Some Tips to Effectively Navigate Through the Current Volatility
The current market and economic conditions are examples of why I stress financial planning as the cornerstone of any investment decision, retirement plan and business continuity strategy. Trying to time the market is nearly impossible and potentially leads to substantially lower long-term returns than remaining in the market. I can suggest certain strategies you may be able to take advantage of depending on your situation. Here are some ideas to consider:
Convert traditional IRA to Roth IRA
There are several reasons to think about this idea now as a part of the long-term tax planning* of your retirement income: taxes are historically low and can be higher in the future; potential market losses reduce taxes due upon conversion; some taxpayers may find themselves in a temporarily low tax bracket.
Increase current 401k/403b and IRA/Roth IRA contributions
Increasing your regular contributions to “buy low”, when the market is down, create opportunities to buy more shares and potentially increase tax-deferred (traditional 401k/403b and traditional IRA) or tax- free growth (Roth 401k/403b and Roth IRA).
Delay taking required minimum distributions (RMDs)
CARES Act changed the minimum required distributions (RMD) rule. RMDs have been waived for 2020. This waiver includes RMDs for account holders of IRAs (including inherited IRAs), 401(k)s, 403(b)s and other retirement plans. It includes original account owners over 70½ (or 72, under the SECURE Act), original account owners who turned 70½ in 2019 (if it was their first distribution and they have not taken the distribution by April 1), and inherited-IRA beneficiaries of any age. RMD amounts are based on the value of the account at the end of the previous year. Because most accounts have seen a steep decline in 2020, the amount of the required withdrawal would have been a much larger percentage of a account’s current value. The new law lets retirees keep that money in their accounts, potentially allowing their accounts to increase or regain their values when the economy turns around – thus avoiding potential losses.
Begin dollar cost averaging cash earmarked for long-term investment**
Dollar-cost averaging can be described as a long-term approach to systematically investing either a fixed amount of currency or acquiring a fixed number of share units at predetermined intervals to slowly build a position in a security. Investors continue to buy shares over time regardless of short-term price movements. For example, an equal dollar amount is invested each month, regardless of the direction of the stock market or the individual security. The average cost of the shares ends up lower than it would have been buying all shares at once. An investor is buying fewer shares when they are up and more shares when they are down. This approach let investor get a lower average weighted cost and a better upside potential in the long run for the investment. This strategy can be used for both retirement and non-retirement investments.
My clients and I talk about “what-ifs” in life, including market volatility and economic downturn. As part of the planning process, I identify their investment objectives and the appropriate amount of risks they are willing to take to achieve their goals. We include risk management strategies. A change in markets is usually not cause for a directional change in our long-term plans.
If you would like to learn more about the value of long-term financial planning and long-term approach to investing, please do not hesitate to reach out. I will be happy to talk to you.
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* Dee Turkalj is not in the business of providing tax advice. Please contact your tax advisor with all questions regarding how anything discussed above may affect your tax situation.
** Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Please consider your financial ability to continue securities purchases through low price level periods.