- Millennials know the potential financial repercussions of the COVID-19 pandemic aren't once-in-a-generation we've been through this before, during the Great Recession.
- But that also means we know wealth-building opportunities will be present on the other side of this crisis.
- As a financial planner, I'm advising my young, high-earning clients to prepare now for another market sell-off by maxing out their retirement accounts, taking advantage of Employee Stock Purchase Plans, and keeping their credit scores high to refinance debt while interest rates are low.
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The current COVID-19 pandemic is widely considered to be a once-in-a-generation occurrence that almost no one could have predicted. However, for many millennials those born between 1981 and 1996 the current wave of mass layoffs and economic instability might look all too familiar. That is because several of us were just finishing college and graduate school in the midst of the Great Recession that was brought on by the collapse of the US financial system in 2008.
Well, just a short decade later, here we go again. Unemployment is at an all-time, there are lines outside of food banks all over the country, and the trend line of the stock market this year looks like it was designed by someone at Six Flags.
For some, the market crash and eventual rebound that ensued a decade ago were extremely fortuitous. For every over-extended homeowner who was forced to sell, there was a willing buyer with the cash available to scoop up the asset for pennies on the dollar. And for everyone who sold out of their stocks in a panic as the S&P 500 index neared its low of 38%, there was a prudent investor with an eye toward the longer term who was more than willing to take the other side of that trade.
With the major stock indexes recently wiped away much of their March and April losses, the window may have closed on the COVID-induced market selloff for now. However, the advice I have been giving my younger, high-earning clients the past few weeks is to get their ducks in a row and be prepared to take advantage of the next downturn. We've seen this one before.
Max out your retirement contributions early
For those who have a tendency to max out their 401(k) contributions every year, it's not a bad time to accelerate your annual contributions and allow those funds to accumulate in a money market or stable value fund. That way, whenever the next great buying opportunity inevitably comes, the dollars will already be in those accounts and ready to take advantage.
In 2020, the Internal Revenue Service allows retirement savers younger than 50 to contribute up to $19,500 into a 401(k) or similar workplace retirement account . Instead of waiting until December to hit that cap, younger savers who have already built up solid emergency savings should consider upping their contribution percentage to the maximum the plan will allow. In most cases, that maximum salary deferral amount is 25%.
Participate in your company's Employee Stock Purchase Plan
Those who work for a publicly traded company are likely able to participate in the company's Employee Stock Purchase Plan (ESPP). These plans allow employees to purchase shares of company stock at a discount usually 15%. This is another great place to go bargain shopping for stocks.
In a broad market selloff like the one spurred by the COVID-19 pandemic this past March, all companies saw their shares sold off, irrespective of their underlying fundamentals or financial strength. Should we see a repeat of such events in the future, participants in an ESPP would be able to claim an additional 15% on top of the inherent discount that comes with buying stock in a quality company during a broad market selloff.
Maintain a high credit score
Lastly, I recommend that clients stay on top of their credit reports and maintain high credit scores . In any recession, the Federal Reserve will look to lower interest rates in an attempt to lure individuals to borrow money and consume products and services on credit. As a byproduct of the Fed making it cheaper to borrow, there will likely be great opportunities to refinance mortgages , student loans, and auto loans at lower rates to save a few dollars on interest.
Saving on interest payments is rarely pursued with the same enthusiasm as locking in a gain on a stock or some other investment. However, reduced debt payments should be thought of as guaranteed returns.
Malcolm Ethridge, CFP, CRPC, is an executive vice president and fiduciary financial adviser with CIC Wealth Management, based in the Washington, DC area. Malcolm's areas of expertise include retirement planning, investment portfolio development, insurance, stock options and other executive benefits.
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