Roth conversions 'on sale' and other retirement advice amid the market crash

The recent market dive has many people worried about retirement, but the sell-off also presents some opportunities, several advisers said.

For anyone considering a Roth conversion, the bear market represents “a sale,” said Beau Henderson, CEO of Rich Life Advisors. Since assets in tax-deferred accounts such as 401(k)s and traditional individual retirement accounts are down by as much as 30%, doing a Roth conversion now means that investors will ultimately pay taxes on a smaller asset base, Mr. Henderson said.

“This is an opportunity where Roth conversions are on sale,” he said. “There might be a silver lining” to the current market crisis that has been sparked by the COVID-19 pandemic.

Mr. Henderson’s firm is planning to email clients to make them aware of the Roth conversion opportunity, he said.

Rich Life Advisors has been fielding numerous calls from worried clients, many of whom are near retirement and wondering if they should move their invested assets to cash positions, he said. Of course, the firm has generally been advising against such moves, instead encouraging retirees to spend down cash before pulling money out of the market for income, Mr. Henderson noted.

“The further we get from 2008, the less people remember,” he said of the possibility that clients who sell now will lock in their losses. But “right now you can’t be thinking about what happened in the last 10 years. We need to start thinking about what’s going to happen in the next 10.”

For many, that could mean staying in the workforce for another two years, or at least as long as it takes for the market to recover, he said.

Delaying retirement can have multiple benefits, Olivia Mitchell, executive director of the Pension Research Council, said in an email.

“Inasmuch as many Boomers are still working, the market crash will likely induce many to seek to delay retirement and work longer, so as to keep saving,” Ms. Mitchell said. “That has the virtue of deferring the date that they need to draw down from their retirement accounts, and it will entitle such workers to higher eventual Social Security benefits.”

Read more: Good ways to pay for the conversion taxes

But, she noted, a recession would also make it difficult for workers of all ages to stay employed – and that would have massive consequences for those who retire earlier than they planned.

“That will come as an unpleasant surprise to the more than 50% of older workers anticipating delaying retirement to at least age 66 – or who never plan to retire,” she wrote. “Therefore, a deep recession could induce many to file for early Social Security benefits, leading to a lifetime of lower income.”

Compounding that problem is the prospect a recession could knock down home values, since many retirees turn to home equity for retirement income, she noted.

“Just being able to delay retirement would be the first thing to consider,” said Wade Pfau, professor of retirement income at The American College. “That may not be possible for everyone right now, especially if they are working in a job that has a lot of face-to-face interaction.”

For those who are near retirement or who have recently retired, “the key becomes doing whatever you can just to not sell assets at a loss,” Mr. Pfau said.

He said market conditions are likely to encourage many near-retirees to consider buying an annuity.

Retirees and those approaching retirement are the most severely affected group in the current market, said Kevin Boyles, business development director at Millennium Trust Co.

“If there was ever a need for financial advisers, it is now, particularly among 60- to 80-year-old investors,” he said. “If we’re hitting a recession, it may drive a lot of individuals to file early for Social Security without realizing how much impact it may have on their long-term benefits.”

Clients have indeed been worried, said Rick Shoff, managing director at Captrust. When communicating with them, it is best for advisers to let those clients express all their concerns first, Mr. Shoff said, before developing a plan.

“People are feeling like this is the end of the world,” he said. “You’ve got to let them talk, [and] you’ve got to be reaching out … That gives you, as an adviser, an opportunity to try to normalize how they’re feeling.”

What clients near retirement should keep in mind is that eventually, markets recover, and “even if you retired today, your time horizon is still 20-plus years,” Mr. Shoff said.

While many financial planners have prepared clients’ portfolios to weather these conditions, new clients – particularly those near retirement – might have to make sacrifices, Gordon Achtermann, principal of Your Best Path Financial Planning, wrote in an email.

“The harsh reality is that adjustments will have to be made,” Mr. Achtermann wrote. “Either expenses will have to be reduced for a time or some other income (part-time work, consulting, etc.) will have to be generated.”

Mary Beth Franklin contributed to this report.