Expect volatility, but avoid letting the headlines alter your plans.
Recent headlines have added volatility to the markets. There will always be new headlines, and any of them could mean turbulence for Wall Street.
As an investor and retirement saver, how much will this turmoil matter to you in the long run? Not as much as you may expect. There are many good reasons to remain in the market rather than attempting to intuit or guess when and where big shifts in fortune may arrive.
What is market timing? Michael Tanney, one of the directors at Magnus Financial Group, puts it plainly: “Market timing doesn't work […] Every bear market has historically given way to a bull market […] No one can predict the timing of these moments.” Market timing is the use of predictive tools and techniques to predict how the market may move and make investments accordingly.
When you work with your trusted financial professional and cultivate a financial strategy, your need to factor in market timing diminishes. You also don’t need to sit still if you have concerns. Instead, you have a strategy that is based on your goals, risk aversion, and time horizon. This balanced approach means that you won’t need to make hurried decisions when volatility arises.
There may well be a situation in which you may need to adjust your strategy, but it’s also possible that snap judgements might cause you to undercut yourself. The market reacts to headlines, but it’s just as common that quick dips might see fast relief.
Remember that many investors come to regret emotional decisions. The average recovery time for bear markets (meaning a downward swing of 20% or more), where equities return to bull market levels? About 3.2 years (measuring each recovery since 1900). For that reason, investing with the longer term in mind, with periodic and carefully considered rebalancing (alongside your trusted financial professional), may allow you to better weather headline-induced peaks and valleys.
Breaking news should not dissuade you from pursuing your long-term objectives. The stock market is always dynamic. Episodes of upward and downward volatility come and go. A wise investor acknowledges that downturns are expected and has patience when they do. Decisions made during market turbulence can backfire. While some of these ups and downs may be significant enough to signal a change in your asset allocation, they need not change the fundamentals of your investment policy.
Not making a move may not always be the best move to make.
A decision not made may have financial consequences. Sometimes, we fall prey to a kind of money paralysis, in which financial indecision is regarded as a form of “safety.”
Retirement seems to heighten this tendency. If you are single and retired, you may be fearful of drawing down your retirement savings too soon or assuming investment risks. Memories of this-or-that market downturn may linger.
Even so, “paralysis by analysis,” or simple hesitation, may cost you in the long run. Your retirement may last much longer than you presume it will – perhaps, 30 or 40 years – and maintaining your standard of living could require some growth investing. As much as you may want to stay out of stocks and funds, their returns often exceed the rate of inflation, which is important. Creeping inflation can reduce your quality of life in retirement by subtly reducing your purchasing power over time.
Retirement calls for distributing some of your accumulated assets. Some new retirees are reluctant to do this, even when some of that money has been set aside for goals or dreams. Frugality suddenly reigns: a long vacation, a new car to replace an old one, or a kitchen remodel may be seen as extravagances.
We cannot control how long we will live, how much money we will need in the future, or how well the economy will perform next year or ten years on. There comes a point where you must live for today. Pinching pennies in retirement with the idea that the great bulk of your savings is for “someday” can weigh on your psyche. What does your retirement dream amount to if it is unlived?
If you fear outliving your money, remember that certain investing approaches offer you the potential to generate a larger retirement fund for yourself. If you seek more retirement income, ask a financial professional about ways to try and arrange it – there are multiple options, and some involve relatively little risk to principal.
There is one situation where waiting may be wise. If you wait to file for Social Security until age 65 or 70, your monthly Social Security benefit will be larger than if you had filed earlier in life. Why? Social Security has what it calls “full retirement age,” or FRA – the age at which you can receive the full Social Security benefit you are entitled to, based on your earnings record.
If you were born in 1960 or later, your FRA is 67. If you were born during 1954-59, your FRA is 66 (and it gradually increases toward 67, depending on your birth year within that date range).
Most retirees claim Social Security benefits in their early sixties (eligibility begins at age 62). In a way, they are shortchanging themselves by doing so. Because they are claiming benefits before reaching their FRA, their monthly benefit is smaller than it would be at age 66 or 67 – in fact, it may be as much as 30% smaller. On the other hand, those who claim after their FRA at age 68, 69, or 70 receive monthly benefits that are larger than they would get at age 66 or 67. Roughly speaking, for every year you delay claiming benefits beyond your FRA, you will increase the size of your monthly benefit payment by around 8%.
Your approach to investing has been created with your retirement in mind. A practical outlook on investing and decisions to work longer or claim Social Security later can potentially help you amass and receive more money in the future.
What are your options? What are the benefits?
If you own an Individual Retirement Account (IRA), perhaps you have heard about Roth IRA conversions. Converting your traditional IRA to a Roth IRA can make a lot of sense depending on your situation. But remember, consulting with your financial advisor before making financial decisions is never a bad idea. Ready to learn more? Read on.
Why go Roth? There is a belief behind every Roth IRA conversion that future income tax rates will be higher. If you are one of the believers, then you may be compelled to convert. After all, once you are age 59½ and have had your Roth IRA open for at least five calendar years, withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. You can withdraw your Roth IRA contributions tax free and penalty free at any time.
As the law is currently written, you never have to make mandatory withdrawals from a Roth IRA, and if your income permits, you can make contributions to a Roth IRA as long as you live.
Currently, if your filing status is married and your adjusted gross income (AGI) is $193,000 or less you can contribute a maximum of $6,000 to your Roth IRA – $7,000 if you’re age 50 or older. The maximum contribution is also available to single filers with an AGI of $122,000 or less. Depending on how high your AGI is, the amount you are able to contribute may change. Consult with your financial advisor to discuss the latest limitations and potential contributions for your situation.
Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.
A Roth IRA conversion is a one-time taxable event. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could send you into a higher income tax bracket in the year when the conversion occurs.
If you are nearing retirement age, going Roth may not be worth it. If you convert a large traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion.
In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.
On the other hand, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.
You could choose to “have it both ways.” As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.
If you do go Roth, your heirs may receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, the distributions of inherited assets from a traditional IRA are routinely taxed.
Supporting family can put a crimp in your strategy.
Families are one of the great joys in life, and part of the love you show to your family is making sure that their basic needs are met. While that’s only to be expected from birth through the high school years, many households are helping their offspring well into their twenties and beyond.
However, you may have concerns that your adult children have come to depend on you too much. On the other hand, you may have given more than you planned, to the point where you are dipping into your retirement savings. If that’s the case, you might want to think about how involved you want to be in your children’s financial needs.
How common is this? An April 2019 Bankrate.com survey of 2,500 Americans indicated 51% of respondents saying that they helped adult children, aged 18 and up, either “somewhat” or “a lot” – specifically drawing from their retirement savings.
While every household has their reasons to help their adult children, it’s important to keep your retirement strategy on track. It’s not only a matter of replacing the money that you are taking out of retirement accounts or investments, but you’re also losing time. The growth that may occur with investments or compound interest is a phenomenon that happens over decades. In that situation, you can replace the money you took out, but you can’t replace its potential.
Communication is a good first step. Beyond your own interest, there’s also the young adult in your life to consider. Helping solve a short-term financial problem is one thing, but you also want to offer them an advantage that may help them face a future money squeeze on their own.
It’s also helpful to keep in mind that not all the expenses young adults are incurring are wasteful. CBS News reports that student loan payments may be $400 per month, describing the amount as “typical.” When you factor in rent, utilities, and basic personal expenses, that underlines why the habit of careful budgeting can be so crucial for someone just joining the workforce.
For that reason, financial education can also be a great gift. There are numerous resources that can help with learning how to budget: books, classes, apps, and more. If you aren’t sure what would work best for the young adult in your life, you can ask your trusted financial advisor for some tips. The skills and knowledge needed to handle money is not instinctual; helping your adult children learn how to better control their financial lives may offer them the confidence to succeed and navigate rough money issues without you, in time.