Mike Farrow, CFP® Next Gen Financial Planning
- 2020 Camino Del Rio N, Suite 215, San Diego, CA 92108
- (619) 259-0584
About Mike Farrow, CFP®
I feel very lucky to have found a career I am passionate about. My father got me started investing at a pretty young age. It was from him that I learned the power of compound interest, and I am forever grateful to him for that. Albert Einstein is widely credited with saying “Compound Interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” Throughout my childhood I earned my allowance by mowing lawns. Once a month we would pull out the checkbook from my father’s desk drawer and add up the money I was depositing. What truly excited me was the amount of interest that would accrue. I quickly realized, if I didn’t spend all my money, it would start to grow on its own. The rest is pretty much history.
What I love most about my job is I get to advise individuals on how to achieve a life free from financial worries; where one can afford to choose a career that provides a real contribution to society, a life that allows for a few luxuries, the ability to help others financially, and a comfortable retirement at a time of your choosing. I think there are very few careers that are more rewarding than that.
NOTE: This is a copy of an email that I sent out to all clients on 3/30 summarizing some of my thoughts about our current situation as well as a wide range of benefits available to help those who have suffered financial consequences related to the pandemic. I decided to share it here as well, in case others might benefit from it.
To all Next Gen Financial Planning clients,
Though we've been in touch with many of you as the world has changed over the past few weeks, I thought that it might be helpful to send out a message to all of our clients summarizing some of my thoughts on key topics as well as providing a consolidated list of valuable resources that I’ve been building which you may be able to benefit from. This list will be fairly long, and I realize that not every section will apply to all of you, but I think that all of you will find at least some parts of it be useful for yourselves or for people close to you.
I’ll break this down into sections with clear headings to make it easier to read and to find what matters most to you:
Our availability and how we can help:
First, I’d like to reassure you that we are still working full time right now and we’ll continue to be here for you! We’ve moved to video chats and phone calls for the time being, and have adjusted the hours available for meetings in our scheduling software, but other than that everything remains the same. I can’t promise that our meetings won’t be interrupted by a toddler jumping on me or by a baby giggling or crying in the background, but I can promise that we’re still doing everything we can to help put your mind at ease and give you confidence in the best course of action to take in your financial situation. This period is a combination of both significant financial challenges and significant financial opportunities for many people, and we’re staying up to date on everything in order to proactively help you with both aspects.
If you have any questions for us, or if there have been major changes to your financial situation that we haven’t yet discussed, or even if you just haven’t talked to us in a while, please feel free to schedule a meeting with Mike or I at this link anytime.
Market swings and the opportunities that they create:
One topic that’s been on everyone’s mind lately is how we should handle what feel like pretty wild swings in the financial markets. It’s definitely not a good feeling to log in and see that the money you’ve put into your investment accounts has dropped in value. The constant uncertainty, the scary news articles flashing red headlines at us, and social media chatter don’t make it any easier. So here are a few key things to remember here that help put my mind at ease and that I hope will do the same for you:
- We’ve been here before. In fact, the stock market has seen drops of this magnitude or greater many times before. To help put our current situation in perspective, check out this graphic showing the price history for the Dow Jones Industrial Average from 1896 to 2016 marked up with 121 scary events that reasonably caused contemporary investors to be concerned. Time after time, human innovation and large-scale economic and technological trends have always defeated short-term fears. Those who stay the course have always won.
- This drop isn’t as severe as the scary articles from your social media feed might lead us to believe. Currently, the S&P 500 is at about the same level as it was in November 2017 and December 2018. At the worst point, it was roughly at the same level as in December of 2016.
- On average, over long periods of time, being broadly and globally diversified into low-cost passive index funds leads to the highest risk-adjusted investment returns and the highest probability of you reaching the goals that are most important to you. Implementing this approach doesn’t require advanced mathematics, or an enormous amount of available capital to put to work, or inside information, or complex tactical shifts. But it does require consistency, discipline, and appropriate identification of goals and time horizons. There is a tremendous amount of academic research demonstrating the effectiveness of this approach, some of which can be seen in this great summary from Beaird Harris Wealth Management. Another summary of the benefits of this style of investing can be found in Vanguard’s “Principles For Investing Success”.
- The biggest drops are often quickly followed by the biggest recoveries. For example, last week the Dow saw its biggest weekly gains since 1938 despite a big drop on Friday.
- Investor behavior is among the highest predictors of long-term investment returns. According to research from Dalbar, the Brandes Institute, and others, on average equity investors dramatically underperform the S&P 500 primarily because of poor market timing decisions. Though it may feel counterintuitive, sometimes it really is best to just sit and do nothing!
- Diversification still works, even during scary times. During any given year, pretty much every asset class is pretty far off from its long-term average and the performance of any one asset class can vary dramatically from one year to the next. Check out this chart from BlackRock demonstrating this variability from 2000-2019.
- Even if we can’t control the current moods of the stock or bond markets, we can still continue to focus on the things that are within our control. Keep focusing on your savings rate, increasing your income and human capital, maintaining sensible insurance coverage, taking advantage of tax planning opportunities that arise, and everything else that is almost entirely within our control. For the far majority of people, effective financial planning in areas such as these will have a much bigger impact on outcomes than investment returns will.
This situation actually creates some tremendous opportunities! Here are a few examples:
- If your income is stable, continue making contributions to your investment accounts and potentially increase the amounts if you’re able to. With share prices being lower right now, every dollar that you put in has a bigger impact than it did a month or a year ago. Here's a quick investing lesson. Let's pretend that you bought $1,000 of stock at $50 a share and $1,000 of stock at $20 a share. What's the average price you paid? If you said $35, that's not right. At $50 a share, you bought 20 shares. At $20 a share, you bought 50 shares. So you spent $2,000 total to buy 70 shares. That means the average share price is $28.57, which is much lower than $35. Think of this as a counter-intuitive math thing that rewards you even more than you think for buying when the market is down. You can do this as a lump sum if you currently have excess cash on hand or through dollar cost averaging if you don’t.
- During these swings in the markets it may be a good idea to rebalance your investment accounts back to the target allocation. If some of the funds within your account have significantly dropped in value relative to others, then rebalancing is simply selling the investments that are now comparatively high and buying more shares of the investments that are now comparatively low. This approach of rebalancing back into equities (up to your planned risk level) can be a great way to capture upside returns without over-extending your risk tolerance. If Next Gen Financial Planning is managing investment accounts for you at TD Ameritrade, then we’re already on top of this. You may have seen some recent trade confirmations come in where we were doing just this.
- Depending on your specific financial and tax situation, this may be a good opportunity for tax loss harvesting. This means selling investments that have gone down in value in order to offset the taxes on investment gains elsewhere. For example, if you’ll be selling (or have already sold) an investment with a $10k gain this year then it may make sense to sell another one that is currently at a $4k loss so that you’ll only pay taxes on the $6k difference. For some of our clients, though, it may actually make more sense to pursue tax gain harvesting to increase your cost basis if you’re in a lower tax bracket now than you expect to be in the future.
- Again depending on your specific financial and tax situation, this is also a great time for many people to consider doing Roth conversions at these lower price levels. This could be a way to pay a little more in taxes now, but much less later in life when you make withdrawals from your accounts completely tax free at higher valuations.
Lowering interest rates:
The interest rates on US Treasury bonds and other types of debts have also seen some dramatic swings recently, mostly to the downside. That’s not good for the interest rate that you receive in your savings account at the bank, but it could be a tremendous opportunity if you have large amounts of any type of long-term debt. The major categories here that will apply to the most people are home mortgages, student loans, car loans, and business loans. Every situation will be different, but if you think that it might make sense for you to refinance any type of debt then you should reach out so we can help you evaluate whether it makes sense. Some of you could save tens of thousands or even hundreds of thousands of dollars here over time. Please note, however, that NOW IS NOT A GOOD TIME for most people to refinance federal student loans into private ones. More on this below.
The CARES Act that was just signed into law on Friday included quite a few provisions to help people with student loans. In case you don’t want to read the actual law itself, the best summaries that I’ve seen of these changes so far have come from the Department of Education, the Student Loan Planner blog and the CSLA Board of Standards. Here are a few highlights:
- Student loan payments will be suspended for 6 months through September 2020 for all borrowers with Federal Direct loans. Note that this does not apply to commercially-held FFEL loans or any type of private student loan. You don’t need to do anything to request these payment suspensions, they’ll be processed automatically by your loan servicer and the Department of Education. No interest will accrue during this time, which is an expansion of the federal student loan interest freeze that was first enacted over two weeks ago.
- The 6 months of suspended payments will still count towards loan forgiveness programs, including Public Service Loan Forgiveness (PSLF) and income-driven repayment plans such as (PAYE, REPAYE, IBR, ICR). Under this new law your payments aren’t tacked on to the end of your pre-established repayment period as has been incorrectly reported in some of the media, those six payments will simply be forgiven. That forgiveness is not taxable income.
- If you are paying down Federal Direct student loans and aren’t in an income-driven plan, then any payments you make during this 6 month period will be applied to principal.
- Your employer can receive a tax break for making student loan payments (of any type) on your behalf, up to $5,250. This currently only applies for 2020, but may be extended for future years.
- If you’re currently in default on your student loans and enrolled in the 9-month loan rehabilitation program, these 6 months of forgiven payments will still count towards that requirement.
- As always, if you have a significant drop in your income then it may be a good idea to provide your loan servicer with updated information even if it’s not time for your annual recertification yet. Doing so could reduce the payments that you’ll be required to make after this forgiveness period.
- The deadline for both filing and paying your 2019 income taxes has been extended to July 15th, 2020. This includes payment of tax on self-employment income, but does not include some types of business tax returns with other due dates or estate/gift tax returns.
- California is one of the states that has extended their tax filing and payment deadline to July 15th to conform with the IRS.
- The deadline for 2019 IRA or HSA contributions is also extended to July 15th.
- Quarterly estimated tax payments have also been extended for self-employment income for 2020.
- Required Minimum Distributions for 2020 will be waived if you choose not to take them.
- The 10% penalty for early distributions from retirement accounts has been waived.
- The limit for loans from retirement plans has been increased from $50k to $100k.
If you own a small business or are self-employed, and particularly if your business operations have been directly impacted by this pandemic, then you need to be aware of two separate major and unprecedented programs that the Small Business Administration is now providing. You can apply for both of these programs, subject to additional requirements and so long as the funds are used for different purposes.
The first is an expansion of a long-standing program called Economic Injury Disaster Loans. The CARES Act expanded eligibility of these loans and streamlined the application process. These loans can provide small businesses with up to $2 million in working capital, repaid over 30 years, at an interest rate no higher than 4%. Upon filing your application at this link, you can also receive a $10k advance towards the loan within just three days. Though some details still remain unclear, this $10k advance may be treated as a forgivable grant even if your EIDL is not approved or you decide not to take the loan.
The second major program that SBA is now providing is a new initiative called the Paycheck Protection Program that will provide up to $349 billion to help small businesses retain employees and continue to operate. Eligible recipients can qualify for a loan of up to $10 million, determined by 10 weeks of their average payroll costs. Payments will be deferred by six months. The major advantage of this program is that most or all of the loan can be completely forgiven as long as the loan proceeds are used for payroll, rent, utilities, and certain other allowable expenses. Some fine print applies, but it’s clear that this is an enormous benefit! Applications can be filed through any SBA-approved lender, but I haven’t yet found any who are ready to start processing them yet as the CARES Act just passed on Friday. If you receive a $10k advance through EIDL and are approved for PPP, then the advance can be refinanced to apply towards your PPP forgiveness. By the way, this can also be used by sole proprietors/independent contractors to cover up to $100k of your own annualized pay. This pdf from the US Chamber of Commerce and this blog post from my CPA friend Philip Taylor are the best PPP summaries that I’ve come across.
If you have, or soon will have, 7(a) loans through the SBA then you may also benefit from the new SBA Debt Relief program. The SBA will pay both principal and interest for new 7(a) loans issued prior to September 30th, 2020 or pay 6 months of principal and interest for existing 7(a) loans.
The SBA has published an overview of these and other resources in this guide. The US Chamber of Commerce has another helpful guide for small businesses at this link. Krost CPAs wrote a great comparison of EIDL and PPP at this link.
The most well-known provision of the CARES Act relates to one-time blanket payments that will be automatically issued to nearly all Americans to help offset the economic impacts of this pandemic. Section 2201 provides for direct payments of $1,200 for individuals or $2,400 for married couples filing jointly, plus $500 per qualifying dependent child, as an advance credit against your 2020 tax return. The most significant limitation is around income, as the payments will start to be reduced for individuals with an Adjusted Gross Income over $75k or for couples over $150k. The payments phase out completely for individuals earning over $99k or couples over $198k. The IRS will base this advance on the AGI from your 2019 tax return, unless you haven’t filed it in which case they’ll look at 2018.
If the IRS already has your bank account information on file from a previous tax return, it will automatically transfer the money to you via direct deposit. The Treasury Secretary has stated that he expects these transfers to occur within the next 3 weeks. Future legislation may provide additional payments in a similar manner.
Unemployment claims nationwide have skyrocketed to all-time highs within the last week. Unemployment benefits in California are provided through the Employment Development Department, and if your income has been reduced (even if not entirely eliminated) then you may be eligible to apply for unemployment benefits at this link. Besides the normal benefits provided through the state, the CARES Act also provides $250 billion from the federal government to expand unemployment benefits.
Under the new stimulus package, workers will be paid an additional $600 per week for up to 4 months until July 31st. After that point, the length of time that the normal state benefits can be paid has been extended by an additional 13 weeks bringing the potential total to 39 weeks of financial assistance in total. Beyond the increased benefits provided for a longer period of time, the stimulus package also broadens the definition of who is eligible to claim unemployment benefits. Self-employed workers/independent contractors are now eligible for benefits, as are part-time workers and furloughed employees and those who had only recently started at a new job.
Remember that unemployment benefits are considered to be taxable income (for federal taxes but not CA) reported on Form 1099-G, though in most cases they will not be subject to FICA taxes. You can choose to have federal income tax withheld from your unemployment payments using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.
Paid sick leave:
Through the Families First Coronavirus Response Act, the Department of Labor is now enforcing expanded paid sick leave requirements for employees of covered employers. If you have been forced to take time off of work because you’re sick, or if you are caring for a child whose school or daycare has been closed for reasons related to COVID-19, then check out this summary of the new provisions from the DoL. This is separate from disability insurance benefits that you may be eligible for.
Sadly, the criminals of the world seem to have taken this opportunity to increase the frequency of attempts at various types of financial fraud. Identity theft, wire fraud, phishing, and various types of cybersecurity threats are all still out there. I recommend reading this guide as a great starting point to protect yourself. In addition to the tips provided there, I also recommend freezing your credit at all times unless you’re actively applying for a loan right now.
San Diego rent:
The San Diego City Council passed emergency Ordinance 21177 implementing a moratorium on both residential and commercial evictions for non-payment of rent if the renter demonstrates either a substantial decrease of income or significant medical expenses due to the Coronavirus. The rent due is not waived, just delayed, and the renter must provide advance notice along with documentation of financial hardship. If you are either unable to pay your rent or you own rental property, then I recommend reading the ordinance along with this writeup from local attorney Ashley Peterson for additional details.
Section 4022 of the CARES Act directs lenders holding federally backed mortgages to suspend borrowers' payments for up to 12 months if they have lost income because of the Coronavirus outbreak. It also suspends foreclosures and foreclosure-related eviction actions for at least 60 days, and eases the rules regarding credit reporting during the designated Coronavirus emergency period. No additional penalties or fees, or interest beyond the normally scheduled amount, will be charged to delinquent borrowers.
This applies to all federally backed mortgages including FHA, VA, and those purchased or securitized by Fannie Mae and Freddie Mac. If you’re not sure whether your loan is federally backed, you can ask your loan servicer or use the online search tools provided by Fannie Mae and Freddie Mac. Many private lenders are also providing various types of mortgage relief, check with your loan servicer for details.
Investopedia provides some additional helpful details in this article.
Here are a few additional links that you may find useful:
- The actual text of HR 748 CARES Act is located here in case you want to read it for further details.
- Michael Kitces, who runs a blog popular among financial planners, has published a great analysis of CARES Act provisions related to personal finance.
- A wide range of companies have decided to provide free services or discounts in order to help. The best list that I’ve found so far is in this Reddit thread with hundreds of offers ranging from cell phone data plans to math lessons for kids to in-home workouts.
When the world changes, your financial plan may need to be updated. When your personal situation changes significantly, your financial plan will certainly need to be updated. We’re here for you! If you have any questions for us, or if there have been major changes to your financial situation that we haven’t yet discussed, or even if you just haven’t talked to us in a while, please feel free to schedule a meeting with Mike or I at this link anytime.
And if you find yourself in a tough situation and don’t think you’ll be able to continue to pay us for our services, then we can help with a temporary payment waiver for a month or two in order to allow us to keep helping you get through this. Please remember that we’re a small business and can’t do this for every client, or for any client for a long period of time, but we do truly want to help as much as we can.
Stay home, stay safe, and stay sane! We’ll all get through this together.
This being the first blog post for Next Gen Financial Planning, I’ve thought a lot about what topic I should choose to write about. Perhaps I could channel my inner nerd as a financial planner and start with a more technical financial topic, such as explaining a complicated tax issue or read more