Don’t Panic and 4 Other Quick Reminders for an Economic Downturn
Stocks slid on Thursday, June 16 to levels not seen since 2020. It can feel disconcerting to watch a portion of your nest egg evaporate. However, it is important to keep this (and any) financial news in perspective. Things will get better.
“Everything will be okay in the end. If it is not okay, it is not the end.”
Here are 5 quick reminders for what to do in an economic downturn:
1. Don’t Panic
Yes. The economic news is a bit distressing. However, don’t panic. Do not sell. Stock market crashes, bear markets, and corrections are all normal.
Historically, those who remain calm and stay the course with their investments are rewarded with a big bounce in due course.
On the NewRetirement Facebook group, members are calm and relatively unphased by the economy.
“I wasn’t concerned when we had the three recessions since I retired in 1999, so I’m certainly not concerned about the current bear market!”
The percentage of loss in this cycle is nowhere near the great percentage of gains from the past few years. Still way ahead of where I was expecting to be at this time. This too will soon pass.
Unfortunately, many retail investors (regular people who invest their money themselves) get nervous as prices trend downward. It is not uncommon to hear stories of people getting nervous and selling at the market bottom and then not re-investing, missing the market recovery. This is the single biggest reason that retail investors typically lag overall market performance.
We can not predict what will happen, but acting calmly is bound to serve you well. Do not panic is the first rule of protecting your long term financial health in a downward trending market.
If you experience losses in retirement investments, you are not necessarily in the poor house, especially if you consider alternate sources of wealth before selling stocks that are down.
Mary and Terry recommend working longer or going back to work to bridge through the economic downturn:
“A lot of people will be retiring a few years later than they had planned.”
A side gig is helping me and it will be something to keep the cash flowing for years to come once I retire. It’s a new and improved way of getting into Real Estate without all the headaches.
You can work longer, borrow from your home equity, or assess some of the other best and worst sources of emergency money.
A Roth Conversion is when you transfer money from a traditional IRA or 401k to a Roth IRA. When you do this, you pay income taxes on the amount you convert. However, once those assets are in the Roth, they grow tax free, and you do not pay taxes on the withdrawals you make in retirement.
So, doing the conversion when the value of your portfolio is down and you think there is potential for long term growth can be a great idea.
Model a Roth Conversion in the NewRetirement Planner.
David and Larry are almost excited about the economy and the prospect of Roth conversions:
“As a retiree, this presents one of the best opportunities for us all in that tax rates are at an all time low and asset class (Stocks, bonds, Bitcoin) values are at lows. That means no matter what you do in a ROTH conversion, you will be able to take advantage of this to your advantage.
There should be no reason to fear if you have 5-10 years of living expenses in assets that are not affected by the market like a Fixed Annuity or MYGA. You will still get gains and if you structure your withdrawal fees to match your annual living expenses or go longer than 7-10 years, you should have no worries whatsoever.
From my perspective, I want the market to go much lower so I pay less than I expected in taxes on my conversions and then go back up in five years when I’m 59.5 so I can tap my portfolio as it rises tax-free.
I’ve been retired for 10 years and have been on this roller coaster many times. It’s never good to watch it happen but I’m not real concerned about the market. I’m using this opportunity for some tax loss harvesting and Roth conversions.
It is almost certain that you are much better off in a market downturn if you have already created a highly detailed and completely personalized retirement plan that can easily be updated when things change.
NewRetirement members report less worry about the current economy:
I always planned for market drops and increased inflation. Always seemed sensible to me to account for those in my plan. Now if it last for many years that will be a different story.
By design, we have enough cash to see us through to 2025. And have suspended all distributions/dividends from brokerage accounts.
We have a financial advisor & met with him at the beginning of the downturn. We have our budget. We have our plan. We’re ignoring the market & just moving forward.
Don’t have a plan? Now is the time. The NewRetirement Planner will help you sleep better at night. You’ll make better decisions and be on track to the future you want.
A plan enables you to quickly run different scenarios and really assess the impact to your near and long term financial health.
Need extra support? Set up a free discovery meeting with a Certified Financial Planners (CFP®) . Our CFP®s offer a flat-fee service that costs ~50% less than the competition. And our hybrid planning approach puts you in the driver seat as we collaborate with you to provide strategies to help you achieve your goals.
Now may be the time to make some minor adjustments to your future projections. You may want to raise your inflation assumptions slightly, lower your anticipated rates of return a bit, and maybe even look at your spending.
Herb is adjusting his inflation assumptions.
“I have adjusted my inflation assumptions in the calculator [the NewRetirement Planner] as average inflation from 1970 until now is at 3.8% annual. I am not retired yet but plan to be in a year. Spending adjustments are to be expected as conditions change.”
Joe and Kelly are reallocating.
If you do not need the money now then selling will just lock in your losses. If you’re not happy with your portfolio (sounds as if you have maybe too much risk) now is a great time to rearrange it as everything is down and you get to an allocation you can be more comfortable with.
I’m getting out of a lot of growth/tech positions and some dividend stocks that won’t compete well with higher yielding bonds. I’m looking at placing my tech and growth positions into some of the CEFs in the science and tech fields. I’m also looking more closely at bonds now that yields are better. Probably another 3-4 months before I go long on those.
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