The recent market turbulence has left many investors feeling uneasy about their financial futures. While traditional strategies like ‘stay the course’ remain valid, there are additional tactics investors can employ to mitigate the impact of declining retirement and investment balances. This article explores three effective strategies tailored for retirees, wealth accumulators, and high earners.
Retirees: Temporarily Halt Systematic Withdrawal Plans
Retirees often rely on systematic withdrawal plans (SWPs) for monthly income, where a predetermined amount from mutual fund investments is liquidated and transferred into interest-bearing accounts. However, during market downturns, retirees must be cautious of ‘reverse dollar-cost averaging,’ where lower mutual fund values require selling more units to meet income needs. This reduces the number of units available for future gains when markets recover. It is advisable for retirees to pause these programs temporarily and consider alternative cash flow methods.
One approach is to tap into bond investments, as evidenced by the Bloomberg US Aggregate Bond Index showing positive returns through April 2025. By doing so, stock investments have more time to rebound. Although this may seem counterintuitive by increasing portfolio risk, it is a short-term measure to avoid selling stocks at their lowest values. Should markets decline further, more drastic actions may be necessary to maintain sustainable cash flow.
Wealth Accumulators: Selective Roth Conversions
For those saving for retirement, especially with traditional IRAs or employer-sponsored plans like 401(k)s or 403(b)s, the current market dip presents an opportunity for Roth conversions. These conversions incur immediate tax liabilities but offer tax-free growth potential. Investors can choose specific securities to convert, focusing on those with significant losses to maximize future gains.
For example, investors with aggressive risk profiles and lengthy time horizons may convert stock positions with steep declines, incurring taxes on their reduced values while positioning for tax-free growth. Similarly, participants in employer-sponsored plans can convert underperforming mutual funds while retaining conservative investments in pre-tax accounts. However, investors should proceed cautiously, as these transactions are irreversible and could result in higher marginal tax rates.
High Earners: Year-Round Tax-Loss Harvesting
High-income investors face steep tax rates, making tax management crucial. A valuable strategy is tax-loss harvesting, typically an end-of-year activity but advisable throughout the year. By selling investments below their purchase price, investors can offset capital gains and, if losses exceed gains, offset up to $3,000 of ordinary income annually, with remaining losses carried forward.
To avoid ‘wash sale’ rules, which disallow repurchase of the same security within 30 days, investors can ‘double up’ by buying an additional lot, waiting 30 days, then selling the original. This method helps maintain market exposure while capitalizing on tax benefits. Tax-loss harvesting is a formidable tool for optimizing tax efficiency.
These strategies demonstrate how investors can leverage market volatility to their advantage. As financial circumstances evolve, consulting tax and legal advisors to tailor these approaches to individual situations is wise.
Note: This article is inspired by content from https://www.kiplinger.com/retirement/financial-planning-strategies-for-when-markets-fall. It has been rephrased for originality. Images are credited to the original source.