Great News, Your Roadmap For Retirement Recovery Is Here

Most people are playing catch-up. The bear market is to blame for last year’s losses, which caused account balances to decrease, particularly in the first half of 2024. The good news? In the game of retirement savings, the time does not run out, unlike in NFL football. Comebacks are feasible, provided the proper strategy is employed and adhered to. The strategy used is known as a recovery plan.

You cannot control the market’s behavior. The Schwab Center for Financial Research’s Rob Williams explains that you have power over how you respond to volatility and temporary portfolio losses.

What you shouldn’t do, according to Williams, is “swing for the fences” and try to get all your money back quickly by betting on the day’s hottest stock. Williams stated you could get lucky, but the danger is too great.

You should instead implement a plan that improves your chances of getting your retirement funds back on track. Hence, you will need to make several financial decisions that, when added together, will assist you in continuously rebuilding your 401(k).

Maximum Retirement Savings And Catch-Up

A prudent solution is to save as much as possible in tax-advantaged retirement plans such as 401(k)s and IRAs. “Pay yourself first,” said Wells Fargo’s senior director of advising, Emily Irwin (WFC). With declining retirement account balances and the market, now is the time to reduce spending to free up additional savings and investment funds.

The upside? You can invest more in growth-oriented assets, such as equities, at discounted rates, increasing your profits during the inevitable recovery.

If feasible, maximize your retirement savings (and invest at least enough to get your employer’s 401(k) match). To counteract growing inflation, the IRS increased the maximum IRA contribution by $500 to $6,500 in 2024 for those under 50; those 50 or above can save $7,500.

Even more good news, 401(k) participants have a greater potential to catch up. In 2024, younger savers can invest $22,500 in 401(k)s, an increase of $2,000 from the previous year. The catch-up payment for those aged 50 or above increased by $1,000 to $7,500. Individuals aged 50 or older can invest $30,000 annually in a tax-deferred 401(k).

Christian Thwaites, a financial advising firm Cerity Partners partner, stated, “This is a gift from the IRS.”

And the gift continues to give. Catch-up contributions are a means of resuming offensive play. The numbers soon mount up. For instance: Investing $2,500 every month (the yearly maximum of $30,000) for ten years at a return of 10% will yield a nest egg of $510,128.

Instead, investing $2,500 monthly (the yearly maximum of $30,000) for five years with a 10% return would yield a savings account of $196,956.

Invest Dormant Cash In Recurring Installments.

Are you sitting on a large amount of cash because you sold in a panic due to market volatility? If so, reinvest the funds in equities, which provide greater returns over time than less-risky assets such as cash.

Irwin of Wells Fargo suggests investing the money over three, six, or twelve months rather than all at once. Investing in stages can prevent buyer’s regret if you invest all of your money on an incorrect day. Irwin advised using dollar-cost averaging rather than going all-in. Select a monetary amount or a percentage of the funds you intend to invest over a specific time. Regardless of market conditions, invest a certain amount and stick to your plan.

Make The Most Of IRS Tax Changes

Irwin advises retirement savers to take advantage of the IRS’s inflation changes to the tax code. For the 2024 tax year, Uncle Sam has increased the standard deduction for married couples filing jointly from $25,900 to $27,700.

This action decreases the taxable income of a couple by $1,800.

Irwin advises that if you require additional income, you should change your tax withholdings, so you have access to the additional funds. Irwin said to get the money now rather than wait for your tax return. And if you do not require additional cash flow, consider the tax relief a raise and invest or preserve the money.

Pretend it never existed and spend the funds for a specific purpose, such as restocking your emergency fund or retirement account, Irwin said.

Consider a Roth IRA Conversion.

Consult your financial advisor to see if converting to a Roth IRA makes sense. With a Roth conversion, you will pay taxes up front on the amount of a conventional IRA and then get tax-free withdrawals at age 59.5 and after meeting the five-year holding requirement.

Why does conversion make sense at this time? Due to the dramatic decline in stock and bond prices, the value of your IRA has undoubtedly decreased. As a result, the dollar amount you will be taxed on when converting to a Roth IRA is reduced, resulting in a lower tax liability.

In addition, the shares you convert to a Roth IRA will profit from the inevitable recovery in asset values. And because the Trump tax cuts are slated to expire in 2025, you can lock in reduced tax rates.

Get Income Through Bonds

The Fed raised its funds rate seven times in 2024 to combat inflation, from 0% to 0.25% at the beginning of the year to 4.25% to 4.5% on December 14, 2024. According to Duane McAllister, co-head of municipal bond investments at Baird Advisers, retirees may once again create a sufficient income to meet their obligations with higher-yielding bonds.

“Your salary is much larger than a year ago,” McAllister remarked. In addition, the federal government does not tax the interest generated on municipal bonds, and state taxes are generally waived, depending on where you live. McAllister explains that the tax-equivalent yield on a municipal bond paying 5.5% would be roughly 9% and much more in areas with high-income taxes.

Regarding taxable bonds, investors may earn yields as high as 4.4% on U.S. Treasury bonds, 5% to 6% on investment-grade corporate bonds, and even more on trash bonds.

I-Bonds issued by the United States Treasury now provides a yield of 6.89%. (through April 2024). These bonds may only be acquired through the TreasuryDirect website. Investors must comprehend the restrictions relating to the maximum yearly I Bond investment amount and the penalty for early withdrawal.

Rebalance Your Portfolio 

The substantial losses incurred by stocks in 2024 may have resulted in a lower equity allocation than your financial plan dictates. Brad Bernstein, managing director, and senior portfolio manager at UBS Wealth Management, advises investors to rebalance their retirement savings portfolios to realign their stock, Bond, and other asset allocations with their long-term objectives.

After the market volatility, “everyone’s asset allocation is out of whack,” Bernstein stated. Removing losers from your portfolio for which you lack confidence that they will recover is also a tax- and rebalancing-efficient method. You can balance $3,000 in earnings with $3,000 in losses for the 2024 tax year and roll over extra losses to future years.

While rebalancing your portfolio, you should also assess the diversification of your assets. Ensure that you are not placing an excessive amount of your portfolio’s bets on a particular industry, such as technology or healthcare, an investing style, such as growth, or a single stock. If so, lower your portfolio’s concentration by selling some of your overweight positions and reinvesting the proceeds in market segments with less exposure.

Resist Selling Under Pressure, Remain in the Game

After a market crash, the last thing you want to do is damage your retirement. “The worst course of action is to panic and sell,” says Williams of Schwab.

Nonetheless, there are instances when you have no option but to use your 401(k). In fact, according to a study of investors conducted by Vanguard, “hardship withdrawals” from employer-sponsored retirement funds have lately hit a record high. These early withdrawals incur taxes and a potential 10% penalty. Dan Cronin, the founder of Lifestyle Wealth Management, recommends putting together a plan to refill what you’ve removed if you take an emergency distribution. Move on from short-term problems as quickly as possible and get back on track.

“Investing and saving for retirement are long-term endeavors,” adds Schwab’s Williams.