The bond market is in the midst of a long and severe decline, with no end in sight. This is the longest and deepest such decline ever seen. Generally speaking, the U.S. bond market is often considered a key indicator of our economic health. With both interest rates rising and bond prices falling, we’re pretty feverish.

The situation is creating a major headache for many bond investors, who have to watch the value of their investments declining at a pace never before seen. Meanwhile, the bond market’s descent is having a ripple effect on other markets, as well, now that investors are seeking safe havens for their money. 

Everybody knows that the stock market is volatile, and the impact is being felt across the globe. This is a major concern for policymakers as they try to figure out a way to stop the bond market decline from turning into a full-blown economic crisis.

Retirees, in particular, are feeling a nasty pinch on their income. Normally financially secure, most have a nest egg that they have built up over their working lives. Unfortunately, however, many are now facing significant financial losses as a result of the bond market’s decline.

One of the main reasons for this is the shift from traditional pension plans to 401(k)s and other defined contribution plans. With a traditional plan, retirees receive guaranteed income for life. How to deliver that is the company’s problem. However, with a 401(k) or other defined contribution plan, their benefits are dependent on the performance of the financial market. 

At the same time, retirees are living longer—and as a result, have more years over which to support themselves. This means that many have turned to bonds as a way to generate income in retirement. In saner economic times, that has always been a reliably sound investing strategy. For decades, it seemed unshakable.

However, today, we’re in uncharted waters: Bond prices have been volatile for a while now, causing retirees who are invested in individual bonds as well as funds to see significant losses. Even those who enjoyed affluence prior to retirement, in some cases, are now facing significant financial challenges.

Just as individual bonds were a go-to favored by retirement planners for years, Social Security has long been esteemed as America’s great financial safety net. If all else failed financially, generations of the elderly could look to their benefits as a fall-back source of income. 

I’ve already stated that I don’t believe it is going away entirely. At the same time, this hunch should not be taken as a guarantee; I can’t see the future any more clearly than you can. Historically, both parties in Washington have tended to put aside squabbling long enough to take periodic measures to preserve Social Security. 

This may not be as good as it sounds, though: There are two possible caveats to it. First of all, these are unusual times. D.C. has become more polarized over the last decade than it’s been in a very long time. With divisions so deep, a Congressional consensus about anything is probably far from a sure thing.

The second thing to keep in mind is that just because Social Security lingers does not mean that it will keep up with inflation’s effects by everyone’s full retirement age. COLAs (cost-of-living adjustments) are made periodically in an attempt to fend off the rising cost of living.

At the same time, many Medicare recipients’ premiums are deducted from their Social Security benefits before they are received. As a result, the benefits checks they receive can be extremely modest, far from anything that would support a lifestyle of luxury or comfort. Although Social Security may stick around, it won’t fund a lavish retirement.

I’m not saying “Ignore Social Security entirely:” I’m saying that you shouldn’t put all your financial eggs into the SSA’s basket. If you’ve participated in the U.S. workforce, you’ve been taxed to pay into it. So, you might as well make use of what you can.

Your break-even age is the potential sweet spot in your future career as a Social Security beneficiary. However, before discussing that, let’s cover some necessary details: How much you can collect each month has a lot to do with your age when you start collecting. Every taxpayer has to examine their other income sources in order to determine when they want or need to start.

Those with little else to support them may have to begin earlier. Doing so means that they will be paid out, potentially, over a longer timeframe. However, it also means that their monthly benefits checks will be smaller. 

Conversely, the longer that someone waits to start collecting benefits, the higher their payout (due to the shorter expected timeframe). When someone waits long enough, their accumulated benefits can actually begin catching up with the sum of reduced benefits they’d have gotten if they had started sooner. 

That catching-up point—the date when the value of claiming your benefits later on exceeds the value you’d have gotten by claiming them early—is your “break-even age.” Social Security benefits are based on a combination of your average income from your working years and the age at which you start collecting them.

My video “Will Social Security Really Go Broke?” from earlier this year explains why I suspect that the Social Security Administration will be around for years (if not decades) to come. I also go a little further into how the Social Security Trust Fund got into its current state. 

As the title at the top of this article suggests, these are days of rough economic seas. Like the ocean, the odds are that things will be calm again, given time. Nevertheless, especially if you’re getting ready to retire, you need to know how storms are currently affecting things.

Rising inflation within any economy means that people are losing purchasing power. Historically, this is the result of too much money in circulation: the more dollars are out there circulating, the more common the dollar is. An overabundance of them means that they are worth less per unit. 

As a result, what might have been a $2 cup of coffee a few years ago may cost you $8 or more today. Too few affluent retirees-to-be understand that this can—and will—affect their futures, as well: A million dollars in the bank in 2023 may not buy as much as it will now in 2022. 

Put another way, the hard truth is yes; even your high-net-worth retirement can potentially be impacted. The reason why is that this isn’t just a storm we’re facing; it’s a perfect storm. At the same time that inflation is roaring, a bear market in stocks and bonds has been raging. 

The stock market’s behavior is mostly cyclical, like the weather, but this has been a year of severe storms. Staples of retirement investing like bonds (which are normally rock-solid outside heightened inflation) have been losing value. In fact, where a 60/40 ratio of stocks to bonds within a portfolio was a rule of thumb for decades, it is no longer a preferable choice. 

The very factors that make bonds stable when inflation is lower are generating lower returns now, causing these losses of value. Diversifying your assets can certainly help (by limiting your exposure to any one asset type’s losses). Meanwhile, that may not be enough to weather the current monetary seas safely. 

When inflation and financial market volatility pair up with potentially higher taxes ahead, it becomes unavoidably clear: We should take extra measures to protect your financial legacy.

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The good news is that there are additional steps a professional financial planner can take to help you begin safeguarding your retirement savings more effectively. For example, tax loss harvesting can help lower your tax liability (the amount of money the IRS says that you owe) for a given period.

The basic idea is to sell assets that have lost value in order to offset capital gains from other investments. For example, let’s say you have a stock that you bought for $10,000 that is now worth $8,000. Whether this is due to supply chain issues or some other reason, it hit a rough patch.

Meanwhile, you also have a stock that you bought for $5,000—but that asset is now worth $7,000. If you sell the dud stock, you will incur a capital loss of $2,000. Normally this is something we want to avoid, but this strategy requires it: The negative cash flow that results can be used to offset any capital gains you realized from the sale of your hearty stock.

In other words, your overall tax liability gets reduced for the year of the sale. You may get to deduct up to $3,000 of your net losses off of your income tax—if your total capital losses for the year are greater than your capital gains. However, it is important to consult with a financial advisor before attempting this strategy due to the inherent potential risks.

If, for instance, the stock market were to rebound shortly after you sold the dud, you could miss out on that potential upside. Additionally, there may be fees associated with selling and buying some assets. Ignoring them could offset any tax savings you took the loss in order to get, so it’s always better to look before you leap.

Another potential tactic we could use is to convert a traditional IRA to a Roth IRA. Known as a “Roth conversion,” this financial maneuver gets the newly-changed account taxed as ordinary income in the year of the conversion. However, after that, all distributions from the account, including earnings, are tax-free. 

Because of this ongoing tax-free status, Roth Conversions are a popular tactic. However, before starting one, make sure that you have met the IRS standards for Required Minimum Distributions (RMDs): 

1. Your Required Minimum Distributions must come first. If the year’s specified minimum isn’t met 100% beforehand, the IRS sees your Roth to-be amount as an RMD that hasn’t been properly converted. RMDs aren’t eligible for rollovers, so this triggers a penalty.
2. Roth IRAs are still subject to the 10% early withdrawal penalty if taken before age 59 ½. This gets assessed on top of any income tax that you already owe.

Again, these tax planning measures aren’t tactics I’d recommend a D-I-Y approach for. Unfortunately, many people face audits from the IRS every year because they assume it  will be far simpler than it turns out to be. 

Any good financial advisor will tell you that retirement planning is a marathon, not a sprint. Just like with any other race, there will be ups and downs along the way. Markets are especially prone to volatility, which can throw your retirement projections off course. This is what makes working with a High Net Worth Financial Advisor so advantageous for navigating down markets. 

Too many individuals nearing retirement age have experienced substantial losses in retirement accounts during down markets. If they had consulted a fiduciary wealth manager beforehand—reviewing their retirement projections and making adjustments as needed along the way—they might have been spared some or much, if not all, of that frustration.

Any decent retirement plan should be designed to generate the highest possible monthly income while still providing for some account growth. Additionally, it should include a buffer to protect against the unexpected expenses that retirees periodically face. 

Your assets should be kept balanced and diversified, as well. If your portfolio receives regular tune-ups, it’s far more likely to weather moody stock market phases better. Similarly, by focusing on spreading your investments across multiple strategies as well as types of assets (such as, for example, commodities and commercial real estate in addition to stocks and bonds), we can reduce the impact of any single investment’s losses.

We are a fiduciary financial advisors with decades of experience working with affluent individuals and couples as they approach retirement. In other words, at Heritage Capital LLC, we take pride in our team’s ability to provide comprehensive, individualized service that takes into account each client’s unique circumstances. 

Our goal is to help you make the most of your retirement years, whether that means pursuing new hobbies, traveling the world, or simply enjoying a greater sense of financial security. That’s part of the reason why I recently completed the certification to add Accredited Investment Fiduciary® (AIF®) to my CV. 

We specialize in providing market-savvy investment management, financial planning, and retirement planning. By utilizing a comprehensive approach, we plan your taxes throughout each to save you as much money as possible—and if you like, you can even try us out for free.

I’ve never liked high-pressure sales pitches, so we don’t give them. If you like what you see and want to work together long-term, that’s great. If you decide otherwise, you’re under no obligation. Contact us or schedule a free consultation to learn more.