The second-quarter GDP report released July 28th raised a red flag – the economy shrank for the second consecutive quarter. However, the August 5th jobs report pegged unemployment at only 3.5%, a sign that the US economy is still strong. So what’s the deal? Are we in a recession or not? The answer is complicated. The wide range of economic indicators that define the peaks and troughs of the US business cycle have long been derived from data that lags several months back. As a result, recessions are not declared until months after one has already started. So what is one to do in today’s complicated economy?
Ultra-high net worth families can make financial gifts while stock prices are low to use up less of their federal lifetime gift tax exemption. The current lifetime exemption of $12.06 million per person is scheduled to reduce substantially at the end of 2025. We are already implementing estate planning strategies for our clients whom this will affect. If you fall into this bracket, consider gifting at market lows to move funds out of your estate in a more tax efficient manner. Moreover, you should follow up with your estate planning attorney, CPA, and CFP® professional in the next year to make sure your estate plan accounts for the reduced lifetime exemption.
Retirees, don’t panic over market volatility or check your retirement accounts daily. If your asset allocation already reflects your risk capacity, your portfolio’s reduced exposure to equity should help carry you through the market turbulence. If the market’s impact on your portfolio still keeps you up at night, talk to your advisor about reevaluating your risk tolerance (the amount of risk you are actually willing to assume). You should already have an emergency fund of 3-6 months of expenses, plus any required minimum distribution (RMD) amounts already sitting in cash. Most post-World War II recessions have lasted 6-12 months. If you don’t think you can make it 6-12 months with what you have currently available, then plan for alternatives like adjusting your lifestyle or potentially returning to work.
Retirement savers should generally continue to invest retirement contributions while markets are down, and consider using any excess cash to increase retirement plan contributions. Market downturns are a great time to consider Roth conversions; when executed at reduced prices, this can be a significant tax savings strategy over the long term for retirees and savers alike. If you are concerned about the market decline’s impact on your ability to achieve future financial goals, schedule a review of your financial plan with your advisor. Sophisticated financial planning software makes it possible to visualize how a financial plan could respond to a whole range of real world uncertainties, not limited to market downturns. Keep your resume up-to-date and have a backup plan should you lose your job. Early retirement plan withdrawals in a down market should be avoided if at all possible.
Historically, the influence of short term challenges becomes less impactful when consistently engaged in long-term financial planning. Find a CERTIFIED FINANCIAL PLANNER™ professional to help you create a financial plan by going to https://www.letsmakeaplan.org/
Published in the Victoria Advocate
Hannah Gohmert is a CFP® professional with KMH Wealth Management, LLC. She is the Chief Compliance Officer of the firm.