Three Financial Planning Strategies for When Markets Fall
The market volatility experienced in early April may have left some investors feeling a bit unnerved.
While many tried-and-true strategies such as “stay the course” are still relevant today, there are three additional strategies available to investors that may help take the sting out of lower retirement and investment balances.
1. Retirees: Turn off systematic withdrawal plans
Many retirees use systematic withdrawal plans (SWPs) to generate monthly income. These plans automatically liquidate a specified dollar amount of mutual fund investments and deposit the cash proceeds into a money market or other interest-bearing account.
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In most markets, these arrangements work fine, but during a sharp market decline, retirees must be wary of “reverse dollar-cost averaging.” Lower mutual fund values mean an increasing number of units need to be sold to generate the specified amount of monthly income.
As a result, when the markets recover, there are fewer units participating in future appreciation.
We suggest pausing these programs for now and taking a deliberate approach to generating cash flow. Consider that the Bloomberg US Aggregate Bond Index, which is a common benchmark used to evaluate the bond market, has a positive year-to-date return through April 16, 2025.
Retirees in need of monthly income may be well served by cashing in a larger portion of bond investments, giving stock investments that may be struggling more time to recover.
At first glance, this strategy may sound counterintuitive because it creates a more aggressive asset allocation at a time when most retirees are looking to derisk their portfolios.
To be clear, a wholesale change to individual portfolios is not what we are recommending. Rather, investors may want to consider a short-term fix to avoid selling stocks at the worst possible time — immediately after they have dropped in value.
Of course, if the markets begin to decline rapidly again, more drastic measures may be necessary to ensure sustainable cash flow throughout one’s lifetime.
2. Wealth accumulators: Cherry-pick specific investments for Roth conversions
Investors who are saving for retirement may have a traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b). When these balances are substantially lower may be an ideal time to consider a Roth conversion.
Conversions trigger an immediate income tax liability, but the future growth accumulates income tax-free.
Importantly, the Roth IRA conversion does not have to be an all-or-nothing decision. In fact, investors can choose the portion of the account and, in most cases, the specific securities they wish to convert.
Consider an investor with an aggressive risk tolerance and long time horizon. If there are several stock positions in the investor’s traditional IRA and some have declined more than others, the investor can instruct the IRA custodian to convert only those stocks with the sharpest losses.
In other words, the investor would incur income taxes on the depressed values while seeding a Roth IRA with stocks that offer the greatest opportunity for tax-free upside.
Similarly, 401(k) and 403(b) participants might choose to convert mutual fund holdings that have suffered the greatest decline, while keeping more conservative investments (such as fixed income mutual funds) in the pre-tax account.
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Investors interested in a Roth conversion should proceed cautiously as the transaction cannot be reversed.
Furthermore, the additional income that must be recognized might push the investor into a higher marginal tax rate and could result in underpayment issues if the withholding amounts are not adjusted accordingly.
3. High earners: Take advantage of tax-loss harvesting throughout the year
As income increases, investors face progressively higher tax rates. The need to manage taxes, therefore, becomes top of mind for individuals in the highest brackets of 37% for ordinary income and 20% for long-term capital gains.
In addition, there is a 3.8% Medicare surtax that applies on the lesser of net investment income (NII) or the amount of modified adjusted gross income exceeding $250,000 (married filing jointly) or $200,000 (single). When combined, the top ordinary income tax rate is 40.8%, and the top long-term capital gains tax rate is 23.8%.
One strategy investors might consider is harvesting capital losses. Although this strategy is often thought of as an end-of-year exercise, investors would be wise to consider implementing tax loss harvesting throughout the year.
In short, investments that are valued below the cost basis (purchase price) can be sold, and these losses can be used to offset capital gains. If losses exceed gains for the calendar year, up to $3,000 may be used to offset ordinary income, and the balance is carried forward to future years.
It’s important to note that, to take advantage of a capital loss and avoid a wash sale, investors must wait at least 30 days to repurchase the security.
However, investors who are concerned about missing out on potential appreciation over the next 30 days can “double up.” This strategy involves buying a second tax lot of the investment that has declined in value, waiting 30 days, then selling the first or original lot. Tax-loss harvesting is a powerful tool when used throughout the year.
The strategies presented here highlight a few ways investors can make market volatility work to their benefit. We would suggest investors consult their tax and legal advisers to discuss whether these strategies are appropriate for their unique situation.
The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.
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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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