Charlie has the worst timing.
She logs in 15 minutes early to the online meeting and makes sure the wireless headset works. Then she grabs caffeine and empties her bladder. Back at the computer, the session is live.
She’s welcomed with, “We can get started, now that Charlie’s done in the bathroom.”
Oh, crap!
How rare is Charlie?
While live mics during online meetings are becoming commonplace, in another critical way, Charlie is above average.
Her emergency fund can cover her bills for six months. That is rare. A recent study shows that barely two out of five Americans could handle a $1,000 emergency from their savings. 1
Now, with the quarantine in place, Charlie’s spending less, so her reserves could easily last to the end of the year, even if she gets furloughed or laid off.
Charlie expects her stimulus check shortly. She knows she can’t put it in her 401k, so she’s decided to start a Roth IRA. This year, because of the extended deadlines, she has until July 15 to get credited with a January 1, 2019 start date.
That’s important because it starts the five-year clock on penalty-free withdrawals of contributions.
Most of her friends already got their money, but not Charlie. She never gave the IRS access to her banking information.
Her check is in the mail, and the market is rising fast. She’s already missed the bottom.
We helped Charlie navigate the IRS website (irs.gov/coronavirus/get-my-payment) to find out when her check is scheduled to get printed and mailed.
Armed with that knowledge, we set up the Roth IRA. She borrowed from her emergency reserves, so she could get the money into the account during the downturn and get credit for a 2019 start date on the Roth.
She’ll use the stimulus check when it comes to repay herself.
Additionally, Charlie decided that investing a set amount every month is a good idea. It’s a strategy called Dollar Cost Averaging (DCA). It’s precisely the same thing she’s doing in the 401k plan, but with a different set of investment choices, and as it’s in a Roth IRA, the earnings are always free of income taxes.
More important, with Charlie’s notorious timing problems, it uses market volatility to her advantage. While dollar-cost averaging doesn’t prevent losses in down markets, more shares are acquired when prices are low than when they’re high. The average cost is lower than the average price of each share purchased.
During this challenging time, with everything in a constant swell of change, you can count on us at Enduring Wealth Advisors®. Reach out with your financial and investment questions or concerns.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
1 https://www.cnbc.com/2020/01/21/41-percent-of-americans-would-be-able-to-cover-1000-dollar-emergency-with-savings.html
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