Stocks have REALLY nose-dived. We’re all stressed with the coronavirus and the stock market. This is the first bear market – defined as a 20% decline from the recent peak – in over a decade. At the close on Thursday we were -27% off the peak just on February 19. How far will we spiral down? We all want a sense that we’re in control. We can’t control the stock market. We retirees can control when and how much stocks we have to sell for our spending. We can push that time pretty far into the future. Surprisingly, we also have better opportunities to improve our portfolio for the more distant future. This posts list what you might do.
One thing that’s not on the list: don’t sell stocks now! That makes NO SENSE. Everything in our financial retirement plan – and all nestegger’s plans – is focused on avoiding having to sell stocks when they’ve cratered. Selling now would mean throwing out my total plan. As I mentioned in the last two posts (here and here), Patti and I have plenty of cash and bonds that stretch the time before we will be forced to sell stocks. Four years. Maybe more. We’ve just got to wait this out. Here’s what I’m doing and what you might do now.
== I sold more bonds this week ==
Restatement: bonds are our insurance against steep, steep declines in stocks. We sell bonds, not stocks when they’ve cratered. Our spending for the balance of 2020 is already in cash. Our next scheduled sale of securities for spending for 2021 is the first week of December. Last week I stated that I wanted to get all that we’d sell this coming December 20 in cash.
I sold more bonds on Tuesday – IUSB and BNDX. I failed to sell enough last Friday. I double-checked my math. I forgot to sell enough include the taxes that we will withhold in December 2020, primarily from our RMDs.
The Tuesday price for IUSB was a less than a percentage point off its all-time high. I now have all of 2020 and 2021 gross spending (our Safe Spending Amount, Chapter 2, Nest Egg Care) in cash. I still may sell stocks and bonds in early December, but it’s good to know that I don’t have to sell any.
== I cut expenses ==
I cut expenses but not by design. We cancelled the trip we had planned for France in April. We also have our annual trip to England in May, and I doubt that we’ll make that. Trips like these are by far our largest discretionary expenses. One trip equals much more than one month of spending on the basics; that lower spending translates to more months before I have to sell stocks.
== I’ll harvest tax losses ==
I have losses in two securities in my taxable account. One taxable loss is the specific shares from 2019 dividends from VTSAX that we’ve owned for years. The other is from FSKAX that I purchased in December. Last fall I refinanced our mortgage. I took out a larger loan than I paid off and netted $85,000. I invested some in bonds that I’ve now sold and some in FSKAX. It’s down 24% now. I have a short-term loss.
I can sell the specific shares of VTSAX and all of FSKAX and capture a tax loss for our 2020 tax return. The loss is big enough such that we’ll pay no taxes on dividends we’ll receive later in 2020. We’ll likely have $3,000 that we can deduct from other income. I think I some loss will carry over for our 2021 tax return. The day I sell I’ll reinvest the proceeds in a security that is different enough so I don’t run afoul of the IRS wash sale rule.
I haven’t really dodged much taxes with this move. I’ve just pushed out the time I’ll pay taxes. I’ll have to pay higher capital gains taxes when I sell in the in the future; that’s from the lower cost basis that I’ll have.
== Sell actively managed stock funds ==
Patti and I don’t own any individual stocks or actively managed funds in our taxable account. My friend Jay owns quite a few. He’s been reluctant to unload even the ones that obviously under-perform because he does not like paying the tax on capital gains that have accrued over the years. (A future post will describe that this is not really a valid consideration.) The steep decline in value means his tax bite on some of these will be very low. The opportunity to clean up his holdings – sell those dogs and move to index funds – is here.
== Convert Traditional to Roth ==
It’s best to convert Traditional to Roth when stocks have declined. You get more bang – lower RMD in the future as an example – for your buck – the amount you convert – when stocks have declined. The dollar amount you convert is a greater percentage of your smaller total.
I haven’t done this yet, but I will convert some Traditional to Roth soon. Converting Traditional to Roth never costs me money – after tax dollars to spend – and makes me money if I use the Roth judiciously to avoid higher taxes that I would otherwise pay. You want breathing room that 100% Traditional IRAs and RMDs don’t give you: too high Adjusted Gross Income triggers ugly taxes that you might be able to avoid.
• One dollar of too much Adjusted Gross Income can result in $2,000 in higher Medicare Premiums; those are deducted from your Social Security paychecks each month.
• A rare few retires have a tax concern from TOO LARGE of Traditional IRA. Those folks may face too high of tax bracket on RMD withdrawals later. That’s because at expected returns for stocks and bonds, RMD will double in real spending power relative to the initial RMD (now at age 72). That real doubling means you could get pushed into a tax bracket that you would really like to avoid. The big jump is from the current 24% to 32%. This is most problematic for couples and after one has died. The tripwire for the 32% tax bracket for a single tax payer is at about $177,000 modified adjusted gross income (MAGI). Folks who can envision this level of AGI in the future should be fairly aggressive in converting Traditional to Roth, and the time is here.
== Add financial capacity at low cost ==
This sounds crazy to include in this list with the market cratering, but here goes: your non-financial assets – primarily your home – are a deep, deep reserve for your financial retirement plan. As I mentioned above, last fall I decided to get more money out of our biggest non-financial asset. I refinanced our home mortgage and got an added $85,000 out of our accumulated home equity. My mortgage rate is 3.625%. That’s low, but the 30-year mortgage rate now is 3.36%, just a tick up from last week, the lowest in 50 years!!!
This was a very easy process. I used one of the mortgage lenders listed with Costco, NBKC. I used NBKC when I last refinanced in 2012. My closing costs were really low. The process this time was easier than before. I think the whole process, starting with my initial inquiry, took six weeks. Maybe eight.
Conclusion. The stock market has cratered. We’re all stressed. We all want to act to give us a sense that we’re controlling our financial future. Our nestegg financial retirement plan lets us avoid selling stocks when they’ve cratered. We pull out our insurance policy and sell bonds for our spending. I sold bonds last week and more bonds this week to have zero uncertainty on price for my next big sale in December. I am looking to harvest tax losses that will give me a bit more after-tax dollars to spend in 2021. I’m looking to convert Traditional to Roth; I get a bigger bang for my buck now that stocks have declined.
If you own stocks and actively managed funds in your taxable account, it’s time to look hard at selling them now. Buy index funds. It seems crazy, but you should consider adding to your financial resources by tapping your non-financial assets; you do that with a mortgage. Rates are the lowest in 50 years.