Retirement Answers

Jacob: 00:00

Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I am your host as always. This week on the show, I wanna talk about current events. We're talking about stock market crash or if it's crash or not.

Jacob: 00:12

And I want to share three different opportunities that might come out of this that you can use in your own portfolio to help make the most of this and maybe see some silver lining. So that's what we're going be talking about today. But before we jump into those three opportunities that I want to share with you, I wanted to remind you yet again that you can submit your questions to me to have them answered here on the show as we begin this new segment called the Friday Q and A, where I answer real questions from you as listeners here on the show that can hopefully provide some insight into real world questions and scenarios that you as retirees or pre retirees are facing. So if you've got questions and they're general enough to where I can answer them on the show, please those using that link down in the description of this podcast episode. Alright, with that said, let's go ahead and jump in.

Jacob: 00:55

So obviously, it has been an interesting, I guess, year so far of 2025 with markets being fairly volatile up and down. Right now, we're in the middle of a down cycle. And this is all due to conversations around tariffs and what has been implemented so far and what's expected to come. Obviously, there's a lot of confusion, and I'll be the first person to admit that I'm not a tariff expert. So hopefully, that gives you a little bit of comfort.

Jacob: 01:18

And what's interesting is that seemingly overnight, everyone has become a tariff expert, and they know exactly what's right or wrong with what's going on. I want to ignore all of that and just say that look, those things are out of our control. We can't help what is or isn't going to happen there. But what we can do is control a few different things and pull a few different levers in our own portfolios and our own retirement plan. So I want to focus on those things today rather than talk about a bunch of stuff that doesn't really have an impact on how we respond.

Jacob: 01:44

So whenever it comes to market downturns, the first emotion typically is, oh my goodness, what do we need to do? What's what's the problem? What can we fix? How can we take action? And that's our human response.

Jacob: 01:56

And the hard part about that is, if you look at any data or any, I guess, information on the average investor and the performance that that happens there. It is well below what the average annual index performances are on any given year, which means that the average investor is underperforming the market by a large margin, simply because of decisions. And one of my favorite things to say around investing is that the more you touch your account, the smaller it's going to get, whether that be through trading or actually taking money out of your account through distributions, your account will get smaller the more that you touch it. And I'm not sure if this is like a real study or if this is just a fable, but Fidelity did a study and they determined that the highest performing accounts on their platform were actually of those of dead people. And what's interesting there is that the performance of people who can't touch their account or make changes or do anything or make irrational or emotional decisions, those accounts perform better.

Jacob: 02:49

And I wanna take that principle and try to apply it or encourage you to apply it to your portfolio and how you manage money. Find a way to have a plan, execute that plan, and in some sense, make less decisions. Where we as humans and as investors, we go wrong is whenever we start making more decisions. So the decisions, those need to be happening whenever things are good and you feel really good about the outlook and what's gonna happen in your portfolio moving forward and your expectations. We don't need to be making decisions on what to do whenever bad times come like what we're in right now.

Jacob: 03:18

So in the grand scheme of things, this market drop is really not that huge overall, we see 10%, 15% drops quite often, honestly, a 10% drop on average happens every year, every couple of years. And if you just look back at some data there, you'll see that that is the case. But what happens is we kind of get worked up about it, right? We never like to see our nest egg or hard earned money going down to value. We always like to see it going up into the right, but that's not reality.

Jacob: 03:41

And if you think of it this way, short term volatility on the downside is simply the price of admission to be able to get the long term returns that you're looking for. So that's all that I'll say there about investing and how to navigate these tough markets from an emotional standpoint is, is simply make less decisions, try to stick to your plan, talk to your advisor, make sure you're doing the right things, and do everything you can to avoid making irrational, short sighted decisions. So with that, I want to talk about the main point of today's episode, which is three opportunities that you as an investor or retiree or someone who's approaching retirement can take. And the first one is tax loss harvesting. And I'll talk about this for just a little bit because there's a lot of maybe misconceptions around tax loss harvesting, or it's presented as something that's more important than really what it is.

Jacob: 04:25

But a few ways that you can use tax loss harvesting to your advantage is to realize losses in a current tax year to offset other gains that have been realized or that you know will be realized in this tax year. So here in 2025, if you got $10,000 of capital gains that you've realized in your accounts, that means you can use $10,000 of losses to offset those gains, which means you're not going to pay taxes. So that's a to help mitigate your taxes in the current tax year through tax loss harvesting, and perhaps most beneficial way that you can use tax loss harvesting to your advantage is to offset your normal income using losses. Now, this is capped to $3,000 per year, whether you're single or married filing jointly, but you can take up to $3,000 of capital losses and offset other normal income with that $3,000 And included in that normal income kind of category is going to be earned income, but also dividends or interest. So you could use up to $3,000 per year of capital losses to offset dividends, interest or earned income.

Jacob: 05:23

And here's the thing, you can actually sell more than $3,000 of losses in one year and all the leftover losses get to be carried forward into future years. So hypothetically, let's say that you sell $9,000 of capital losses this year, you can use 3,000 against normal income this year, you could do 3,000 of the six remaining left over next year, and then you have 3,000 more left over for that third year that you could offset $3,000 against your income using those losses moving forward in future years. So that's a way you can use tax loss harvesting to mitigate your taxes this year, but also in subsequent years because you do get to carry forward those losses into the future. Now, here's what I will say about tax loss harvesting. Tax loss harvesting is beneficial in the current tax year, but it doesn't necessarily help you long term and here's why.

Jacob: 06:08

Let's say you owned a stock that's worth a $100 a share, it then goes down to $80 a share, so you realize a $20 loss per share. You can use that $20 and whatever the amount comes out to, to offset your income, other dividends, other capital gains or interest. But here's the problem, whenever you do that, you're essentially resetting your basis to a lower amount. So you don't have a basis of $100 anymore, you have a basis of $80 per share, which means in the future, you're building up a larger tax bill for yourself at that point, because your gains will be larger whenever the market starts to recover. So there is a sense of, you know, you can benefit from a tax standpoint this year, but you don't get to avoid those taxes forever, because you're building in larger gains and larger taxes for the future.

Jacob: 06:52

Now, here's how that might actually work out. Let's say you are in the obviously investing in a brokerage account. This is where all these capital gains and tax loss harvesting occurs. It doesn't happen in IRAs or Roths, but let's say that right now you can offset your income because your tax rate while you're working is really high. It's really beneficial to realize those losses now to offset or eliminate the taxes you would pay on that earned income, because you'd be at high tax rates.

Jacob: 07:17

And in the future, whenever you're retired, your tax rates would go down because you're no longer earning a high salary, and perhaps you would be able to realize gains in the future at a 0% long term capital gain bracket through tax gain harvesting. And what you can do is you can start to look at this a little bit deeper instead of just looking at this from a right now tax savings, what you can do is if it's beneficial, realize those losses now build up more and more tax losses for the future and reset your basis. What you're able to do in the future is even though you have that lower basis, you're going to be able to realize gains at that 0% bracket because of tax gain harvesting and your income being in a lower spot in retirement. Now that's kind of next level stuff, and it hopefully that makes sense in terms of the way I explained it. But the key there is to know what your potential future looks like.

Jacob: 08:01

What is your plan for all of this? Don't just realize losses just to realize losses, have a plan behind it and understand what the benefits are both now in the current tax year, but also in future potential tax years. The second opportunity you can take advantage of during market declines like this is going to be rebalancing and simply investing more into those lower priced assets. So think about it this way. If you've got cash on the sidelines, you got $50,100,000 dollars sitting in a money market wondering what you should do with it.

Jacob: 08:29

Now's a wonderful time to begin slowly piecing that in through dollar cost averaging into the downside, so that you can capitalize on those new lower prices. You're getting something at a deal at a discount by investing money that was previously in cash that did not go down with the market. You can invest that in at a lower spot. Now, here's what I'll caution you with on this. Most people try to time the bottom.

Jacob: 08:50

And here's what I'll say, avoid doing that because again, going back to how I started this episode talking about decisions and decision making, we try to avoid making decisions based on what we think is happening or what we think is the right thing. We want to make a systematized decision. So here's an example. Let's say the markets down 20%. Let's say that you got a $100,000 that you have available to invest right now today that's been sitting on the sidelines and now it's go time.

Jacob: 09:14

Let's take that $100,000 and let's divide that up over the next, I don't know, two to three months. Let's say we take 30,000 or $25,000 in monthly increments, where you can break this down into weekly increments, whatever the math comes out to on that, but pick a time period, month, two months, three months, six months, whatever you think is reasonable. And then pick how much you want to invest each week, each month, every couple of weeks, whatever your specific schedule would be. And then invest that every single time, regardless of the markets up or down from when you decided to do this. So what happens here is you're trying to avoid timing the market by simply buying what is available that day.

Jacob: 09:49

So if the market keeps going down after you start this dollar cost averaging schedule, that's a good thing because then you have more money to invest at lower prices. If the market goes up, well, at least you got some in at these lower prices before the market started going back up. So the idea here is try to avoid timing the market, invest your money because you need to get it invested if you have it available, and you wanna do that in a thoughtful systematized way. Now, the second thing here in terms of investing more money can be done by rebalancing your portfolio. So let's say you have an eightytwenty portfolio, that's what is right for you.

Jacob: 10:21

And now if the markets gone down, hypothetically, let's say that you have a seventythirty portfolio because the stock portion is now worth less compared to your bond or fixed income portion of your portfolio. In that situation, you might want to do a rebalance to get your portfolio back to your target of 8020, so that you move money from the thing that has not gone down quite as much, fixed income, money market bonds, move that over into what has gone down more being the stock market and invest that 10% the difference between what you currently are at seventy thirty versus your target of eighty twenty, invest that back over there, so you're buying more shares at a discounted value, and then whenever the market recovers, you will be recovering at a faster rate because you have more money compounding in that stock position. Now, again, once you get to the back end of this, and let's say the market has recovered, you'll have to rebalance back to your overall eightytwenty position because you'd be closer to an 85 or a 90% stock position at this point, once that market does recover, and you don't wanna maybe stay there for the long term.

Jacob: 11:18

So you've got to think about rebalancing, think about how much money you might have on the sidelines, find ways to deploy that money, get it working for you, now is a wonderful opportunity to do that. Don't go all in all at one time because you don't know what could happen from here, whether the market recovers back to what it was or continues to go down. You wanna kind of hold a little bit of reserve and build out a dollar cost averaging schedule, especially if you have money sitting in cash on the sidelines ready to go. And the third huge opportunity available to you during market declines like this is going to be Roth conversions. So whenever we think about a Roth conversion, we're moving money from a tax deferred IRA over to a Roth IRA, and to do that, we have to pay income taxes on the amount of dollars that we convert.

Jacob: 11:58

What we don't pay taxes on is the number of shares. So I want to maybe walk through an example with you here, so I can explain this in a little bit more depth and make it a little bit simpler for you. So let's say right now today, we have 1,000 shares of XYZ stock that we own, okay? And the price per share is $100 So we own a $100,000 of XYZ stock, and a thousand shares is what that is made of. Now, here's what we'll say.

Jacob: 12:24

Let's say that the market goes down 20%. Okay, so we still own 1,000 shares of XYZ stock, but now the price per share is $80. So that's the 20% difference there. So originally, we had a $100,000 account value in our traditional IRA, and now we have an $80,000 account value in the traditional IRA after the most recent downturn of 20%. Again, these are hypotheticals, we're just using numbers to explain this and how this works.

Jacob: 12:48

So with that understood, let's say that we want to do a $50,000 Roth conversion. Okay, so that we can stay within a certain tax bracket, just call it the 12% tax bracket. So if we want to convert $50,000 going back to example number one, where we own 1,000 shares that are priced at $100 per share, we will be able to convert 500 shares in that example, because that would equal $50,000 So whenever we do that, that's 50% of the account that's going to be moved from traditional IRA to Roth, and we'll pay our income taxes on the $50,000 Now, we move to the second example, where we sell a thousand shares of XYZ stock, but now the price per share is only $80 because of the 20% decline, we're still going to be converting $50,000 total, but because of the price per share decline, what we're going to do is we're gonna be able to convert 625 shares to the Roth as opposed to 500. So do you see what's happening there? We're still getting to convert $50,000 total, which is our target because that would fill up the 12% bracket.

Jacob: 13:47

But the number of shares that make up that $50,000 is actually more now because the price per share is less. So we get to convert a higher percentage of shares to the Roth at the same price tag. So we still pay the same amount of taxes at 12% on $50,000 but we get to have $6.25 shares go into the Roth rather than only 500. So this example outlines why you would want to do Roth conversions during market declines or after market pullbacks is because you get to convert more of your overall nest egg at a cheaper price tag because your taxes are based on how much dollar amount you convert, not on the total amount of shares. So now whenever you have the market recovery happening, it's gonna be happening in the Roth, and you're gonna have more shares growing in the Roth and a tax free capacity compared to the original example.

Jacob: 14:36

So hopefully that gives you an idea or gives you a perspective on how Roth conversions can be beneficial during this particular period. So let's say hypothetically, you're retired, you're in your gap years, as you hear me talk about, and how it's a good time to do Roth conversions, and you were planning on doing a 50,000 or whatever dollar amount you were planning on doing this year to convert. Typically, you wouldn't do that until later in the year because you want to know what your total income numbers come out to, you want to know what your income outlook looks like to make sure you convert the right amount up to whatever tax bracket you're targeting. But now you've got this market decline earlier in the year, what it might make sense to do is speed up those conversions to do them now rather than in the future, because this is a prime opportunity to do so. Now I would caution you here and say maybe if you're trying to do a $50,000 conversion total, maybe it makes sense not to do all those conversions just yet, and maybe do multiple conversions throughout the year.

Jacob: 15:27

So if you think, hey, the market's gonna go lower from here, I might not wanna convert all of my $50,000 at this price because I might can get a better deal as the market continues to go down. Well, pick a certain amount of how much you wanna convert in terms of dollars and do that today, and then leave a little bit of opportunity left for yourself throughout the year. So maybe do $25,000 worth of a Roth conversion right now at this 15 to 18% drawdown. If it keeps going further, you've got another $25,000 of room at the tax bracket you want to do conversions at that particular point as well. And here's another thing, What if you were planning to do conversions up to the 12 bracket or whatever bracket is the right one for you.

Jacob: 16:05

And then this happens and you get a twenty, thirty, 40% pullback in the market. Well, it might make sense to go above the target percentage in terms of your tax rate that you're targeting. It might make sense to go from the 12 to 22%. And just an example that we're looking at here and pay more taxes to get more money converted to Roth because of this huge opportunity with the market pullback. So there is a little bit of nuance, there's a little bit of, I guess, art to this Roth conversion thing whenever opportunities like this arise.

Jacob: 16:32

But the key is, is understand what you're trying to do, have a plan for it and take advantage of the opportunity that's in front of you. And you'll be glad that you did years down the road because you'll get to see how much growth is happening in that tax free Roth compared to not taking advantage of that opportunity when it was there during the market decline. So all that to say, you've got three big opportunities in front of you during market declines like this. The key is, is don't panic, find a way to look back at your plan, see what you said you were gonna do whenever things were good, you didn't have the emotion kind of weighing on you and say, hey, here's the opportunities. What can I do?

Jacob: 17:05

How can I use what Jacob is talking about to my advantage in my own portfolio? And then go execute on that. If you need help with some of those things, feel free to reach out. I am taking on new clients and I'd be happy to see if we might be a good fit to work together. Also, if you have questions, again, submit them using that link down in the description below.

Jacob: 17:22

I look forward to answering one of those here on an upcoming episode of the Friday Q and A and expect the first episode of the Friday Q and A this Friday where we will talk about a listener question and see if it can help you in your situation. Thanks so much for tuning in. We will see you next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.

Jacob: 17:50

Thanks for tuning in to this week's episode. I look forward to talking with you again next week.