Morningstar - Q4 2020 - 30

Spotlight: World After COVID-19

financial planning-specifically, how they
approach spending and saving. Many households
have experienced income shocks and have
burned through their cash reserves, illustrating
the critical role that liquid assets play in the health
of any financial plan. Other workers have had
health challenges at the same time they've
experienced income reductions or job losses. That
underscores the challenges of a system that
tethers health insurance coverage to employment
and points to the importance of factoring
healthcare outlays into a total financial plan.

The pandemic's economic side effects also have
significant implications for how older adults
plan their retirements. Not only have older workers
experienced some of the highest rates of job loss
of any age band, but in previous recessions, it has
taken older unemployed workers much longer to
become re-employed than younger ones. That, plus
the fact that a recovering stock market has taken
retirement account balances up, has no doubt
prompted some to ponder early retirement. Yet low
interest rates-while a boon to borrowers-are a
headwind for people nearing or in retirement.

All these trends will affect the way households-
and the advisors who assist them-manage their
financial plans. While the COVID-19 crisis has
brought them to the fore, their importance is likely
to persist after the pandemic as well.

EXHIBIT 1

Triple Tax Benefit HSAs are the most tax-beneficial way to invest over the long
term. Contributions are tax-deductible, growth is tax-free, and if they are used for
qualified medical expenses, withdrawals are tax-free.
Pretax Amount

Value After
Contribution

Value With Interest
and Investment Growth

Withdrawal

Total

Roth

$5,000

$3,900

$12,508

Not Taxed

$12,508

$16,036

Taxed

$12,508

Taxed
IRA & 401(k)
$5,000
Not Taxed

USED FOR QUALIFIED
MEDICAL EXPENSES

HSA
$5,000
Not Taxed

$16,036

Not Taxed

$16,036

NOT USED FOR QUALIFIED
MEDICAL EXPENSES

Taxed

$9,301

BEFORE AGE 65
Assumptions
$5,000 one-time investment, 22% marginal tax rate at contribution
and withdrawal, 6% annual return over 20 years
Source: Morningstar.

Taxed

$12,508

AFTER AGE 65

1 Pew Research Center. 2020. "About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19." April.

Morningstar Q4 2020

Pandemic Highlights Importance
of Emergency Savings
The pandemic's economic shock illustrates, yet
again, the importance of emergency reserves
as part of a financial plan and the difficulties that
many households face in amassing these
rainy-day funds. The standard benchmark calls for
three to six months' worth of living expenses.

Lower-income households, not surprisingly, are
the least well equipped to handle financial
emergencies. In a Pew Research survey conducted
in April, just 23% of lower-income households
said they had an emergency fund sufficient to tide
them through three months of job loss.1
But the lack of short-term financial wherewithal
isn't limited to lower-income tiers. More than
half (52%) of middle-income households in the Pew
survey said they didn't have enough savings
to cover three months' worth of living expenses,
and 25% of upper-income people said they didn't
have three months' worth of reserves.
In an effort to help Americans affected by
the pandemic gain access to cash, the CARES Act,

Morningstar - Q4 2020

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