Investors know that they can “lose” money in the market. Most times those losses will be temporary and are rarely ever “total” losses. Experienced investors measure gains and losses in terms of percentage points, not in dollars. Dollars are not “real” money until you withdraw them. I will further argue that gains and losses should be measured comprehensively! This means tallying your gains and losses by a collective percentage in ALL the assets you personally own: cash, gold, stocks, bonds, real estate, etc. Chances are, some of your assets are rising while others are declining. If those assets don’t generate a monthly statement, it’s easy to forget that they are appreciating. Lastly, don’t forget that Uncle Sam is a silent partner in your portfolio. The balance on your statement must be adjusted for taxes due at withdrawal.
In very rare circumstances does anyone lose their money from their initial investment all the way down to $0. In most of those cases, the person was holding a speculative stock or crypto currency. In all those circumstances, the investor didn’t understand what they owned and/or they neglected to regularly monitor their investment.
I have witnessed more than a few people “running out of money.” There is the old saying “A fool and his money are soon parted” so I want to share the top 3 ways people run out of money to help keep current market conditions in perspective. I believe they are ranked in the correct order.
Adult kids in financial crisis
Investors who access their own IRA to bail their adult kid out of a money jam. This usually looks like an unplanned $20,000-$50,000 IRA withdrawal before taxes. These “jams” are almost always a self-created situation that resembles foolish debt, legal problems, vehicle replacement, tax debts, and homes they cannot finance for themselves. These withdrawals are never repaid and are usually not one-time events where a lesson was learned.
There is a world of difference when a parent helps or gifts to an adult child from their personal savings rather than accessing an IRA.
People who live for today (YOLO)
People who habitually rack up debt and take a 401k loan or IRA withdrawal to wipe the slate clean. $20,000 - $40,000 is typically the point at which a person feels the pain of soul crushing interest eating up their cash flow. These IRA withdrawals exacerbate a person’s tax bracket, often triggering the vicious cycle again when the next tax season rolls around.
People who fail to take tax obligations seriously
Some people simply fail to understand or take taxes seriously. Tax trouble occurs from being disorganized, failing to pay attention to income, expenses, tax withholding, or selling something without knowing the tax treatment. Below is a short list of situations that warrant engaging a tax advisor:
· Commission income and/or self-employment (also side-hustles)
· Transactions involving real estate sales (both gains AND losses)
· Capital gains from selling investments
· Inheritance taxes
These folks fail to engage a CPA or heed their advice. They end up taking a large withdrawal from an IRA to pay past due taxes instead of withholding the tax portion due in advance. IRA withdrawals are taxable and if taken before 59 ½, include a 10% penalty. This basically doubles a tax bill.
In Summary
If you have been paying attention, you will notice the situations outlined above involves using an IRA for purposes other than baseline retirement income. IRA’s primarily serve a dual purpose:
1. they help workers lower their taxable income in their working years while actively saving for retirement
2. provide retirement income that complements Social Security and other savings
Using IRA’s for large unplanned withdrawals often causes significant wealth damage particularly for people who do not have an emergency fund or any other investments (options) outside of their IRA. Large discretionary withdrawals often work best when the market is up, and the investor does not rely on the IRA for baseline income. It is prudent for long term financial stability to simultaneously save and build wealth outside of retirement plans because the tax treatment is generally better and there is more accessibility.
There are examples when utilizing an IRA to fund something other than retirement income needs has proven to be a wise move. Those strategies are best weighed with investment, tax, and legal advice. Some examples include but are not limited to: starting a business, getting divorced, making a down payment on a rental property (to generate income), etc.
It appears that volatility is here to stay for the next few months and a recession is possible. We are working hard to manage your investments and capitalize on opportunities that volatility presents so that you come out of this cycle on solid ground. I encourage you to be vigilant for your own financial well-being. If you are on a fixed income or your job security feels threatened, now is the time to avoid carrying debt – particularly on credit cards. Reconsider and try to postpone any big-ticket expenditures that has the potential to over-extend your financial security such as a kitchen remodel, pool installation, new cars, or a lavish trip to Europe, etc.
If you have cash in the bank that is not yielding at least 4% or old IRA’s/401(k)s that are unmanaged, now is a good time to give them some attention. Feel free to book on my calendar: www.calendly.com/mary-ggf
These market cycles are not forever, and some are shorter lived than others. Tune out the news and embrace the joys of spring.