It can be nerve-wracking for an investor to see the holdings in their 401(k) disappear during a recession, even if experts say the market will eventually make a comeback. At Insider, Jay Zigmont, a financial planner and founder of the Live Learn, offers three steps for proactively protecting retirement funds from a recession.
Convert a traditional 401(k) or IRA to a Roth account
While traditional 401(k)s and individual retirement accounts are funded with pre-tax dollars, Roth accounts, are funded with after-tax dollars, which means the retiree won’t have to pay taxes when they withdraw the funds in retirement (as they would with traditional 401(k)s and IRAs).
“When you do a conversion, you pay the taxes now, but amounts converted to a Roth IRA grow tax-free and they come out tax-free,” said Zigmont, adding: “Keep in mind that a 401(k) has required minimum distributions, so if you have a Roth 401(k), be sure to roll that to a Roth IRA after you stop work as a Roth IRA does not have RMDs.”
Reassess the Social Security plan
Zigmont recommends that investors visit ssa.gov to download their most recent Social Security benefits.
“Your Social Security statement will tell you how much you will get if you start claiming Social Security now and each year going forward,” he said. “Each year you put off getting Social Security, the amount you get each month (for life) will go up.”
He added that Social Security benefits have a built-in cost-of-living adjustment, which is 5.9% in 2022.
And while some people might choose to start drawing from their Social Security benefits now, Zigmont warned: “If you feel like you need to take your Social Security payment now to make up for the down market, remember, you are making a choice that impacts the rest of your life.”
Live on a fixed income now to prepare for retirement
The best way to recession-proof a retirement plan is to start adjusting to a lower fixed income as soon as possible.
“If you feel like things are going to be ‘tight,’ then it might be that you need to shift your retirement date,” said Zigmont. “Start living on a budget now as if you were on a fixed income and see if you are OK with it.”
Those who are particularly anxious can use financial software that runs Monte Carlo simulations, which churn out how a retirement plan will work depending on where the economy is by the time the investor retires.
“Those simulations will give you a number that reflects the chances that you’ll run out of money,” he said.
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For more news, information, and strategy, visit the Retirement Income Channel.