Assess Your Retirement Plan as the Markets Roil


Assess Your Retirement Plan as the Markets Roil

Review your portfolio, adjust your withdrawal strategy and look for tax-saving opportunities to turn market lemons into lemonade.


The market mayhem may unsettle your stomach. But this volatile period is a good time for older workers and retirees to take a levelheaded look at their investment mix and spending strategy.

See Also: SLIDE SHOW: 7 Worst Mistakes Investors Nearing Retirement Can Make

The market entered 2016 in a sour mood, as Standard & Poor's 500-stock index posted its worst opening week ever. Things didn't get much better from there, as markets were roiled by plunging oil prices, anemic U.S. economic growth and a slowdown in China. The S&P 500 had its third-worst January in history, losing 5.1% and wiping out $1.92 trillion in market value.

Sponsored Content

Still, you can make some lemonade out of these market lemons. You can reassess the risks in your portfolio, tweak your drawdown strategy to extend your nest egg's longevity and possibly even save a bundle on taxes. Just don't make any sudden moves based on emotional reactions to the market's swings, advisers warn.


If you have the jitters, you have company. Advisers have been flooded with calls from anxious clients. Some are asking whether this is another 2008, says Kevin Meehan, regional president at Wealth Enhancement Group, in Itasca, Ill. Older investors with large stock allocations are saying "I can't go through that again," he says.

It's not wise to flee stocks in a panic. But if you're feeling queasy, it may make sense to trim your stock allocation a bit, advisers say. After all, stock investors enjoyed years of strong gains before the recent turmoil. If your stock allocation has wandered more than five percentage points from your target allocation, consider rebalancing to your target weights. If you're holding a lot of your employer's stock or other concentrated positions, dial down your risk by rebalancing out of those positions first, says Laura Scharr-Bykowsky, principal at Ascend Financial Planning, in Columbia, S.C.

While you're tweaking your portfolio, look for opportunities to sell investments held in taxable accounts at a loss. You can use these losses to first offset any taxable gains on sales of other holdings and then to reduce up to $3,000 of ordinary income.

If you are retired or on the brink of retirement, a "bucket" strategy can help you arrive at a reasonable asset allocation -- and help you sleep soundly through market turmoil. Keep money you need to cover three to five years' worth of living expenses in the most conservative holdings, such as high-yield savings accounts, certificates of deposit and high-quality short-term bond funds. (If you don't have enough ultra-conservative holdings to cover a few years' worth of spending, you can gradually fill this bucket with proceeds from portfolio rebalancing, tax-loss harvesting, and income and dividend distributions.)


The next five years' worth of expenses can go into slightly more aggressive holdings, such as intermediate-term bond funds. Riskier investments, including the bulk of your stock holdings, can go into a third bucket. Since you won't need that money for about 10 years, you don't have to worry about the market's gyrations.

Adjust Your Withdrawal Strategy

If you're withdrawing a steady, inflation-adjusted dollar amount each year in retirement, you may need to make some adjustments to keep your plan on track. Many retirees follow the "4% rule" -- withdrawing 4% of the portfolio in the first year of retirement and adjusting that dollar amount annually for inflation.

Let's say you took 4%, or $40,000, from your $1 million portfolio, in your first year of retirement last year, leaving you with $960,000. When it comes time to take your withdrawal this year, you plan to give yourself a 3% cost-of-living adjustment -- but by that time, your portfolio value has dropped 10%, to $864,000. Your $41,200 withdrawal takes a 4.8% bite out of your portfolio. The higher spending rate -- particularly in early retirement -- raises your risk of outliving your assets.

Consider adopting a spending strategy that responds to your portfolio's performance, perhaps forgoing your inflation adjustment in the year following a market plunge. Another option: Base your annual spending on the required minimum distribution rules that govern drawdowns from traditional IRAs after age 70 1/2. To use this strategy, divide your total year-end portfolio balance by the life expectancy factor for your age listed in IRS Publication 590-B. Research has shown that the RMD spending strategy beats alternatives like the 4% rule. Part of the advantage: The withdrawal amount fluctuates with your portfolio balance, and the withdrawal percentage increases with age.


If you have a traditional IRA, the depressed market may offer a good opportunity to convert to a Roth IRA, which will give you a source of tax-free withdrawals later in retirement. The conversion will trigger income taxes, so you can slash the tax bill by converting when the account value is down. Having the option to draw from a taxable, tax-deferred or tax-free account each year in retirement can help extend your portfolio's longevity by maximizing the tax efficiency of retirement drawdowns. You can draw more from tax-deferred accounts when your taxable income is unusually low, or draw more from tax-free accounts when you're in a relatively high tax bracket.

If you converted your traditional IRA to a Roth last year, you "might now be having converter's remorse because the account has lost value," says Suzanne Shier, chief wealth planning and tax strategist at Northern Trust. The good news: You may have an opportunity for a tax-saving do-over.

Before October 17 of this year, you can "recharacterize" a 2015 Roth conversion, meaning you undo the conversion and its accompanying tax bill, and the money goes back into a traditional IRA. You can then reconvert to a Roth, but you must wait at least 30 days after the recharacterization to make the move. If the account balance is still low after the 30 days have passed, it may make sense to reconvert, Shier says.

Depressed stock prices can also provide a good opportunity to give gifts of stock to family. You can give up to $14,000 per person each year without filing a gift-tax return. And "you can get a little more mileage out of your annual gifts when securities are at a lower value," Shier says. Let's say you planned to give your daughter 100 shares worth $140 each, for a total gift of $14,000. But the share price dropped 10%, to $126. You can now give her 111 shares without going over the gift limit. And if the stock later rebounds to $140, your daughter will have more than $15,500.

See Also: SLIDE SHOW: 23 Great Places to Retire That Won't Wipe Out Your Nest Egg