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Strategies for retirement immunity despite pandemic

Strategies for retirement immunity despite pandemic

From the 8 things you should know about recessions — and other tips for managing money during a pandemic series
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Less than a decade ago, I used to drive from Philadelphia up to northern New Jersey for client meetings. I would print my directions off of MapQuest and do my best to stay on course. I would inevitably get lost or end up on a detour somewhere around the Lincoln Tunnel. But I'd eventually get back on track and find my way to my destination.

If you're reading this article for a few quick tactics on how to make this bear market sting less but haven't yet laid down the fundamentals of your financial roadmap, you're getting ahead of yourself. Before moving on to what highways, lanes and exits you're going to take, you need to figure out where you are going. Anyone within five years of retirement should have a plan that shows how much you'll have and where it will come from. The plan also must account for taxes and inflation. Once you've checked that box, read on.

1. Build your cash reserve

We've all heard the advice from our parents or grandparents to "build a rainy-day fund." Well, that's sage advice that's mighty hard to follow when every day is sunny. But guess what: It's been raining since Feb. 24, and in many parts of the country, you can't go outside in this storm.

With such a large percentage of the workforce now logging in from home, a few things are happening behind closed doors in the corporate world. Companies are figuring out how to get lean. As revenue shrinks, business owners will need to cut expenses. Here are three possible outcomes:

  • They have enough in cash to sustain the hit. While company valuations will shrink, they will continue life as it was prior to COVID-19 until some point in the indeterminate future.
  • They will do more with less. They will find creative ways to generate business online or through delivery. Those who make lemonade will come out of this stronger than ever.
  • They will fire you.

God forbid, No. 3. But, if you do find yourself in that camp, you'll be happy you had six months of expenses in something liquid, with principal protection, like a checking, savings or money market account. Fidelity and Charles Schwab both offer high-yield cash options that you can open up alongside your investment account. Not there? Start now, while you are still getting a paycheck. Even if this means cutting your savings or expenses, the emergency fund comes first.

2. Harvest losses or realize gains

Loss harvesting has gained momentum in recent years as certain "robot advisers" have offered it as a premium service. The idea is simple: You buy an investment, it goes down in value, you sell it to realize a loss, and reinvest in something that is not "substantially identical" but similar enough to realize a similar rebound. This is often done at the end of the year to offset any realized gains in your taxable investment accounts.

The problem in the last 10 years is that it's been hard to find a losing investment. Well, not anymore. Outside of twice daily walks with my 2-year-old daughter and dog, it's been hard to put a positive spin on COVID-19. So, loss harvesting is now a very valid opportunity.

3. Roth conversions

I am a coffee fanatic. Helpful in times like these. La Colombe is my go-to whenever I'm making a batch of cold brew. The standard price is $13 per bag. With a recession now likely, if I were to go to the store today and see that La Colombe was on sale for $9 per bag, I would likely stock up. This is the same idea behind Roth conversions. Pay your taxes now, while they are on sale, and avoid them in the future, at full price. A Roth conversion is simply taking a portion of your pre-tax IRA and moving it into a post-tax, Roth IRA. You pay the tax toll on the way.

Why would a global pandemic and the ensuing bear market make Roth conversions any more attractive? Because you pay taxes on the converted amount. Let's assume that you were planning to convert $100,000 in 2020 and that $100,000 is now worth just $70,000. Converting at the new, lower amount will not only lead to a lower tax bill but also allow the $30,000 rebound, whenever it comes, to be tax-free.

4. Consider refinancing

My wife and I have been looking for a new home for about six months. We signed a contract on March 15 (yes, ill-advised with a looming recession, but life doesn't often move in tandem with economic cycles). Part of the attraction of buying now, in addition to reduced demand, is historically low mortgage rates. As of March 19, the 30-year fixed rate was floating just below 4%. Just to put that into context, the rate one year ago was 4.31%, according to Bloomberg. That new rate would save you $1,500 per year on a $500,000 loan.

These low rates not only encourage acquisitions but also allow current owners to stretch or improve their terms. If you think your job may be on the chopping block, extending your loan term while you still have steady income may be a safe move to reduce your monthly liabilities.

If you have a small loan, and reliable income, refinancing to a 15-year loan makes a lot of sense in today's environment. Keep in mind that closing on a new loan comes with significant costs. You want to make sure it doesn't take you 10 years to break even.

We have seen two camps of prospective clients in the past month: those who are running full-speed into our (now virtual) office, and those who are stuck in quicksand, unwilling to make a move and accept a loss. Whichever camp you fall in, make sure you take advantage of the planning opportunities such losses bring.

You now have plenty of alone time to figure out which may work for you.

Evan T. Beach is wealth manager for Campbell Wealth Management. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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