial adviser at Betterment. “Market drops and ups and downs are part of the game,” he said. “You don’t get returns without risk. Those two things are connected. But by and large, not trying to time the market or making decisions based on short-term predictions is the best way to long-term success.”
Have an emergency fund
Many Americans across the country were in dire financial situations this year, the reasons include a lost job, reduced wages or contracting the virus — just to name a few. Not everyone has the ability to save thousands of dollars every year for their future or a comfortable nest egg, but having some sort of emergency reserve could help alleviate the financial stress during a dark time.
Some experts, such as Holeman, argue an emergency fund should trump a retirement account in the short-term, even if there’s not much saved for retirement. “Emergency funds come first,” he said. “Even if you’re behind or you feel behind, they should come first.” If workers have access to a workplace retirement account with an employer match, they should try to contribute even a few percentage points of their salaries to the plan so that they take advantage of the match, he said.
Those able to save more money can use numerous vehicles to fund their retirement goals. Along with the 401(k) plan, workers can open traditional or Roth individual retirement accounts, a Health Savings Account if accessible for triple-tax benefits regarding health expenses or a brokerage account for general investing.
Understand your finances
Plans are important, but so is reviewing how your daily habits affect your finances. “Understanding your finances is one of the most powerful things you can do,” said Kyle Ryan, executive vice president of advisory services at Personal Capital. Along with reviewing your net worth, parse through your credit card and bank statements to see how you use your money. Are you paying more for cable than your friends? Are you using all of the subscriptions charged to your card? Also ask yourself questions, such as if you’re happy with the way you’re spending, or if there are activities or items you’d rather put your money toward. To arrive at your goals, it helps to know where you’re starting. “Take time to understand and evaluate where you are,” Ryan said. “Commit to periodic check-ins.”