It’s difficult to imagine that anyone has been financially untouched by the COVID-19 pandemic and economy-closing efforts to contain it. Job losses and income cuts are an obvious example, but many people will be hurt in other ways, and the impact could linger for years.
Some Americans, for example, will see an erosion in their credit scores, affecting their ability to borrow on good terms, while others could fall further behind in retirement preparedness. Income-tax perils and other dangers also lurk.
With a jump in the nation’s jobless rate, many Americans now find themselves pinched by lower incomes. Some individuals weren’t able to build an emergency fund even when times were good. “People who were living paycheck to paycheck do not have the financial cushion to absorb a shock of this magnitude,” McKinsey & Co. said in a report.
Even before the pandemic hit, about 40% of Americans reported that they couldn’t cover an unexpected $400 expense without borrowing or selling assets, McKinsey noted, citing a widely quoted Federal Reserve study. The COVID-19 outbreak has made money issues more worrisome for people in this group.
Many unemployed individuals have become dependent on stimulus checks and expanded jobless benefits – two programs that seem likely to be extended, with details still pending.
Losing ground on retirement
For a while, it looked like millions of investors and their 401(k) retirement accounts would get wiped out by the stock-market plunge triggered by the sudden coronavirus recession and economy-shutting measures to contain it. That doesn’t appear to be the case anymore, with the market inching up to near its former highs. But many people still will lose ground in retirement planning.
Individuals who lost jobs, were forced to take temporary furloughs or had their 401(k) matching funds cut will have fewer contribution dollars flowing into their retirement accounts. Worse, some investors have tapped their accounts for loans or permanent withdrawals, removing money that could have bounced back with the stock market.
Then there’s the lure of claiming Social Security benefits as soon as possible, for anyone who has reached age 62. People who face job disruptions might be forced into this predicament. But claiming Social Security early comes at a cost, as monthly benefits rise over time for people who can afford to wait (up to age 70).
Even before the virus hit, half of all American households were at risk of falling short in retirement savings, said the Center for Retirement Research at Boston College in a recent report. Many people now “face a larger savings gap,” with retirement at-risk households jumping to 55% from 50% before.
Less obvious than stock-market volatility, lower interest rates also pose a danger. At today’s depressed yield levels, retirees and other savers will find it difficult just to keep pace with inflation.
Facing an uncertain tax situation
One silver lining to all of these disruptions is that many people could face a lower burden when it comes time to filing federal and state income-tax returns early next year. To the extent you suffered a job loss or reduced hours, for example, your taxable income for 2020 could be considerably less than it was for 2019.
Just be aware that unemployment benefits are taxable, so plan for a tax bill later if you were thrown out of work and didn’t have enough money withheld. Another danger awaits anyone who permanently withdrew money from 401(k) plans or traditional Individual Retirement Accounts – or those who can’t repay a 401(k) loan. In general, this money is taxable, and you might face a 10% penalty if you pulled it out before age 59½.
Then there’s the Internal Revenue Service, which was tasked with issuing stimulus checks during the middle of tax-return filing season – just as its own offices were closing to help slow the spread of the virus. The resulting delays in processing returns and issuing refunds caused hardships for some people.
This episode should have you rethinking the wisdom of over-withholding taxes in hopes of getting a big refund quickly, if you’re counting on the money to help make ends meet.
Dealing with credit-report problems
As more people struggle with their finances, problems have shown up as credit-report demerits and lower credit scores.
LendEDU analyzed the volume of complaints fielded by the Consumer Financial Protection Bureau from March 13 to July 17. Complaints surged during that period, with gripes about credit scores and reports accounting for more than half the total.
Besides more people having trouble making payments, the spike in complaints points to a communication breakdown among consumers, lenders and the three credit bureaus.
“Many financial institutions were flexible with borrowers and agreed to things like a reduced minimum payment or even a deferment period,” noted Mike Brown, who wrote the LendEDU report. “However, it appears that many of these agreements were never really confirmed or finalized.”
In some cases, credit-card companies reduced available borrowing limits for people who reported payment difficulties, resulting in a hit to their credit scores (which drop when more of a person’s remaining credit has been utilized). In other cases, lenders or credit bureaus added erroneous information to consumer files.
All of which underscores the wisdom of checking your credit reports occasionally – you can do so for free at annualcreditreport.com – and alerting the bureaus if you spot errors. Services such as CreditWise that provide near-instant monitoring of scores also can be helpful, Brown said.
Coping with more stress
The coronavirus financial fallout appears to have contributed to greater anxiety. Americans polled recently by Charles Schwab rated their financial stress at an average 52.5 on a scale of 0 to 100 (where increased stress equates to higher scores), up from 45.9 in January. A lot of people expect their money worries to remain elevated even after the outbreak subsides.
Many Americans also might be thinking a bit differently about money in the wake of the pandemic. Respondents in the Schwab survey say it now takes fewer assets than before to be comfortable – an average $655,000 in net worth in the June survey compared to $934,000 in January. True wealthy status starts at around $2 million in net worth, respondents now say, down from around $2.6 million in January.
The report didn’t explain why people have scaled back their measures of affluence, but a lot of Americans likely have lowered their expectations and aspirations.
