COVID-19: Finances, Retirement, and the Impact on Small Business Owners

Not to assume I speak for all my readers, but my guess is that many of you are feeling like I do, knocked off kilter by limited social interaction, restricted working conditions and the disconcerting feeling of watching your retirement savings dwindle and finances sag.

I have not even mentioned the most serious issue: health. You or a family member may have contracted the new coronavirus. And if you have managed to avoid it, you may still be concerned for yourself and your loved ones, some of whom may be especially vulnerable.

Financial concerns

The financial concerns because of this virus are real. Whole industries such as travel, entertainment and oil have been hit extremely hard. Financial transactions have slowed or ground to a halt in certain industries. Many if not all businesses will be impacted by the economic consequences to fight this virus. Some will bounce back quickly, others more slowly.

We are impacted as employees, small business owners or retirees vis-a-vis the security of our jobs, the stability of our businesses and how we fund our retirement (with retirement funds down 10-30% depending upon your asset mix, in a matter of weeks). The anxiety we all feel is rooted in a reality that will not be fully measurable until the virus recedes and normal life resumes. But normal life will eventually resume, and we can take action now and in the future, to put us in the best position to rebound from the financial challenges of coronavirus.

I have received various questions from individuals and business owners. I will address those questions in this post.

Individuals

I have been asked two questions in particular by individuals:

1. Should I reduce my equity exposure to limit my stock losses?
2. I am near retirement - should I delay my plans?

Equity Exposure

In a perverse way, COVID-19 has forced many of us to learn about our risk tolerance and ability to handle the volatility of our current investment allocation; that volatility is often correlated to the level of equity we hold. If you cannot sleep at night with your current equity or investment allocation mix, then maybe you have too much investment risk and you need to speak with your investment advisor.

This discussion should revolve around whether your equity allocation truly suits your investment objectives and whether the potential volatility of your equity holdings is appropriate for your risk tolerance, now that you have been on the roller coaster ride and can quantify your risk aversion.

You will have noticed I have not directly answered the "should I reduce equity" question. That is because (1) as an accountant I cannot provide investment advice and (2) the answer is really based on your risk tolerance and other factors specific to your own situation. 

As a side commentary, while a requirement of the investment industry is to determine a client’s risk profile and create a portfolio that suits that profile, I would suggest this risk determination is often superficial. Most of us do not understand our true risk tolerance until a situation such as the markets’ rapid reaction to the virus knocks your portfolio down 25% in a matter of days.

The better investment managers I deal with, not only determine your risk tolerance through an interview process but also back-test your tolerance for that risk over the markets for the last 30 years or so. They do this before they invest your money. It would be interesting to see who has been more stressed recently, those with risk tolerances determined purely by questionnaire and discussion and those who also back-tested before they invested. I would guess the latter.

Retirement Plans

It may or may not be too early in this ordeal to alter your retirement plans. We have previously discussed how the sequence of returns can affect your retirement. While sequence of returns technically deals with your investment returns when you start retirement, the reality is that whether practically or psychologically, this significant drop in our retirement savings could impact when we start our retirement.

There is no one-size-fits-all answer to this issue as it will be very fact specific. If you have a pension from your job or some other anticipated flow of funds in retirement, a stock market decline may not be a large longer-term issue assuming the market bounces back at some point like it has done historically.

However, if you were going to draw on your retirement funds immediately upon retirement, the reduction in your nest egg in this bear market could severely impact your retirement plans.

My suggestion is that once things settle down, you review your plans (including the preparation of an actual financial plan or a review/update of an existing plan) with your financial planner, financial advisor or accountant. You will then have objective valuation of whether your retirement date may need to be pushed back a year or two.

Small Business Owners

Small business owners face a whole bunch of concerns sparked by COVID-19 that employees don’t need to manage. These fall into both short- and long-term buckets.

Short-term concerns

Short-term practical concerns include items like how you manage your cash flow, will insurance cover any of the lost profit or expenses and what are business owners’ employment responsibilities.

Many small business cash flow issues are addressed in this document.

I have been informed by colleagues at my firm who deal with preparing insurance claim reports and the related costs that there is no standard answer to whether a company’s insurance coverage will cover any of their losses due to COVID-19. Each claim will come down to the specific wording of the policy and how that policy deals with such terms as “pandemic,” “infectious disease” and “business interruption.” A legal interpretation may be required in many cases.

The employment law questions are complex and unique in this current situation, and unfortunately, I tell my clients they need to talk to their employment lawyer.

Clients are also asking if Ottawa or provincial governments will provide aid to help keep their businesses afloat. This is a fluid situation. The feds have announced a robust stimulus package, with many details still to follow. [ Note: after publishing this post, the Emergency Care Benefit and Emergency Support Benefit were subsequently rolled into the Canada Emergency Response Benefit (see details here)]. The provincial and territorial governments may also chip in to help their constituents.

Longer term concerns

As discussed earlier, certain industries and businesses have been hard hit by the economic slowdown caused by the virus, and almost all businesses will suffer to some degree – Netflix and Amazon are likely two of the high-profile exceptions. For a couple of the business owners I work with who have been considering selling their business, this sobering event has crystalized the risk of having their retirement concentrated on one major asset: their business. This is known as concentration risk.

They have now come to realize that almost any type of business could be severely impacted by a black swan event such as COVID-19. The risk to their retirement is significant if the concentrated business asset loses value due to an unanticipated event, especially close to their retirement date.

I think once the dust settles, some business owners may get very serious about the process of getting their business ready for a sale, whether in a year or over a couple years. As part of that process, they may undertake a value enhancement process to increase the sale price, by taking the necessary management, technological and other steps to become more attractive for a buyer (unashamed plug, BDO has specialists that assist you in achieving this value enhancement and others that can then take your business to market once the enhancement has been accomplished).

Tax considerations for difficult and uncertain times

Here is a link to a BDO publication released on March 16 about tax considerations for difficult and uncertain times. It is a good read.

A final note on the personal side of coronavirus

This was not a blog post I expected to write. Typically, at this time of the year, I write about how tax season is going. Coronavirus has disrupted our lives, sometimes in small areas that punch way above their weight.

Let me say upfront, I understand restricted social interaction including the cancellation of most sporting events is a minor inconvenience to help slow down the spread of the virus. In comparison to those who have fought wars or escaped warzones or been subject to other horrific issues, social distancing does not compare.

That being said, as most readers are likely aware, I am a big sports guy and I follow the Leafs, Raptors, Blue Jays, NFL football (sorry, CFL fans, I used to love the Argos, but that was many moons ago) and golf, among others. Like many of my friends, I have been shocked by the void of not having sports available to take our minds off the coronavirus as we have had during other economic downturns or communal crises, like SARS or even 9/11. The social distancing that is saving lives has also taken away a diversion that could help sustain everyone’s mental health.

I had never given it much thought, but when I went to my computer to surf and get my mind of the virus issues, I quickly realized the majority of my internet favourite list is made up of sports and investment sites. With no sports to write about and no desire to hear more bad investment news, my internet surfing has ground to a halt. Amazon is now the beneficiary of my increased Kindle book downloads. Probably a better thing intellectually, but I still have a sports void.

For those of you who expected this week to see Part 2 of the excellent series on Alter Ego and Joint Partner Trusts by Katy Basi, I hope to bring that to you in two weeks or when current events dictate. We are living in strange times, and I’ve always taken pride in The Blunt Bean Counter being a living blog, one that responds to events in the market and in our lives. It’s not business as usual for any us, but together we will get through this. I wish you and your families the best of health and a quick financial recovery.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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Oh Those Sleepless Nights - What is Keeping You up at Night?

What is keeping you up at night? That is one loaded question. It may be a financial issue, a family issue, a business issue or in my case, the sub sandwich with hot peppers I ate at 10:00 pm last night. All joking aside, this is a serious question and everyone from psychiatrists to financial consultants asks this question or a variation of it when meeting a new patient or client.

If you had asked me twenty-seven or so years ago whether this question would have any relevance to me professionally, other than from a financial perspective, I would have looked at you like you were crazy. However, as I look back over my career, I am amazed at how often I have been a psychologist/psychiatrist to my clients and how often money issues are intertwined or even secondary to family and personal issues. Analyzing sleep loss is a skill set I was not taught in university or in any of my Chartered Professional Accountant courses.

Despite my sometime amateur psychologist/psychiatrist status, it would be presumptuous of me to even consider providing advice of a psychological nature
on non-financial matters. Thus, today I will focus on the observations I have made over the course of my career in relation to financial matters that have kept my clients up at night.

As I reflect on this issue, I have come up with four primary observations:

Get Objective Advice

It is extremely difficult to solve complex problems by yourself. It is vitally important when you have significant financial issues keeping you up at night that you speak to someone who can provide objective financial advice (your accountant, financial planner, investment advisor or a close friend). When one experiences a significant financial issue, it has been my experience that he/she loses perspective and fails to see the forest for the trees. Speaking to someone you trust implicitly who knows both your financial situation and your personality provides you with a detached, non-emotional perspective on your financial issues.

It Takes Time

Most financial problems are not immediately solvable. From excessive debt, to funding your child's education, to fluctuations in foreign currency causing the cost of goods in your business to rise dramatically, the sad truth is that time is often the only answer and the sooner that fact is accepted, the better. Whether it is the slow process of putting an actionable debt reduction budget in place, the many years it takes to fund a RESP, or cutting back on costs to offset foreign currency fluctuations and/or wait out a reversal in those rates, in each case, time is the only answer.

Some Financial Problems Don’t Have A Solution

Thankfully these instances have been few and far between, but the saddest moments in my career have been those where a financial problem was not solvable. The typical situation where this occurs is when a once successful business is careening towards bankruptcy because of technological changes, competitors outsourcing to a low cost country or just plain business mismanagement. These situations are very complex. Often the person is a long-time client whom I have gotten to know on a personal basis and I have to tell them they need to close their business (this would be last resort advice after all other alternatives have been exhausted).

This advice often leads to confrontation because (a) the client’s self-worth and net-worth often revolve around their business and (b) the client’s own solution is typically to throw more money at the problem; while I am trying to prevent throwing good money after bad to ensure they still have resources once the business is closed.

In the end, all a financial advisor can hope for is that the client eventually realizes their situation is not fixable and begrudgingly, takes your advice and conserves their remaining resources.

The Moment of Absolute Certainty Never Arises

One of my favourite quotes is from a poem by S.H. Payer’s “Live Each Day to the Fullest”. It goes as follows:

When you are faced with decision,
make that decision as wisely as possible -then forget it.
The moment of absolute certainty never arrives.

Think about that last line, “The moment of absolute certainty never arrives”. Whether a decision is financial or personal, it has been my experience that often, people are frozen in their tracks with indecision and cannot take action on their issue until they feel they have found that moment of certainty. However, we all know that moment very rarely identifies itself or if it does, often it is not in a timely manner. That is why I love this quote. Time constraints often force us to deal with an issue before there is certainty and those people who make the best decision under the circumstances and move forward without regret or second guessing themselves are best equipped to solve and deal with their issues, even if the decision does not turn out to be correct.

Today’s blog is not technically related to tax, business or investment advice but sometimes general life advice is worth far more than income tax or financial advice and is definitely cheaper :).

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.