Reevaluating Your Financial Plan in the Face of Inflation and Market Volatility

Steve Kohler, CFP®, CPFA® and Nancy Kunz, CFP®, CPFA®, ChFC®, CLU®

While recent market volatility and high inflation are common causes of concern, they may be used to your advantage. Rather than take a defensive posture - or worse, a defeated posture – be proactive. The strategy you use will depend on your age, current asset allocation and proximity to retirement.


You can start by reevaluating your financial plan’s goals and objectives. Depending on your particular situation, market downturns present an opportunity to review your investment goals, time horizon and retirement objectives. Are you still in the accumulation phase, contributing to your portfolio at lower prices? Or are you nearing decumulation where the portfolio will need to provide more support? Tracking your goals is especially important if you’re nearing retirement or have a significant expenditure on the horizon requiring a withdrawal, such as a second home purchase or college tuition payment.


Once you are comfortable with your retirement plan, you can look at buying opportunities for your portfolio that align with your overall plan objectives. In the short term, markets fluctuate. We do not need to discard everything we know in the face of near-term discomfort. In 40 of the past 50 years, the S&P 500 has generated positive performance and an average annualized return of 9.4%. High-quality investments, compounded over time, shift the odds of achieving your retirement goals in your favor.


So, how can you turn the current volatility into an opportunity?


Increase your 401(k) retirement plan contributions


Now may be a good time to keep funding your company retirement plan to take advantage of stock prices at discounts. Boosting contributions and receiving matching contributions from your employer after market corrections allows you to invest at higher prospective returns. However, it is still important to view asset location over the long-term for a portfolio.


Remember that historically, the market has always recovered. In fact, markets have, on average, returned to pre-drawdown levels after three to four years, including after the Great Depression. If you are at least that far away from retirement, you can feel confident that continuing your contributions - or even increasing them - is a financially prudent decision.

Note: In some instances, you may want to consider working a little longer than originally planned. It would allow for an extra year or two of contributions to offset any losses caused by an extended bear market.


Rebalance your portfolio


We are believers in rebalancing portfolios during significant movements in markets to either the downside or upside. If you are nearing retirement, it may be appropriate to consider moving more of your assets into lower-risk investments such as bonds. However, if you are younger and have time to withstand interim volatility, you may want to invest in quality stocks capable of generating higher rates of return over the long-term. There may still be opportunities to improve the risk profile of your portfolio, whether through greater diversification within stock or bond holdings, active management, or investment opportunities outside of traditional stocks and bonds. Of course, it is also important to consider asset location when rebalancing your investment portfolio.


For example, if you currently subscribe to the traditional 60/40 (stocks/bonds) split and hold much of your growth or equity exposure in a Roth IRA or 401(k), the tax-free retirement balance should grow more if stocks outperform bonds in the long-term. With current conditions in the stock market, your allocation may actually be more like 58/42. So, when rebalancing to regain your target of 60/40, consider allocating more of the equities into the Roth accounts so the future growth of this increased stock allocation will be tax-free at distribution time in retirement.


Recent market declines have improved valuations and the outlook for the 60/40 portfolio, based on a combination of the price-to-earnings ratio for the S&P 500 and the yield for the AGG (Core US Aggregate Bond ETF). Valuations aren’t an effective market timing mechanism, but they are an important consideration for longer-term return expectations, and that picture has improved.


Take advantage of Roth IRA conversions ‘on sale’


Beyond looking for value in less expensive investments, you can also take advantage of tax savings. One way is to transfer money from a traditional, taxable IRA to a tax-free Roth IRA. A declining market essentially puts a Roth conversion ‘on sale’. If you were to complete this transaction while asset values in your IRA are lower, the tax consequences on the transfer will also be lower.


As the total value of the account drops, the dollar amount to be converted to a Roth account will represent a larger percentage of the pre-tax account. A larger portion of the future growth of the account shifts into a Roth without moving into a higher tax bracket.


Prepare for higher healthcare costs with an HSA


At age 65, 10% of one’s savings might be spent on healthcare-related expenses. At 85 years of age, that allocation jumps to 20%. Certain medical care, prescription drugs and other related expenses can become even more costly due to price inflation. One excellent remedy that you may already have in place is to take greater advantage of a health savings account (HSA). They can be a huge help in funding premiums and offer tax-free withdrawals for uncovered expenses.


Delay social security benefits


If you are nearing retirement, delaying your social security benefits a little longer can have financial advantages. Waiting until the full retirement age could increase the benefits you receive by 25% to 35%, or as much as 75% if you wait until age 70. You can also take advantage of current high cost-of-living increases down the road.


In addition, life expectancy rates today make it even more attractive to delay benefit collection. The CDC’s most recent figures suggest that those who make it to age 65 may expect to live another 19 years. If your Social Security benefit at 70 is more than 75% higher than your benefit at 62, you’re going to have a lot more money to take care of your needs as you age.


Utilize tax loss harvesting


If you have been hit with losses during the downturn, you can sell some of your ‘losers’ at a loss and write them off on next year’s return. It is an opportunity to reduce your tax burden and balance any losses you may have had this year.


Gift assets at lower values


When assets such as property and stocks have lower values, they may appreciate more in the future. You may be able to shift more assets at lower values to family and friends, earning them greater returns in the future.


Conclusion


While your strategy should be adaptive, and the options presented help overcome challenges in the market, it is important not to deviate from your financial plan. It is your blueprint, the tool allocating dollars to best fit your individual goals, objectives, and timeline. Keep in mind that bear markets are usually followed by bull markets. Those who stop investing or flee to cash now should be aware of the potential cost of missing the early stages of a market recovery, which historically have provided the largest percentage of returns per time invested.


Thanks for reading.




---


Steven Kohler, CFP®, CPFA

Senior Financial Advisor

Financial Planning Chair

skohler@dbroot.com


Nancy Kunz, CFP®, ChFC®, CLU®

Senior Financial Advisor

nkunz@dbroot.com


This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.



Thanks!

Subscribe to exclusive DBR & CO updates including market commentaries, timely financial planning tips and more.

LATEST BLOG POSTS