As Kiplinger readers know, the investment landscape changed overnight with the recent outbreak of the COVID-19 pandemic and its devastating impact on vast swaths of the global economy. As stock prices plunged and interest rates fell to historic lows, many Americans saw their investment portfolios shrink dramatically — faster, perhaps, than in any other crisis in U.S. history.
For retirees looking for a few ways to manage through the turmoil, here are some ideas that may help.
Embrace Social Security (and wait if you can)
For the vast majority of retired Americans, IRAs and other investments don’t account for all of their wealth. Social Security is a key source of retirement income, and, unlike stock dividends or yields on certificates of deposit, it does not go down. If you’re already claiming Social Security benefits, enjoy them — and take comfort in knowing they won’t shrink. If you haven’t yet started to claim benefits and can afford to wait, consider doing so until age 70. Social Security payouts increase approximately 8% a year for every year you wait to start claiming them. That’s a return conservative investments like bank CDs can’t begin to match right now.
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Convert some of your traditional IRA dollars to Roth IRA dollars
If you do this now, while the value of your IRA is depressed, you may pay less in federal income taxes than you will if you make the conversion after your account has rebounded. Once your money is in a Roth IRA, all subsequent withdrawals will be tax free as long as certain requirements are met. To convert efficiently, consult your tax adviser to make sure you don’t unwittingly push yourself into a higher tax bracket.
Consider an immediate annuity
Retirees with defined benefit pensions are generally happy these days — their monthly pension checks aren’t impacted by fluctuations in the financial markets. If you don’t have a pension, consider creating your own stream of guaranteed lifetime income by purchasing an immediate annuity. Yes, interest rates are low right now, and annuity payouts tend to be lower when rates are low. But interest rates have been depressed for more than a decade. If generating guaranteed income makes sense for you now, it could still be prudent to act. Even at current interest-rate levels, an immediate annuity may be able to deliver higher monthly payouts than you could sustain on your own, in part because with annuities, you are pooling your life expectancy risk with other annuity customers.
Rebalance your portfolio – and maybe revise your asset allocation strategy
If you are a do-it-yourself investor, make sure you rebalance your portfolio so that it remains aligned with your asset allocation strategy. Let’s say your goal is to keep 40% of your money in stocks and 60% in bonds. If the value of your stock funds has fallen sharply, they may now represent significantly less than 40% of your portfolio. To get back on track, you may need to move some money out of bonds and into stocks. Meanwhile, if the pain of watching your portfolio sink earlier this year significantly reduced your ability to enjoy retirement, you may want to reconsider how you allocate your money among the different classes of assets, such as stocks and bonds.
Don’t make any rash moves, but if you can’t sleep at night you may want to gradually shift your asset allocation mix to become more conservative. Lastly, consider how much money you keep on hand in the form of liquid emergency savings. Holding more cash can provide peace of mind and help you stick to a target allocation despite market fluctuation.
Align your thinking on fixed income with today’s environment
Stock market losses have been hard to swallow. Reinvesting CDs at today’s low interest rates can be hard to swallow, too. But if that has you thinking about dramatically increasing your allocation to bonds, don’t lose sight of the potential dangers in that asset class, either. Interest rates are already near 0% and that leaves rates with only one way to go: up. Because interest rates and bond prices move inversely to each other, any increase in interest rates would be accompanied by a decline in bond prices, which could result in bond funds delivering negative total returns over some periods of time.
Take advantage of the 2020 RMD waiver
Retirees who had attained age 70½ in 2019 or earlier are normally required to take a required minimum distribution (RMD) from their 401(k) and traditional IRA (not Roth IRA) assets each year. Ordinary income taxes are due on these withdrawals. However, the CARES Act gives retirees a one-year reprieve on RMDs in 2020, thereby allowing IRA values some additional time to recover. The bear market in stocks has impacted many retirees’ IRAs, and taking a withdrawal before the market recovers locks in a loss on those assets being withdrawn. So, if you can afford to, consider not taking your RMD this year and give your IRA another year to recover some of its investment losses.
Pay off debt
One of the best “investments” you can make is paying down your debt. After all, it’s a sure thing. While you can’t predict with certainty what your return might be on most investments, you know you’ll be “earning” 15% when you pay down a credit card that charges 15% interest, or 4% when paying down a 4% mortgage. It’s important to balance savings and paying down debt in times of uncertainty, particularly to have liquid cash on hand in case of emergencies. But you’ll likely feel better when you see your high-interest debt dwindle.
Volatile financial markets have strained investment portfolios for many retirees and added to their stress levels. But the markets have a long history of recovering from downturns. Eventually, this period of volatility will pass. In the meantime, taking positive steps to protect your finances may make it easier, psychologically, to ride out the storm.
The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact a financial professional.
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