It’s been only three months, but 33.5 million Americans have already lost their jobs. The percentage , now 15 percent, will soon hit 20 percent. That’s a better rate than we averaged during the good Depression. GDP is now running 40 percent below last year’s level. During the good Depression, the utmost annual GDP decline was 26 percent. Major companies, some a century old, are now going bankrupt. Others, across all sectors of the economy, will soon hit the rails. Even segments of the healthcare industry are in financial peril and shedding employees.
We need a coordinated national policy to capture and kill Covid-19, not a “backup” task force. As described in my recent column and during this protocol by Professor Peter Frazier of Cornell, in need of a miracle vaccine, defeating Covid-19 requires household-based group-testing of each American household hebdomadally . Doing so can get the economy back on its feet in four weeks with 96 percent of the population entirely virus free, sporting green wristbands to form clear to all or any they’re virus free, and ready to engage fully in normal activities. The remaining 4 percent would be in quarantine. After two months the virus, for all intents and purposes, would be history, with essentially no new cases or additional deaths. Moreover, those arriving to our shores would even be group tested and, if tested negative, given green wristbands or, if tested positive, placed in two-week quarantine. The green wristbands would be coated to show to red after one week, meaning every household that tested green the week before would wish to be retested. By retesting weekly, the amount of false negatives released into the economy goes to zero over the course of only one month.
Group testing all households hebdomadally requires six million tests. this is often well within the range of weekly testing our country can preform, if not in the week , within three weeks. Best yet, each household’s sample are often provided by its members via a cushty saliva test, developed by Rutgers University, which the FDA has just approved.
Unfortunately, Drs. Fauci and Birx aren’t pushing this approach for reasons that baffle and dismay me. Maybe they’re concerned that every person needs their own diagnosis. But during this case, they don’t understand standard grid-based group-testing protocols, which precisely identify positive subjects. Yes, the topic here may be a household. But since household members got to quarantine together, determining the actual household members that are positive is merely necessary when such members become seriously ill. during this case, they’ll be individually tested consistent with their doctors’ orders. regardless of the explanation for their intransigence, which can simply be their not having studied or understood Professor Frazier’s protocol or the strictures of the President’s political calculus, our death count, now over 78,000, will keep climbing and with it the fear of getting to work, frequenting a restaurant, shopping in crowded stores, and interesting in other routine economic activities. Yes, I know, half the states are reopening. But most do so in violation of CDC guidelines. Hence, we are largely returning to where we were in February, i.e. roughly an equivalent conditions, position, and, generally speaking behaviors, from which our country’s Covid-19 infections and deaths exploded.
Einstein defined insanity as doing an equivalent thing repeatedly and expecting different results. Reopening the economy without a vaccine, without a proven, including available treatment, without a nationwide, enforced face-masking policy, without a nationwide, enforced social-distancing policy, without a nationwide means of contact tracing, without anywhere near the amount of survivors needed for herd immunity, and without a group-testing mechanism to check all households hebdomadally , is an act of pure insanity. But that’s where we are and that is why we all got to take not just extremely physical precaution, but serious financial shelter.
Secret 1: Cut Your Spending and Tap Your Retirement Account Assets
There has never been a more critical time to try to to lifetime financial planning — planning that takes full account of your cashflow constraints. As those of you who follow my columns know, my personal financial planning company’s software, MaxiFi Planner, does such planning. i do not know the other software available to the general public or financial professionals that does an equivalent . Hence, I’m getting to use our software for instance some key secrets to financially surviving Covid-19.
To be clear, the Covid Plague may end during a month or in two years. nobody knows. we have seen some countries, like Sweden and Taiwan, stay open and manage alright . But our country is managing very poorly. what proportion is thanks to this or that factor is unknown. what’s known is that new infections across the country have barely declined and in some states, as distant from each other as California, Texas, and Alabama, new infections are currently on a tear. Indeed, if you allow out ny , which isn’t opening up, new cases across the country are increasing, not falling.
Everyone, even those with jobs, must adjust their spending immediately in light of actual or prospective job loss or salary cuts. This goes for tenured professors like me. many universities and colleges will close, most permanently , counting on the duration of this plague. Hence, we all got to plan for an extended period of low or zero wages. As for retirees, the important (inflation-adjusted) return one can safely earn in today’s market is zero. a few years back it had been 1 percent. which will appear to be alittle difference. It’s not.
How much should one cut spending? Let me illustrate. Take a middle-class, Indiana couple, John and Sue, age 50, both of whom were earning $75,000 before the plague. The couple, I’ll assume, features a combined $800,000 in 401(k) assets, a $500,000 house with a $350,000 mortgage. John has just been furloughed. he’s employed on internet affiliation deals, which are now dying on the vein. He now worries he’ll be out as long as two years. to form matters far worse, as I noted above, the safe long-term real (after inflation) rate of interest is now zero.
How big successful will the couple take under their worst-case scenario? This entails not just planning for John to be out of labor for 2 years, but also planning on the couple’s earning no real (inflation-adjusted) return within the future. Yes, they might invest in stocks. But stocks are risky, particularly now. Once you adjust for his or her risk, they’re yielding precisely zero after inflation. And, yes, the safe long-term TIPS (Treasury Inflation Protected Securities) rate may return up. But it’s going to also fall further. Hence, John and Sue have decided to plan prudently and assume they’ll earn what they will actually now safely earn on their assets — zero percent, not 1 percent real, which they were previously assuming.
Absent these adjustments to their circumstances, the couple was ready to spend $76,232 annually on a discretionary basis, i.e., on everything above and beyond paying their housing costs, taxes, and prospective Medicare Part-B premiums. Incorporating John’s two-year job loss and a zero real return, the couple’s lifetime discretionary spending drops by 9 percent. Lifetime discretionary spending references this value of all of their future years of discretionary spending. as long as the important discount rate (return to savings) is zero, this value is just the straightforward sum of all future year’s values.
But that’s not the worst news. The couple is cash constrained. They only have $50,000 within the bank. Consequently, their plan requires a $22,404 or 29 percent cut to urge through subsequent two years with annual discretionary spending thereafter at $67,262. this is often an enormous adjustment, which is leaving John and Sue nervous wrecks. Cutting one’s routine spending by even 10 percent is hard enough, but 29 percent?
One answer is for the couple to require special withdraws of $75,000 for subsequent two years from their retirement accounts. because of the CARES Act they will do so penalty free. Now the couple can spend $66,983 on a smooth basis going forward. This entails cutting their annual real (inflation-adjusted) spending by $9,249 (relative to their previously planned $76,232 per year) and their monthly spending by $771 for the remainder of their lives. That’s a nasty 12 percent hit from what they’d planned to spend two years back once they last updated their plan. But if John and Sue don’t cut their spending now, their living standard will take a good bigger hit down the road.
Secret 2: Retire Later
Working longer, if that’s possible, may be a thanks to partially offset the couple’s sustainable living standard hit. If John works till age 67 instead of retires at his planned age 65, the couple can spend $69,112 per annum , which is 9 percent but the first $76,232. If both John and Sue run through 67, annual discretionary spending is $71,108 — 7 percent below $76,232.
Secret 3: Use Your 401(k) to Pay Off Your Mortgage
John and Sue have an excellent investment opportunity of which they’ll not remember . Their mortgage rate of interest is 3.75 percent. Meanwhile, the long-term Treasury bond rate is 1.25 percent. Hence, there is a 2.50 percent real return available from pre-paying their mortgage. Suppose the couple withdraws $70,000 a year from their 401(k)s for roughly five years to pay off their mortgage. Does this help? It certainly does. Now the couple’s sustainable discretionary spending is $74,755, up from $71,108. (This column provides another illustration of the gains from pre-paying one’s mortgage even at the worth of paying higher taxes within the short run.)
Secret 4: Maximize Your Lifetime Social Security Benefits
John and Sue plan on taking their Social Security retirement benefits at age 67, once they reach full retirement age. What if they wait till 70? Doing so will raise their annual benefits by 24 percent adjusted for inflation. How does it impact their affordable, sustainable annual discretionary spending? For subsequent four years, they get to spend $77,492 per annum . Thereafter, they will spend and keep it up spending $78,646. Both of those figures are above the $76,232 annual spending they have been doing in recent years. By the way, the rationale their spending rises after four years reflects the structure of the couple’s cash-flow constraints.
Secret 5: Move to a Cheaper State
Both John and Sue have jobs they will do remotely. As mentioned, before he was laid off, John worked fixing internet affiliation deals. Sue does remote training of customer reps. Consequently, nothing is tying them to Indiana, which features a 3.23 percent state tax . That’s not huge, but not nothing. What if John and Sue relocate to Texas, which has no state tax , reproducing their current housing arrangement. Their annual sustainable living standard rises to $80,858, which may be a whopping 6 percent above their pre-Covid-19 level!
The Biggest Secret
As you’ve seen, for some, probably most households, it’s possible, with the assistance of a strong financial planning tool, to survive the terrible economic situation numerous folks are now facing. I’ve considered adjusting spending, taking pension plan withdrawals early, retiring later, paying off one’s mortgage using one’s pension plan asset, maximizing lifetime Social Security , and relocating to a less expensive state. There are many other things John and Sue can consider, including refinancing their current mortgage, planning, down the road, to require out a reverse mortgage, downsizing their home, doing a Roth conversion while their rate is low , starting their own business (John is considering fixing a groceries purchase and delivery service in his new Texan community), reducing contributions to retirement accounts if it doesn’t jeopardize their employer match, taking in boarders, moving back in together with your parents, and therefore the list goes on. the most important secret is doing precise, living-standard-based lifetime financial planning. Economics-based financial planning is another term. Its dramatically different from conventional financial planning, which, to my knowledge, can’t make any of the above calculations correctly. Economic-based financial planning can turn Covid-19’s financial nightmare into something not just manageable, but surmountable.