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Slumping Stocks and Inflation Slam Retirement Portfolios

With markets sinking, it’s important to think carefully about where you draw money from and when you claim Social Security benefits.

(Bloomberg) -- With stocks slumping, a recession looming and inflation running hot, it’s a tough time to retire. 

The turmoil is hitting at a time when many Americans already faced a serious shortfall in retirement savings, making it even more difficult to plan for the future.

It’s a reminder that having a strategy to draw down assets later in life can really pay off. If you don’t already have a plan in place to guard against needing to sell stocks in a downturn, here are some ideas to explore.

Tax Strategy 

If you need to withdraw savings when the market is down, the common advice is to tap after-tax dollars first. That avoids the income tax bill on money pulled from tax-deferred accounts like IRAs — and the 10% penalty if you withdraw before age 59 ½.

There still may be taxes. If you’re selling stocks at a gain, you’ll pay capital gains tax, which tops out at 20% for stocks held more than a year. If you sell at a loss, you can use $3,000 to offset gains you may have taken during the year (and if your loss tops $3,000 you can carry the rest over for future years). If you have no gains, you can offset up to $3,000 of ordinary income to reduce your tax bill.

Whether to tap pre- or after-tax dollars depends on your marginal tax rate  — the tax you’d pay on each additional dollar of income, according to financial planner George Gagliardi of Coromandel Wealth Management. He gives the example of a married couple with large IRAs relative to taxable accounts and taxable income below $83,551, which is taxed at 12% in 2022.

Gagliardi might recommend the couple take money from the IRAs as long as it didn’t bump their income above $83,551. The tax on IRA withdrawals could be significantly higher in future years, particularly when income is swelled by having to start taking required minimum distributions from tax-deferred accounts at age 72.

Delay Social Security

Resisting the urge to claim Social Security before full retirement age, which is 66 or 67 depending on your birth year, makes a lot of long-term sense. The longer you wait, up to age 70, the bigger the inflation-adjusted benefit.

“Delaying Social Security requires higher withdrawals now while markets are down, but it is often still worthy waiting for age 70 based on health, longevity and the annual cost of living adjustments,” said Melissa Weisz, a wealth adviser at RegentAtlantic. 

Couples may want to consult a financial planner about claiming strategies. A rule of thumb is that it makes sense for the member of the couple with the highest Social Security benefit to wait until age 70 to claim, since that amount will become the survivor benefit if the higher-earning spouse dies first.

You can try out claiming scenarios at (You’ll need a “My Social Security” account on the Social Security Administration’s website to get the data needed for the calculator.)

Portfolio Triage

Consider tapping short-term bonds and cash alternatives before selling depressed stocks. Even without a downturn, Gagliardi typically recommends clients have three to five years’ worth of expenses in assets like money market accounts, CDs and fixed-term annuities with annual penalty-free withdrawal rights, in case of market volatility.

That approach is similar to a “bucket strategy” — earmarking money for different life stages and investing according to the timeframe when it will be needed. With three to five years of income in low-volatility assets, money needed later in life could be invested less conservatively.

“Use this time in history as a lesson — emergency fund, emergency fund, emergency fund, as well as strong asset-class diversification in each type of account,” said planner Beth D’Andrea of PlumTree Financial Planning.

Tap Your Home

If a big home expense or dental bill hits and you don’t want to liquidate stocks, a home equity line of credit (HELOC) or a reverse mortgage — also called a home equity conversion mortgage, or HECM — is an option. 

While borrowing against home equity can make people nervous, doing it while having a plan for repayment can keep funds invested longer. This strategy “is a tough one with interest rates rising,” said D’Andrea. “This would apply to a unique individual who probably has enough money to withdraw but doesn’t want to in a down market.”

If the HELOC money might have to be paid back from IRAs and 401(k)s, a better option might be a HECM, said Gagliardi. To use one, you must be at least 62, get the mortgage on your primary residence, maintain the house and have homeowners’ insurance. 

“There are upfront costs and the loan balance typically uses a floating interest rate, but the loan never has to be paid back, closing costs can be rolled into the HECM, and it can serve as a source of income throughout retirement,” said Gagliardi.

To contact the author of this story:
Suzanne Woolley in New York at [email protected]

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