Retiring in the face of a volatile stock market can be concerning. Whether you just retired or are planning to make the jump in a few years, seeing your account balances decline could make you question the timing of this decision. While some factors are out of your control, there are steps you can take to ensure a successful retirement. In this article we will go over some issues to consider and potential strategies to utilize when retiring in a down market.
Revisit Your Plan
As you near retirement, hopefully you have put together a plan around how you will generate income in retirement to support your lifestyle. This income is likely a combination of withdrawals from your investments, social security payments, and potentially pension payments or other sources of income. This plan should take into consideration the volatility that stock investors are likely to experience over time.
As part of revisiting your plan, you can see if any change in your withdrawal rate is warranted. To ensure that retirees do not run out of money, some plans will set up spending rules that adjust for changes in the value of the portfolio. You will also want to review your portfolio to make sure it is still positioned appropriately. This may be an opportune time to rebalance your portfolio and revisit your asset location strategy. You will also want to make sure you have at least a few years worth of spending in cash or other safer assets.
Examine Your Spending
As you transition to retirement, this is a good time to review your spending. Knowing where your dollars are going allows you to make sure your money is being used for things that are important to you and isn’t going to any unnecessary or unknown items. A market decline can be an opportunity to scale back your spending or possibly delay big purchases.
Look for Tax Opportunities
Potential tax planning opportunities are one silver lining in a stock market decline are. These can include Roth conversions, tax-loss harvesting, and gifting assets.
With the markets down, you may consider a Roth conversion, where you convert assets from a traditional IRA to a Roth IRA while they are at depressed values. As these assets rebound, the growth in the Roth IRA account is tax-free.
Investors may also want to sell investments that are at a loss, also known as tax-loss harvesting. Depending on your overall financial picture, this may allow you to offset gains elsewhere and potentially offset some of your ordinary income taxes.
Down markets can also present an opportunity to gift assets while their value is depressed. This can reduce the potential gift and estate taxes due.
Take a Step Back
Your retirement could last 30+ years and during that time it is highly likely that you will experience large swings in the stock market. Since 1950, there have been 12 bear markets (declines of 20%+), an average of one every six years. With that in mind, this volatility should not be surprising but seen as a part of being a stock market investor. This volatility is the risk that stock investors accept to allow them to generate strong returns over the long run.
Seeing the markets decline around the start of your retirement can be unsettling. When this happens, it is a good time to review your overall financial plan and see if any changes need to be made to your retirement income strategy or your portfolio. This can also be a good time to look at tax planning opportunities that arise during down markets. If you would like to talk with a financial planner about developing a plan for retirement, please schedule a call with us here.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.