Millions of Americans have lost their jobs, experienced furlough and applied for unemployment during the COVID-19 pandemic. As a result, many are struggling financially, and some must even choose between buying food to feed their families and paying the bills. If you find yourself in the same predicament, you may wonder how you’ll be able to afford your mortgage payments in the coming months.
While rethinking your budget may help you scrounge up a few extra dollars here and there, it likely won’t be enough to pay your mortgage without a steady stream of money coming in. If you’re unable to make payments any longer, mortgage forbearance may be the route you need to take. Here’s what you need to know as you pursue this option.
Pros of Mortgage Forbearance
While mortgage forbearance shouldn’t be your first option when seeking financial assistance, it can be helpful, especially as you cope with short-term financial emergencies. Here are a few advantages of pursuing mortgage forbearance.
1.) Suspends mortgage Payments
If and when you agree to mortgage forbearance with your servicer, they will likely temporarily defer your payments for a specified period or allow you to skip some. This setup will help you avoid foreclosure or damaging your credit score.
Most importantly, a temporary suspension of payments gives you time to find a job, recover from the pandemic and begin saving money and eventually making payments again.
2.) Protection under the CARES Act
Under the CARES Act [in the United States], homeowners can receive certain protection benefits if they have a federally backed mortgage. One such benefit is that your lender or servicer may not foreclose on you until June 30. Another advantage includes having the right to request mortgage forbearance for up to 180 days, plus an additional 180-day extension.
Moreover, lenders don’t require documentation proving you qualify for forbearance. Speak with your servicer and answer a few questions about your financial hardship to qualify.
3.) Better Alternative to Foreclosure
The alternative option to forbearance is foreclosure: which often goes hand in hand with bankruptcy. This combination can easily sink your credit score for years and result in months, and even years, of legalities and paperwork. It’s also incredibly expensive for lenders to foreclose on a home, so allowing borrowers forbearance is a more affordable option.
Cons of Mortgage Forbearance
All of those benefits may make mortgage forbearance sound like a great deal. However, there are consequences to pursuing this option, even if it does solve your financial problems in the short-term.
1.) Possible Credit penalties
Pursuing forbearance during the coronavirus pandemic should not affect your credit score. In fact, the CARES Act states that no negative credit reporting or late charges will occur during your forbearance agreement. However, credit penalties and dips may still happen as your lender reports your account information to credit bureaus. Continue Reading…
Spending money is easy. Saving and investing is supposed to be the difficult part. But there’s a reason why Nobel laureate William Sharpe called “decumulation,” or spending down your retirement savings, the nastiest, hardest problem in finance.
Indeed, retirement planning would be easy if we knew the following information in advance:
Future market returns and volatility
Future rate of inflation
Future tax rates and changes
Future interest rates
Future healthcare needs
Future spending needs
Your expiration date
You get the idea.
We can use some reasonable assumptions about market returns, inflation, and interest rates using historical data. FP Standards Council issues guidelines for financial planners each year with its annual projection assumptions. For instance, the 2020 guidelines suggest using a 2% inflation rate, a 2.9% return for fixed income, and a 6.1% return for Canadian equities (before fees).
We also have rules of thumb such as the 4% safe withdrawal rule. But how useful is this rule when, for example, at age 71 Canadian retirees face mandatory minimum withdrawals from their RRIF starting at 5.28%?
What about fees? Retirees who invest in mutual funds with a bank or investment firm often find their investment fees are the single largest annual expense in retirement. Sure, you may not be writing a cheque to your advisor every year. But a $500,000 portfolio of mutual funds that charge fees of 2% will cost an investor $10,000 per year in fees. That’s a large vacation, a TFSA contribution, and maybe a top-up of your grandchild’s RESP. Every. Single. Year.
For those who manage their own portfolio of individual stocks or ETFs, how well equipped are you to flip the switch from saving to spending in retirement? And, how long do you expect to have the skill, desire, and mental capacity to continue managing your investments in retirement?
Finally, do you expect your spending rate will stay constant throughout retirement? Will it change based on market returns? Will you fly by the seat of your pants and hope everything pans out? What about one-time purchases, like a new car, home renovation, an exotic trip, or a monetary gift to your kids or grandkids?
Now are you convinced that Professor Sharpe was onto something with this whole retirement planning thing?
One solution is a Robo Advisor
One solution to the retirement income puzzle is to work with a robo advisor. You’ll typically pay lower fees, invest in a risk appropriate and globally diversified portfolio, and have access to a portfolio manager (that’s right, a human advisor) who has a fiduciary duty to act in your best interests.
Last year I partnered with the robo advisor Wealthsimple on a retirement income case study to see exactly how they manage a client’s retirement income withdrawals and investment portfolio.
This article has proven to be one of the most popular posts of all time as it showed readers how newly retired Allison and Ted moved their investments to Wealthsimple and began to drawdown their sizeable ($1.7M) portfolio.
Today, we’re checking in again with Allison and Ted as they pondered some material changes to their financial goals. I worked with Damir Alnsour, a portfolio manager at Wealthsimple, to provide the financial details to share with you.
Allison and Ted recently got in touch with Wealthsimple to discuss new objectives to incorporate into their retirement income plan.
Ted was looking to spend $50,000 on home renovations this fall, while Allison wanted to help their daughter Tory with her wedding expenses next year by gifting her $20,000. Additionally, Ted’s vehicle was on its last legs, so he will need $30,000 to purchase a new vehicle next spring.
Both Allison and Ted were worried how the latest market pullback due to COVID-19 had affected their retirement income plan and whether they should do something about their ongoing RRIF withdrawals or portfolio risk level.
Furthermore, they took some additional time to reflect on their legacy bequests. They were wondering what their plan would look like if they were to solely leave their principal residence to their children, rather than the originally planned $500,000. Continue Reading…
My latest MoneySense Retired Money column is a mini review of roughly a dozen personal finance or Retirement books I’ve been reading of late, or intending to finish. You can find the full column by clicking on the highlighted headline here: 12 Top Personal Finance books to read this summer.
First up are a couple of macroeconomics books: Graham Summers’ The Everything Bubble: The Endgame for Central Bank Policy, first published in 2017. It describes what the author calls “serial bubbles” – not just stocks but virtually every asset class, including fixed income and real estate. The book also tackles the two sources of financial repression for retirees hoping to live on interest income: ZIRP and NIRP, which stand respectively for Zero Interest Rate Policy and Negative Interest Rate Policy.
Like it or not, the November 2020 U.S. election is likely to have an impact on investors and would-be retirees, no matter how it works out. Two years ago, my MoneySense column reviewed several other Trump books in an attempt to understand the investment implications of his presidency.
Have we reached Peak Trump?
Amazon
Since then, I’ve also read Peak Trump: The Undrainable Swamp and the Fantasy of MAGA, by David Stockman, published in 2019. Peak Trump includes a chapter also titled The Everything Bubble. Stockman believes the Trump boom – aided by the Federal Reserve’s “rotten regime of Bubble Finance” — has been a mirage and is fated to fade away. Presidential incumbents usually win re-election if the economy and stock market stay strong, but that’s hardly a slam dunk after the depression-level unemployment and social unrest that has come about in the wake of Covid-19.
Dual citizen and political pundit David Frum has just released his second Trump book: Trumpocalypse: Restoring American Democracy, a followup to his earlier Trumpocracy, which was mentioned in the link above. The blizzard of online and media reviews seem to suggest Frum believes Trump has lost the plot and may be vulnerable in the upcoming election.
With all this talk of asset bubbles and negative interest rates, it seems everyone is fated to worry about money and not just near-retirees. Worry-Free Money, by financial planner Shannon Lee Simmons, was published in 2017, and will primarily interest younger investors with a long time horizon. Simmons declares “everyone is worried about money” and says social media has only aggravated the situation. But if you’re worried she will nag you about things like budgeting, fear not: she gives reasons why “you need to stop budgeting.” Rather, you have to control your spending, living within your “hard limit” and say “No” to unhappy spending.
The Joy of Being Retired
For those closer to Retirement The Joy of Being Retired, by the prolific Edmonton-based international self-publishing master Ernie J. Zelinski, is a light read, with 365 reasons (and cartoons) on why Retirement Rocks “and Work Sucks.” Continue Reading…
The economic downturn caused by the global COVID-19 pandemic is accelerating major themes in digital transformation as businesses and workers adjust to new ways of providing goods and services. This acceleration of trends is creating opportunities for investors in the equities of U.S. companies in sectors such as technology, health care and pharmaceuticals.
There are pockets of opportunity now in U.S. equities for selective investors and if you can look through the near-term uncertainty, you can buy great long-term companies at good prices.
The technology sector has benefitted during the shift to a “work from home” environment: especially products and services related to cloud computing, remote access, digital payments, and online security. This technology is in higher demand as individuals, companies and organizations rely on technology to work, communicate with clients and staff, and perform transactions in a virtual platform during pandemic restrictions. The COVID-19 crisis is also highlighting the powerful combination of technology and health care in areas like gene sequencing and data analytics, which will benefit pharmaceutical and biotech firms in the future.
Outlook for U.S. economy
Overall, the U.S. economy likely will remain affected by weakness driven by the pandemic for some time, but the economy should begin to show improvement in the fourth quarter, accelerating into 2021. Decisive stimulus actions taken by the U.S. Federal Reserve will likely help bridge the downturn for many businesses and consumers.
If progress is made on developing a medical treatment for the coronavirus — including a vaccine — then there could be a fairly rapid “healing of the U.S. economy” and a rebound of pent-up consumer demand when restrictions are loosened.
A health care crisis needs a health care solution: there is a massive research effort under way to develop an effective medical treatment of the coronavirus.
Positioned for opportunities in trend acceleration
As the digital technology transformation advances, companies in some of the most innovative sectors of the U.S. economy are positioned for growth during the downturn. For example, we see opportunities in the wireless tower space as part of the wider shift to 5G wireless technology and the increased focus on data usage and mobility for individuals and businesses. Providers of software for back-office business processes, which are essential for workers at home during the crisis, are another opportunity. Continue Reading…
Pursuing a post-secondary degree marks a significant chapter in one’s life: and it’s being dramatically rewritten for millions of students across Canada in the wake of COVID-19. Campuses on lockdown, classes gone digital, and increasingly gloomy job prospects are just some of the new realities students face.
But while these times pose new challenges, there’s some silver lining as many schools have made moves to ease grading criteria and the federal government has stepped in a big way to launch new financial aid programs. If you’re a post-secondary student who’s looking to better manage your money during COVID-19 but aren’t sure where to start, you’ve come to the right place.
Below is a list of what I consider to be the key first steps students should take to get a better grip on their finances during COVID-19:
1.) Apply for CESB
Whether you’re a freshman whose paid summer internship was abruptly cancelled or a recent grad struggling to land a position due to the very real impact COVID-19 has had on the job market, you can seek financial support from the federal government by applying for CESB.
CESB – which is short for Canada Emergency Student Benefit – is a form of unemployment insurance and is the single-most impactful form of financial support you can receive as a student during COVID-19.
Here are some things you need to know:
How much support can you get?
If you qualify for CESB, you can receive one of the following amounts for a set four-week period:
$1,250 either because you’re: 1. unable to work due to COVID-19, 2. actively on the job hunt but can’t successfully land a position, or 3. currently employed but only earn a monthly income of under $1,000 before taxes
Up to $2,000 if you tick off any of the three boxes above and you also have a disability or you’re a parent with a child under the age of 12.
Who does (and doesn’t) qualify for CESB?
While CESB is mostly geared towards students currently enrolled in a post-secondary institution, you can also receive support even if you’re not technically in college or university right now. For instance, you can receive CESB if you’re a recent post-secondary grad and completed your education in December 2019 or later. Additionally, if you’re in high school and applied for a post-secondary program set to start by February 2021, you also may qualify.
You must also be a Canadian citizen, permanent resident, registered Indian, or in very rare cases, recognized as a person in need of protection by the Refugee Board of Canada.
Unfortunately, that rules out international students.
The type of program and institution you’re enrolled in matters too. You’ll need to be in (or applying to join) a program that’s at least 12 weeks long, working towards a certificate or degree, and a student in one of the post-secondary institutions recognized by the government (the good news here is the list of designated schools is long and widely encompassing).
Aside from just being an eligible student and ticking all of the boxes above, you must also be actively looking for a job and unable to find employment due to COVID-19. You’re not eligible to get any CESB payments if you aren’t actively looking for work, have a job that earns over $1,000 per month before taxes, or already receiving support from the Canada Emergency Relief Benefit.
How to apply
CESB is available for up to a maximum of 16 weeks; however, you’re not guaranteed to get payments for that entire length of time and must apply for CESB every 4 weeks. The idea being you can keep reapplying and receiving support until you no longer need it.
The 4-week application periods aren’t arbitrary and follow a strict schedule based on the following dates:
May 10 to June 6, 2020 (no longer available)
June 7 to July 4, 2020
July 5 to August 1, 2020
August 2 to August 29, 2020
As long as your SIN is registered on the CRA website and you’ve filed your 2018 tax return, you should be able to apply online straight from CRA’s My Account. If you don’t, you can call 1-800-959-2019 or 1-800-959-2041. Phone lines are open seven days a week between 6 am to 3 am. You’ll also want to set up direct deposit on your CRA My Account so your CESB payments can be sent straight to your bank account digitally.
Remember, CESB isn’t intended as a free subsidy for all students but is temporary financial support for those who are actively looking for a job and can’t get one. The Government of Canada may even require you to submit proof you’ve been searching for a job, so be sure to keep records of your emails and other communications with potential employers.
2.) Set a budget and cut discretionary spending
A well-maintained budget can help you save hundreds of dollars every month – and in an unprecedented time like this – every dollar counts.
The first step of creating a budget is to start tracking how much you spend in the first place.
List out every purchase you make by amount and by type. And yes, I’m talking about every purchase. Spent $10 on
Lunch? Track it. Bought $50 worth of groceries? Track it. Use your smartphone or scribble down in a small notebook, it’s up to you, just track it.
While you can use apps to automate the process, I recommend noting down every purchase manually since it’s the best way to put your spending habits under the microscope, spot your biggest money wasters, and discover how even small nondescript purchases can add up. Nothing can get you more motivated to start meal prepping at home than seeing exactly how much you spend on takeout.
Once you have a grasp of your spending habits, start separating needs from wants and cutting out any discretionary purchases. Next, set strict spending caps for every category (i.e. no more than $100 on groceries per week) to ensure your monthly income can cover those essentials.
If you’ve got any money left over at the end of the month, don’t splurge and instead set aside the money in a high-interest savings account to gradually build up some cash reserves.
3.) Check if you can receive relief from your biggest bills
If you own a car, reach out to your insurance provider. In the wake of COVID-19, many are offering either rebates, discounts, or deferrals that can help cut down your monthly insurance payments. The same goes for utility bills. For instance, both Toronto Hydro and BC Hydro are offering support to customers who may be under financial pressure with options like payment deferrals or flexible payment plans with no penalties.
Banks are also stepping up in their own way. If you currently owe credit card debt, reach out to your bank and ask to receive payment deferrals and a temporary drop in your card’s interest rates. That can help postpone your minimum payments and ensure more of your money can go towards covering your more immediate essential expenses. Ratehub has provided a breakdown of how credit card minimum payment deferrals work and how terms differ by bank. Continue Reading…
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