Since the start of the COVID-19 pandemic, more Americans have realized the importance of a financial plan. But developing and sticking to a financial plan can seem overwhelming, particularly in the face of a major economic event that creates financial concerns.
Millennials — born between 1981 and 1996 — have been acutely affected. This segment of the population became the largest generation in the full-time U.S. workforce at the beginning of 2019, according to the U.S. Labor Force Statistics Current Population Survey. They have struggled during the pandemic — experiencing job losses and reduced wages.
These financial shocks have led many millennials to make tough financial decisions. A recent study in Financial Planning Review, the CFP Board Center for Financial Planning’s peer-reviewed academic journal, found that millennials between the ages of 30-39 were most likely to take a hardship withdrawal or a loan from their employer-sponsored retirement plan, compared with other age groups. While the CARES Act made tapping a retirement account easier, such as by waiving penalties for early withdrawals from 401(k) accounts and IRAs, diminished retirement savings could affect future income in retirement.
As millennials face the challenge of balancing short- and long-term needs, it begs the question: What can millennials do to build financial security? Develop a financial plan. If a financial adviser is assisting in drawing up a financial plan, keep in mind three key components to incorporate:
1. Emergency savings: One of the pandemic’s many lessons is the value of being prepared for situations that require unplanned spending. For many who experience unforeseen life changes, such as the loss of a job, a backup fund to assist with rent, utilities and other basic expenses can be a blessing during challenging times.
While savings may not necessarily replace the financial security of a steady income, an emergency fund can soften the short-term impact of disruptions. To prepare for unplanned expenses, an emergency savings fund should remain a priority — even when your financial situation improves.
2. Diversification: In the first half of 2020, stock markets hit all-time highs and lows as a result of volatility brought about by the pandemic. To help buffer and sustain your nest egg through significant economic events, a diversified investment strategy is best. Not only is it important to diversify your investment portfolio, it is also important to diversify your tax strategy and even your income stream, if possible.
Tax diversification (a blend of tax-deferred, tax-free and taxable accounts) can help mitigate the impact of taxes on your future retirement income while also creating flexibility to better control your tax bill when you tap your savings in retirement.
Meanwhile, establishing different streams of income, such as supplemental income through freelance work, can create an additional safety net in the event of significant changes in your employment picture.
3. Estate planning: Due to their age, many millennials don’t see estate planning as a priority. Yet COVID-19 underscores the importance of estate planning — regardless of your wealth or age — to ensure that loved ones will have adequate protection.
Now in fact may be the best time to explore creating a will or trust, name guardians for dependents and take stock of assets. Insurance coverage also helps ensure protection in extenuating circumstances. Understanding the available options, such as life insurance and long-term care, can help prepare for future financial impact as a result of changes in health.
Rachel L. Sheedy CFP® is manager of the Financial Planning Knowledge Center, CFP Board Center for Financial Planning.