2020 really has been one turbulent year and, to be honest, it still feels a bit like we’re just settling in for the ride. The markets weren’t just rattled, they were shook. Let’s be real – these last few months left the crisis of 2007/8 looking quaint in comparison, right?
You likely saw the value of your portfolio plummet, then grow incredibly rapidly, then shrink a bit again, then plateau for a while, then decrease… It’s certainly been bumpy.
Although businesses are reopening and life is going slowly back to some kind of normal, it’s certainly not the normal we once knew and the path ahead looks uncertain. But even though it’s a truly exceptional time, the markets frequently wobble and your decisions now can still be guided by the same kind of decisions you’ve made before.
To help your finances recover after a downturn, you’re going to need patience, a bit of grit and determination, but most importantly, sticking to the same principles as always.
Stay Calm – Or Greed and Fear Will Cost You Dearly
Normally I’d make you wait until the end of the article before delivering the key bit of wisdom, but this time, I’m going to lead with it. And that’s because it should always be front and center in your investment planning. You should already know this.
So here it is. Don’t try and time the market. Don’t. You can’t. It might be tempting – you might feel like you have a gut instinct for the way the value of stocks and shares are heading but if there’s one principle to employ in your financial management plan, it’s this. Research has shown that up to 90% of investors will lose money investing in stocks.
Why? It takes a very cool head to succeed. Emotions are likely to lead the decision-making process. Decisions are made through greed or fear, and neither are bedfellows with rational thinking.
It can end up very costly – each transaction is going to cost you, and you may well miss out on some extremely good days as the markets surge upwards. Have a look at this graph to show how missing out on just 20 good days over a decade can have a negative impact on your portfolio value.
How to Help Your Finances Recover After a Downturn
Whatever stage you’re at – preparing for retirement or there already – a significant decrease in the value of your savings will be frightening. But please remember that there are always cycles to the market anyway and we can predict that during everybody’s retirement, there’s likely to be at least two market crashes.
So the key is to make your investments as diverse as possible, and create as resilient a plan as possible. And of course, we can help with this.
Then save as proactively as possible. Take a look at these steps you can take now, depending on your age and life stage, to protect your retirement savings and help your finances recover.
Oh, you’re a spring chicken, aren’t you? Lucky you! You’ve probably got ten or fifteen years yet until retirement. So now is the time to maximise your retirement contributions. After the age of 50, you can make supplemental contributions to your 401k.
Also, consider your other available options. If you have a high-deductible healthcare plan, you’re likely to be eligible for a health savings account and this one has significant tax advantages. It means you’ll retire with a pot of money specially set aside for medical purposes, and this can have huge benefits.
So now you can officially retire, and take penalty-free distributions from your 401k. However, if you can keep working, we’d recommend it. You’ll earn more in the meantime which will mean your 401k is going to grow even further, and your retirement savings will then last longer or be more rewarding during retirement.
If you’ve got an HSA, from age 55 you can start making supplemental savings here too as you’re allowed to add an extra $1,000 per year.
You can now take distributions from your retirement accounts without any tax penalties. If you take money from your HSA, they’ll be tax-free if they’re for medical expenses. Otherwise, until you’re 65 they’ll be subject to income tax and a 20% withdrawal penalty.
Now, just because you can, doesn’t necessarily mean you should. Money left invested is much more likely to grow over time than money shunted around, and you’ll probably end up with a much healthier retirement pot if you delay taking distributions. Talk to an advisor if you’d like some advice on the pros and cons of taking distributions now.
You can now begin to receive Social Security payments, but it pays to delay. If you start to claim at age 62, you’ll receive 75% of the amount you’d receive at full retirement age. Use this planner to see how the amount you receive changes month by month between the age of 62 and 66, for either you or your spouse.
IRA or Roth?
You can also consider a Roth conversion, which may well have tax advantages for you when it comes to taking withdrawals. If you’re going to end up in a higher tax bracket after you retire, this conversion is going to be a good move, as withdrawals from it during retirement are going to be tax-free.
If you’re looking at retirement imminently, then the Covid-19 pandemic could have had just this effect on your tax situation if it’s changed your income levels this year.
Earn More, Save More
So you can help your finances recover by sticking it out a little – increasing your savings as far as possible, and planning to delay taking either Social Security payments or your 401k distributions.
Also, don’t forget that accelerating your income whilst you’re able to will help your finances recover as well. If you can boost your income in any way whilst remaining in your current income tax bracket, you’re going to earn more in comparison to your tax bill. In turn, that could mean you could comfortably afford to save more for your retirement.
With the government spending that’s accompanied the recovery from the Covid-19 crisis, it’s almost guaranteed that income taxes are going to increase significantly. If you choose to proceed with a Roth conversion, those higher income taxes won’t affect any future withdrawals.
Resist Impulsive Decisions
It can be incredibly difficult to see your savings affected by a market crash like the one we’ve just seen But sit tight. Don’t make any drastic decisions until you’ve had a chat with your financial advisor.
To make sure your portfolio is as resilient as possible, and to make changes that can help your finances recover, make an appointment to have a chat with us. We’ll be really happy to help.