It’s never easy watching your retirement account drop by 30% or more in a matter of weeks.
It likely took you years, or even decades, to save and set aside that money for your retirement.
Maybe you were finally getting back to a comfortable amount in your nest egg after The Great Recession.
And then a black swan arrives, a virus sweeping the globe, and just like that your nest egg takes a massive hit.
Tens of millions of us are in the same boat, wondering if the worst is yet to come, and what we can do to financially survive what lies ahead.
While everyone is different, here’s a simplified approach that can serve as a blueprint to use for your own situation.
The First Step
What you need to focus on first is taking a look at exactly what you own in your portfolio.
It won’t be fun. You’ll probably see a bunch of small red numbers where there were once larger green numbers.
But you need to make an honest assessment of the stocks you own and the likelihood that those companies survive what is looking more and more like a recession bearing down on us.
Certain industries are in real trouble, and are more at risk that others.
Any stocks in the airline, cruise line, or travel industry should be looked at with the real possibility of the company going bankrupt. If that happens, the equity will likely be wiped out and the stock becomes worthless.
Even if these companies don’t go bankrupt, they will likely take years to recover and could never get back to break even.
Keep in mind, once a stock has fallen 50%, it has to gain 100% just to get back to break even.
So take a stock like Carnival, the cruise operator. It has fallen from a high of $51.90 this year down to around $14.50 today. That’s a 72% decline.
But to get back to breakeven ( let’s just say that is $51.90) the stock now has to rise 257%.
I’m not sure I want to wait around for 257% gain just to get back to break even.
So know what you own, and know what the likelihood is of those companies surviving.
Consider selling anything that has a questionable ability to survive a recession.
The Second Step
Once you take an honest look at what you own and how you expect those companies to do go forward, assess your investing time horizon.
If you are retired or near-retired, you’ve got a shorter time frame to work with, and hopefully don’t have too much exposure to equities right now.
The hard part is deciding between selling and moving your remaining money into safer investments (but locking in the loss that you can never get back) or just riding out whatever happens over the next few months or years and assume that the market will come back, like it always has in the past.
If you are younger and still have plenty of years before retirement, the best thing you can do is nothing and just buy more stocks when they are cheaper to lower your average cost, and wait it out until the market (and economy) recover.
Yes, buying stocks right now is scary. But stocks are cheaper today than they were a month ago. Could they get cheaper? Sure. But nobody has ever timed the market correctly.
Buying a little here and a little there gets you a lower buying price, and if prices continue to fall you can buy a little more later.
No one knows how long the coronavirus will affect our economy, or if we will tip over into a recession because of it.
All we can do is make an honest assessment of what we own, what we think those companies will do in the coming years, and if we have a short time frame for a recovery or a long time horizon.
What absolutely isn’t the answer is panic selling everything, because once you lock in those losses, you never have the chance to make the money back. Take a cool, calm approach and understand that this too shall pass.
5 Little-Known Ways To Lower Your Taxes
Everyone loves to pay lower taxes, but very few people understand or take advantage of all the tax breaks that are available to them. Here’s a list of 5 little-known tax breaks that you can use to help lower your tax bill.
1. Pay No Capital Gains Tax
If you sell an asset you’ve owned for more than a year, you pay long-term capital gains tax of either 0%, 15% or 20%. This is a favorable tax treatment when compared to selling assets you’ve owned for less than a year, which are taxed at the same rate as your ordinary income.
But, it’s possible to pay no capital gains tax when selling your long-held assets like stocks and bonds or mutual funds. In order to pay no capital gains tax, your taxable income needs to be less than $39,375 if you are single or $78,750 if you are married when filing your 2019 taxes. For the 2020 tax year, those numbers jump slightly to $40,000 and $80,000.
2. Earned Income Tax Credit
This program directly benefits those with low-to-moderate incomes, and particularly those with children. A single filer would need an adjusted gross income of $15,570 or less to benefit, but for a married individual with three children, the adjusted gross income limit is as high as $55,952. In certain situations where your EITC benefit exceeds the amount of taxes you owe, you would receive a tax refund.
3. Deduct Your Retirement Account Contributions
If you are putting money aside in a traditional IRA as part of your retirement plan, you can contribute up to $6000 per year. If you aren’t part of a retirement plan through work – like a 401(k) – you can deduct all of your contributions no matter what tax bracket you are in. Non-working spouses (or spouses making very little income) can contribute up to $6,000 ($7,000 if 50 or older) into their own IRA account as long as the working spouse has enough earned income to cover both contributions. There are limits to the deductions as income increases, so check with a tax adviser.
4. Saver’s Tax Credit
If you are a single filer with adjusted gross income less than $32,000 (or $64,000 if married) you claim a tax credit (a credit, not deduction – more on this in a moment) of 10%, 20% or 50% of the first $2,000 you put into a retirement account ($4,000 for married filers). The lower your income, the higher the credit amount. Unlike a deduction that lowers your taxable income, a credit reduces the amount of taxes you owe on a dollar-for-dollar ratio. So a $2,000 tax credit reduces your taxes by $2,000.
5. Lifetime Learning Credit
If you are interested in continuing your education, you can utilize the Lifetime Learning Credit. This allows you to go back and study nearly any topic, at any school, you can get back 20% of up to $10,000 in expenses per year. The income limits are $68,000 for single filers and $136,000 for married filers. Now go back and enroll in that art class you always wished you had taken!
Here’s When You Can Expect Social Security Cuts
Social Security is a retirement cornerstone for tens of millions of Americans. According to the Centers for Budget and Policy Priorities, every year it keeps 15 million retirees out of poverty.
Unfortunately, the program is facing massive financial hurdles. It has been collecting a net cash surplus for the last 38 years. However, starting next year, it is projected to run a $21.1 billion net cash outflow.
The program entered the decade with a reserve of $2.9 trillion in assets. Although, many expect the net outflows to increase each year and chip away at the reserve by $1.1 trillion. This leaves the program with only $1.8 trillion in reserves by 2029.
The program isn’t facing bankruptcy or insolvency. Instead, it is more and more likely that retirees will soon face reductions in their benefits to keep the program afloat.
Two trusts actually make up Social Security. The first one is the Old-Age and Survivors Insurance (OASI) trust. It provides payouts to retired workers and survivors of deceased workers. The other is the Disability Insurance (DI) trust. This one supplies payments to workers that are long-term disabled.
When reporting on the state of the program, the Social Security Board of Trustees generally lumps the two trusts together. However, each trust is independent and faces individual risks.
Of the two, the OASI is projected to be in financial distress the soonest. The latest Trustee report estimates that the OASI will deplete its asset reserves by 2034. Meanwhile, the DI trust could possibly depleat its reserves in 2065.
But because the OASI is much larger than the DI trust ($2.8 trillion of the combined $2.9 trillion in reserves), the combined trusts are projected to become insolvent in 2035.
So expect the first major cuts to come in 2035 in an effort to avoid insolvency. Those efforts will involve a potential bitter pill for retirees to swallow.
Unless Congress finds a way to raise additional revenue and/or reduce outlays, retired workers and survivors of deceased workers can expect a 24% reduction in monthly benefits starting in 2035. While that seems a long time from now, it’s only 15 years away and will be here sooner than you think.
In real numbers, a retiree who receives the average monthly Social Security benefit of $1,503 today would see their monthly benefit reduced to $1,142 per month, or $361 less to live on. A married couple receiving $2,531 in monthly benefits would see their check cut by $608 per month, down to $1,923.
While the monthly reduction stings, looking at it from a lifetime benefit approach magnifies the worries for retirees trying to live out their golden years. A hypothetical worker who retires this year and starts receiving benefits would typically expect to collect about $500,000 in Social Security benefits. A 25% reduction means they would see their benefits cut by $120,000, down to only $380,000 in retirement benefits.
A married couple would see their projected $1 million in benefits reduced by $240,000 down to $760,000. That’s not an easily-replaced amount of retirement income.
If there is a glimmer of hope, it’s that Congress can take action to avoid – or delay – the day of reckoning. Yes, they’ve known since 1985 that the program would one day run out of money. But if there is one thing that the government is good at, it’s waiting until the last minute to really dig in and find a solution.
Let’s hope they can set aside their differences and put America’s retirees first.
4 Ways To Get Your Retirement Plans Back On Track
Whether you are nearing retirement or already enjoying your golden years, the recent market correction – and subsequent rally – has millions of Americans reconsidering their retirement plans.
If you’ve found that your retirement accounts aren’t quite where you would like them to be, don’t worry, there’s still time – and steps you can take – to improve your financial situation.
Play “Catch Up” In Your Retirement Accounts
If your nest egg isn’t as sizable as you had hoped it would be by this stage, there is some good news. If you are over the age of 50, you can make what are called “catch-up contributions to your retirement accounts. These allow you to put more money into your retirement account each year than is permissible for those under the age of 50.
For example, the 401(k) contribution limit for those 50-and-under in 2020 is $19,500. But for those over 50 years of age, you can contribute an extra $6,500 this year as a “catch-up” contribution, for a total of of $26,000.
The same thing goes for a traditional IRA. The typical limit for 2020 is $6,000 per person. But for those over 50, you can contribute an additional $1,000 to catch up, for a total of $7,000.
Convert Your IRA To a Roth IRA
As Suze Orman recommended a few weeks ago, if you have a traditional IRA, it might make sense to convert over to a Roth IRA this year. With a traditional IRA, your money is invested pre-tax and you don’t pay any taxes until you start withdrawals.
With a Roth IRA, your deposits are after-tax, so you don’t pay any taxes when you withdraw money in retirement. Given the massive budget deficits our country is running, there’s a very strong likelihood that taxes will be much higher in the future than they are today.
So while it may be appealing to let your money grow tax-deferred in a traditional IRA, you could end up paying a higher tax rate in the future. If you convert your IRA to a Roth IRA, you would pay your taxes in the year you convert. This could be extra-beneficial if you will fall into a lower tax bracket this year due to job losses or retirement. Pay the taxes this year at a lower tax rate and let the money grow tax-free going forward.
Review Your Social Security Blanket
Social Security is a major part of every retiree’s monthly income. Fortunately, that monthly income won’t ever decrease, and is automatically adjusted for inflation every year. So it makes the decision of when to start collecting Social Security very important.
You can start collecting as early as age 62, but your benefits will be permanently reduced as much as 30%. If you were born between 1943 and 1954, your full retirement age is 66, and for those born between 1955 and 1960 the full retirement age is 67 – and is also 67 for everyone born after 1960.
Here’s where some patience can pay off: if you can afford to wait until age 70 to collect your benefits, your monthly checks will be 8% larger for every year you delay claiming your benefits.
Pay Off Loans Against Your Retirement Savings As Soon As You Can
Pay off any 401(k) loans as soon as possible. A loan against your 401(k) is counter to your goal of saving for retirement. inadequately funded.
Also, the money you are paying your loan back with has already been taxed, so you are paying back pre-tax money with after-tax money. To further frustrate you about taking out the loan, when you eventually retire and start withdrawing from your 401(k) you will be taxed again.
So you will end up paying taxes twice. It’s better to not take a loan against your 401(k). Although, if you must, pay it back as soon as you can.
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