As the coronavirus crisis shakes our financial system and investment markets, you might be wondering how your finances will survive the uncertainty.
If you're retiring soon, Wall Street's recent performance may be especially troubling. While it's reasonable to worry, know this: Well-diversified retirement plans are built to endure economic turmoil. So, the last thing you should do is panic.
That’s easier said than done when you see sharp losses. But these tips can help:
If you need cash, tap stable funds
Right now — and maybe for the next year or so — be extra careful when withdrawing from retirement accounts. Fortunately, you can choose which investments to sell. During times like this, it may be best to withdraw money from fixed-income assets like bonds (versus stocks). You’ll need stocks for growth throughout retirement; this gives them more time to recover.
Consider a Roth IRA conversion
If you have all your retirement savings in a traditional IRA or workplace plan like a 401(k), consider converting some of that money to a Roth IRA. Essentially this means selling investments from your traditional account and buying the same investments in a Roth account. Unlike a traditional account, Roth contributions are taxed going in instead of when you take the money out. As a result, the conversion is treated as a taxable event.
This offers two advantages, particularly if you sell investments that have lost value:
First, even though you'll owe tax on money you move out of a traditional account and into a Roth, you may see bigger tax benefits in the future. That’s because Roth withdrawals will be tax free if you’ve held the account at least five years and other criteria is met.
Next, moving to a Roth can mean you may be able to "buy low" now and gain more over time. (That’s not a guarantee, of course. Your new account’s value might not rise by the time you need it to in retirement.)
Retire (and withdraw) later
Working longer may not be part of your plan. But if you can keep earning income, it’s worth considering. For one, pushing back retirement (and withdrawals) allows you to push off taking Social Security. The plus: For each year you hold off on starting your federal benefit (until age 70), your monthly check increases by 8% — for life.
Working longer also keeps your retirement accounts intact, so your fallen investments can eventually recover. And it gives you more time to add to those investments (at potentially lower prices) — with fewer retirement years to save for.
Even part-time work can help you get by as your accounts weather this storm. If you'd prefer a hard close on your current career, consider doing something you've never tried. Many companies are hiring part-time workers right now, so think about how your skills might translate to the current crisis. (Even so, consider the added health risks of certain jobs, like delivery driver, especially if you’re older. For example, many states have asked retired health care workers to pitch in via remote telemedicine jobs.)
If you're over 72 and worried about required minimum distributions (RMDs) from your retirement accounts, don't be: The $2 trillion federal stimulus law (CARES Act) says retirees can skip their 2020 withdrawals. That gives your accounts another year to recover and enables you to transfer money to a Roth IRA.
Ask the professionals
Everyone's financial situation is unique, so engage a team of professionals to help you plan your path forward.
Ask a tax advisor about whether a Roth account make sense for you. And talk to a financial advisor about sound investment choices in a bear market. "Buy low/sell high" is a fine mantra, but stay smart and seek professional advice for your portfolio.
During a crisis, it's important not to let emotions control your investment decisions. By giving it time and playing it smart, you can at least temper — and very likely recover — your losses so you can live comfortably throughout retirement.