Navigating Retirement Amid Market Volatility

Focus on What You Can Control

Recent market volatility, driven by persistent inflation, shifting interest rates, and geopolitical tensions, has tested the resilience of even seasoned investors. High-profile events such as f luctuating bond yields, market reactions to Federal Reserve policy shifts, and uncertainties surrounding global economic growth underscore the importance of having a proactive retirement strategy.

Retiring during periods of market volatility can be particularly unsettling. Whether you're about to transition into retirement or you've already retired, a downturn can significantly affect your savings, with implications that may linger for years. How can you ensure your retirement plans stay intact and your lifestyle remains secure?

When you can't influence market returns, your best strategy is managing what you can control: your spending and taxes. Regardless of where you are in your retirement journey, careful budgeting and proactive tax strategies can offer significant benefits.

Establish a Practical Budget—And Commit to It

Budgeting often faces challenges from lifestyle inflation. No matter how meticulous your f inancial plan, it is easy to stray when temptations like vacations, dining out, or family activities arise. These expenses quickly add up.

During market downturns, withdrawing funds from your investments means potentially selling at lower prices, locking in losses. You might also need to sell more shares than planned to meet your income needs, hindering your portfolio's recovery and long-term growth.

Regularly reviewing and strictly adhering to your budget is crucial to ensuring your expenses align closely with your retirement income.

Strategically Reduce Your Tax Burden

Effective tax planning helps maximize your available retirement income, which can offset budget constraints or allow long-term investments more time to recover. Taking active steps to remain in the lowest feasible tax bracket can significantly benefit your retirement strategy.

Optimize Your Tax-Free Social Security Benefits

Social Security benefits have a minimum 15% tax-free portion. Whether the remainder is taxable depends on your total income. Increasing your benefits by delaying claims until age 70 provides an 8% annual increase from your full retirement age. For couples, it may be wise for the higher-earning spouse to wait until age 70, while the lower earner claims benefits sooner.

Optimize with the Three-Bucket Approach

Think of your investment strategy as filling three different buckets—taxable brokerage accounts, tax-deferred retirement accounts (such as 401(k)s and IRAs), and tax-free Roth accounts.

The aim is to lower lifetime taxes by placing each investment type into the bucket where it receives the most favorable tax treatment. Stocks, for example, benefit from lower tax rates on dividends and long-term capital gains, so they fit well in your taxable bucket. Municipal bonds also suit this bucket, offering tax advantages. On the other hand, placing higher-yield corporate bonds in your tax-deferred bucket can help minimize required minimum distributions (RMDs) since these distributions depend on the account's value.

Lastly, your Roth bucket provides flexibility, especially during higher-income years, allowing tax free withdrawals that can reduce taxable income and help avoid surcharges for Medicare Parts B and D. In lower-income years, Roth assets compound and grow tax free – combined with no lifetime distribution requirements, these assets can be earmarked for legacy and inheritance assets to your beneficiaries.

Capitalize on Lower Asset Values Through Roth Conversions

While declining values in traditional retirement accounts are concerning, they offer an opportunity: lower tax liabilities when converting these assets into Roth accounts. Such conversions eliminate future RMDs and establish a more advantageous asset location framework, providing greater long-term tax control.

Your Path Forward

Retiring in volatile markets adds complexity to your financial planning. However, by diligently controlling expenses, optimizing tax strategies, and strategically positioning your investments, you can significantly influence your financial security and sustain the retirement lifestyle you've envisioned.

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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.