A sudden downturn in the markets usually gets individuals and families thinking about their personal finances. At a time like this, it’s important to make sure your financial plan is still in a place to succeed, no matter how long the volatility may last. Below, we’ve outlined some of the most common questions that come to mind when markets get shaky.

1. Is now a good time to move to cash?

   Selling out of the stock market in a market downturn means fully realizing your losses. It also means you are probably taking risk out of the market at the worst time. Converting investment assets to cash in the middle of a selloff is a last resort option.

   If you can, try to live on existing savings and postpone scheduled withdrawals, such as required minimum distributions from retirement accounts. It is a better idea to ride out this downturn by leaving your investments where they are and continuing to diversify. That way, you’re set up well, no matter the market environment.

   Having all cash may seem like the safest way to get through a bear market, but in the long-term, this strategy isn’t likely to generate enough to realize major goals such as retirement. Keeping everything in a savings account, especially in a low-interest rate environment, could mean missing out on market gains when the market bounces back, and it probably means you’re foregoing necessary long-term growth too. Market downturns always end, and selling at a less volatile time can mean greater gains.

   Now may be a good time to revisit your asset allocation and consider how your current strategy is suiting you. If you feel ‘stuck’ in a certain asset or position, now may be an appropriate time to rebalance and exit it.

2. Should I refinance my mortgage?

   It’s important to keep an eye on mortgage rates. Recent weeks have seen lower rates and a lot of rate volatility, making now an attractive time to refinance. If rates are significantly lower, by a percentage or two, than what you’re currently paying, it may be a good idea to consider refinancing, especially if you are nearing retirement and still have income.

   You should also keep in mind that if a lot of borrowers are looking to refinance their debt, rates are going to spike in order to keep demand down. As demand rises for new and refinanced mortgages, the process may take longer than usual. Also, keep in mind that closing costs (lender fees, title and escrow fees, attorney fees, etc.) will be due up-front.

3. Is it better to do Roth conversions in a down market?

   This down market might be a good time for a Roth IRA conversion. A Roth IRA conversion involves moving part or all of the balance of a traditional pre-tax retirement account and converting it into an after-tax Roth account.

   You shouldn’t base the decision solely on market environment, but rather on your current marginal tax rate. If your rate is lower now than it might be later in retirement, or if taxable income is expected to be lower as a result of taxable investment accounts likely generating less realized gains in low-growth years, a conversion might make sense for you.

   If you do decide to convert your traditional pre-tax account into a Roth IRA, be aware that this involves paying income taxes while markets are down. Further, it is recommended using non-IRA assets to pay tax on the conversion instead of withholding a percentage of the distribution.

4. How do I invest during a bear market?

   Before investing, make sure your savings are prepared to take on this type of market. Make sure your emergency fund will cover three to six months’ worth of expenses.

   During a bear market, you should focus on investing for the long-term. The equity market, despite looking bad during the middle of the downturn, is likely to be ripe with opportunity. Diversify your portfolio and be sure to make your investment decisions with your overall goals in mind.

   While some numbers may appear poor right now, market downturns are normal, and it’s possible to invest successfully despite them. Understanding your risk tolerance and financial goals will set you up to make long-term investment plans that will outlast a bear market. Revisit your plan, even when it feels like the bad times will last forever, to make sure you’re prepared to take full advantage of any market environment.

   Lastly, managing your assets and keeping you on track to your financial plan amid fast moving markets is a significant challenge for most people. For help, please feel free to reach out to an advisor for assistance.

5. Should I pay off all my debt right now?

   Sudden market volatility can sometimes scare investors into taking action on outstanding debt and loans. It’s important to think about the long-term impact of taking on more debt or paying it off. Keep your long-term goals in mind despite shaky markets.

   Maintaining debt can be a good idea if you can achieve larger returns by investing the money that you would be devoting assets toward the interest paid on your debts. Be sure you can continue making regular payments towards your debt and think carefully before accruing more debt or taking out a loan against your retirement savings.

6. Now that the tax deadline has been pushed to July 15th, should I file my taxes now? Does this change the deadline for contributions to my IRA?

   It depends on what you expect out of your taxes. While the market is down, keeping cash on hand is important for many, so if you expect to owe the IRS, it may not make sense to file immediately. On the other hand, if you expect a refund, it may be helpful to file now in order to receive your refund check earlier.

   Since the IRA contribution deadline is tied to the tax filing deadline, you can continue to make contributions to your IRA account up until July 15th, 2020 and have them counted as a part of 2019’s tax year.

7. Should I consider ‘tightening my belt’ as a part of a dynamic withdrawal strategy?

   A dynamic withdrawal strategy, or adjusting your withdrawals from year-to-year depending on how the market performs, may be a good idea if you’re already retired. This means making larger withdrawals when times are good and reducing your spending during a market downturn as opposed to the ‘static’ 4% rule. With this method, you’re ensuring the longevity of your retirement savings.

8. What happens if I run out of money in my emergency fund?

   While interest rates are low, you may want to consider ‘unlocking’ the equity in your home through a home equity line of credit, which will give you access to cash based on the value of your home. You can also consider a ‘cash-out’ mortgage, which would involve replacing your current mortgage with a higher one and taking the difference in cash. These options should only be considered in the direst times.

   You should avoid pulling money or taking loans from your retirement accounts. Try not to sell out of the market when most equities are at their lowest value and have the potential to come back up.

9. Should I be updating my estate plan?

   Now may be a good time to revisit your estate plan in terms of health care proxies, advance directives, and living wills. Based on where you reside, the current pandemic is changing the way hospitals and doctors can provide care. If you become sick or ill during this time, travel restrictions may prevent your health care proxies from reaching you and being able to advocate on your behalf. Now may be a good time to consider if you have adjusted all your preferences accordingly.

10. Do emergency fund recommendations change in a recession or bear market? Where should my emergency funds come from?

    Normally, a typical emergency fund is enough cash or easily accessible funds to cover your costs of living for 3-6 months. Everyone’s recommendation is different, and yours may switch based on how the current economic situation is affecting you. For some people, the 3-6 months may be enough. But if your house has less income for a variety for reasons (e.g., furlough), then it may make sense to increase this amount to be safe.

    The same may also apply if you are close to retiring and are worried about achieving your retirement goals. If you are going to increase the cash you have available for your emergency fund, you should first look to accounts that will not penalize you for moving out assets, like non-retirement brokerage accounts. This prevents you from incurring added costs later, which would be the case for moving money from a 401(k) or IRA (Individual Retirement Account). Taking money out of these accounts should be your last resort.

11. How much can I afford to donate?

    In such a difficult time, many organizations need additional aid and resources. Making a contribution is a great decision, but make sure it fits within your budget, and current financial plan. Estimate your cost-of-living for the next few months and ensure your emergency fund is all set before contributing.

    Note that the CARES Act created a new above-the-line deduction, up to $300 for any cash donations to qualifying charitable organizations. This is not available if you itemize deductions. Check out our Highlights of the CARES Act post for more information.

12. Do you have any recommendations on how best to save or invest my stimulus check?

    If you receive a stimulus check, you should use it towards taking care of any high percentage debt first. Next, you can use this money toward funding an emergency pool or adding to an after-tax investment account. Once you have worked through those more important needs first, your stimulus check can be an ideal source for making a charitable donation or spending on any purchases you may have been waiting on.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this paper is not intended as legal or tax advice.