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En español | The coronavirus-driven stock market plunge was a punch in the gut to retirees who use their retirement savings to pay some of their bills. But a bear market doesn't have to deliver a knockout blow. Nest eggs that suffer cracks due to sinking markets aren't forever broken.
Whether you're looking for ways to withdraw from your savings without further depleting a mutual stock fund, or are searching for new ways to free up much-needed income, these suggestions may help your portfolio recover more quickly from the lightning bear market that clawed investors in March. Consider all your options before you take any actions; you may want to talk to a tax or financial advisor as well.
"The starting point is to review your overall finances to determine what options you have,” advises Diahann Lassus, president and chief investment officer at Lassus Wherley. “The financial markets will recover over time, so anything you can do to slow down withdrawals will help you recover from the downturn.”
Increasing your cash flow
"Many retirees find themselves in a situation where the bills continue to roll in while the markets have shrunken the size of their nest egg, even if only for the short term,” says Kelly Waller, a financial adviser at Wells Fargo Advisors. If you can increase your cash flow, even temporarily, you can still pay your bills and avoid taking withdrawals when stock prices are low.
1. Spend less
You've heard that advice from any number of money scolds. But it's a lot easier to follow in our new shelter-at-home world. After all, if you're hunkered down at home, you're not spending money on dinner out or happy-hour drinks, or tickets to a sporting event or concert. Gas prices are down, and you're not filling your tank often. Every dollar not spent is a dollar that can be used for other things.
"With social distancing, most people can't spend as much as they did in pre-COVID-19 days,” says Anthony Ogorek, president and founder of Ogorek Wealth Management. “You may be surprised at how little you need to draw [from your retirement account] on a temporary basis."
2. Use your COVID-19 relief
If you're getting a 15 percent rebate from your auto insurer because of a drop in accidents, reduce the withdrawal from your 401(k) or retirement plan by that amount, Ogorek recommends. Similarly, if you get a coronavirus relief check, reduce your withdrawal by that amount.
If you have student loans, remember that under the CARES Act, no payments are required between March 13, 2020, and Sept. 30, 2020, on federal student loans that the U.S. Department of Education owns. In addition, the interest on these loans will automatically drop to zero percent between March 13, 2020, and Sept. 30, 2020. (Private student loans and federal student loans that the Education Department doesn't own aren't covered by the CARES Act.)
3. Go for the gold
One asset class that's been rising in value during these turbulent times is gold. The yellow metal has lived up to its reputation as a haven during a crisis. Indeed, an ounce of gold has gone from around $1,525 per ounce at the start of the year to more than $1,700 per ounce. That gain of around 12 percent is better than the 12 percent decline suffered by the S&P 500 stock index.
The takeaway: This may be the right moment to turn that gold watch into green dollars, Ogorek says. “Gold prices are up. If you have physical gold in the form of jewelry or coins, this may be a good time to cash them in.” Obviously, you don't want to sell items that are of great sentimental value. But if you have gold pieces that you don't want, consider getting some cash for them. The same is true for silver, which sells for about $15 per ounce, although it's down nearly $2 since the first of the year. If it's not sparking joy, let it generate cash. Get a couple of quotes for your gold or silver from reputable dealers to make sure you get the best price.
4. Finance can't-wait major purchases
Let's say the refrigerator conks out or your car's transmission stops working. Normally, you'd pay for major appliance replacements or car repairs with cash. But doing so now will starve you of the dollars needed for other things.
One solution to consider is taking advantage of lower borrowing costs or a zero percent credit card offer, Waller suggests, noting that “it can buy someone a bit of time.” Waller points out that financial markets tend to show positive returns six to 12 months after a low in a major correction.
"Taking out debt may seem contrary to conservative investors,” Waller adds. “But spreading payments out at low rates may be an appropriate move for some investors who need to make larger purchases that cannot be delayed.”
5. Reduce withdrawals
If you've increased your income a bit, you can reduce your withdrawals a bit. Taking any withdrawals from stocks or stock mutual funds can be a bad idea in a bear market, because withdrawals amplify your losses. Suppose the S&P 500 ended the year with a 20 percent decline, and at the end of the year your $100,000 portfolio was worth just $80,000 before taking distributions. If you had taken out $4,000 during the year, your ending balance would be $76,000, a 24 percent decline. You'd need to earn nearly 32 percent to get back to $100,000.
If you can afford it, withdraw less. “Investors may need to drop their draw rate by 1 percentage point to 1.5 percentage points until they can rebuild their investment base,” Ogorek says.
A more sophisticated solution is to take your withdrawals from assets other than stocks. Most people have a mixture of stock, bond and money market mutual funds in their portfolio. You could take withdrawals from your money fund or bond fund, instead of your stock fund, when the market declines. Eventually, you'd have to refill those money market or bond accounts, but it would be better than taking withdrawals from stock funds in a bear market.
If you're getting checks automatically from a retirement account, consider putting a hold on them, if you can afford to. This will allow you to choose when you're selling your shares.
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6. Don't reinvest dividends
If you regularly reinvest stock dividends you earn back into your retirement fund, stop doing this until the crisis passes, Lassus advises. This strategy will allow you to funnel needed income to a money market account and help you avoid having to sell stocks in funds that are worth a lot less than they were at the start of the year. Says Lassus: “These distributions can be … used to build cash to supplement income.”
7. Lighten up on losers
If you invest in individual stocks, don't make the mistake of jettisoning the strongest ones in your portfolio, says Jeff Winn, managing partner at International Assets Advisory. A better strategy is to trim your laggards. “Pick on the weaker holdings and hold the stronger ones,” he recommends. “Avoid the mistake of selling the winners because you're afraid to sell the losers and accept defeat. Arrogance like that is expensive.” Be sure to check the brokerage costs of selling your stocks, and remember that if you are in a taxable account, you may have to pay capital gains taxes.
If your stocks are in a taxable brokerage account and you sell a stock or mutual fund at a loss, you get some comfort from Uncle Sam. You can use your losses to offset capital gains you have that tax year and deduct $3,000 of losses from your income if you have excess losses. You can carry any other losses forward into the next tax year.
8. Rebalance but don't reload
If your planned asset mix is 50 percent stocks and 50 percent bonds, your stock portion likely shrank during the sell-off. You might have 40 percent stocks and 60 percent bonds. So now's a good time to sell assets that went up, such as bonds, and put the proceeds back into stocks to get back to your target asset allocation, Winn advises. This type of strategy forces you to buy low and sell high.
But there's a caveat: Don't rebalance and make your portfolio riskier by increasing your allocation to stocks to more than it was before the bear market. Sure, your portfolio might rebound more strongly with a higher percentage of stocks, but recall how bad you felt when you watched it tumble. “[Investors] need to be careful and truly rebalance — not create a directional bet on a recovery,” Winn says. “In other words, rebalance, don't overweight.”
And one more thing: There's not necessarily a quick fix to repair a portfolio after a bear market.
There are no “rabbit-out-of-the-hat magic tricks,” Winn says. “In my opinion, they don't exist. … The closest thing to a real fix is time and a balanced [portfolio], not a hot stock tip or a too-good-to-be-true [investment] product.”