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Retirement planning expert on the down market: ‘Lower prices are your friend’

Christine Benz, director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast, joins Yahoo Finance Live to discuss retirement planning amid stock market declines, tax loss harvesting, and tips for accumulating wealth through recessions.

Video transcript

- Welcome back to "Yahoo Finance Live." We are seeing all three majors in the green today. But major averages still deeply in the red for 2022. And our next guest says that could be a good time for portfolio check in. Joining us now is Morningstar's Director of Retirement and Personal Finance, Christine Benz. She has a few tax strategies investors could take advantage in a downturn.

Christine, I think people are all asking, like, is now the safe time to kind of look at my portfolio? Because it has been very scary over the last several weeks. What's the silver lining?

CHRISTINE BENZ: The silver lining is, first, that security prices are down. Both stock and bond prices are down. So if you're a dollar cost average or if you're someone who just is moving money into your plan on an ongoing basis through your 401(k) plan, for example, keep doing that because lower prices are your friend when you're in accumulation mode. Stock prices look inexpensive relative to our equity analyst team. It doesn't mean that they've bottomed, necessarily. But definitely stick with that plan of adding to a depressed equity market.

- And Christine, investors who aren't necessarily passive, you got some stocks in your portfolio. More than likely, a lot of them are going to be in the red. Can you talk about the tax-loss harvesting strategy and how investors can use that to save a couple of bucks on their tax bill?

CHRISTINE BENZ: Absolutely. It's one of the great silver linings in a down market. This strategy would apply to your taxable account, so not to your retirement account, not to your 401(k) or your IRA. If you have taxable holdings in a brokerage account, the idea is that you can sell them. If they are trading below what you paid for them, sell them, realize a loss. And then you can use that loss to offset gains elsewhere in your portfolio.

So many investors need to do a little bit of repositioning. Perhaps they want to skinny down their positioning in something that has increased a lot. Having those losses help offset the capital gains burden associated with lightening up on those positions that you might otherwise want to sell. There are a couple of things to bear in mind, though.

One is what's called the wash sale rule. So you can't rebuy that same security within 30 days of having sold it. Otherwise you'll negate the tax loss. You want to be mindful of that. You can't sell the same security or what the IRS considers a substantially identical security. So you couldn't sell an S&P 500 index fund and swap into an S&P 500 ETF.

- Christine, what about IRA conversions? What should be considered there?

CHRISTINE BENZ: Right. Another terrific strategy to consider. The idea is, if you want to convert your traditional IRA to a Roth-- and there are a couple of key benefits to doing so. One is tax-free withdrawals in retirement, no required minimum distributions. That's why people like the idea of getting money over into the Roth IRA column.

The advantage of doing so when the market has dropped is that your balance has dropped. And the taxes due upon making these conversions would be less than when the market was higher. You do want to take your personal tax situation into account. So if for whatever reason, even though your balance is down, you find yourself in a high tax year, you would want to be careful about doing these conversions.

Check with a tax advisor, get some advice. Often a series of conversions over a period of years can make sense for people where they're converting just enough to avoid tipping themselves into a higher tax bracket. This can also be a great strategy to consider if you've retired and your income is at a low ebb right now. You have a lot of control over your income. That can be a great time to consider conversions, before Social Security begins, maybe before you are subject to required minimum distributions. That's kind of the sweet spot for thinking about some of these IRA conversions.

- And Christine, we talk to a lot of advisors and money managers on this show. And their phones start ringing off the hook when we got one of those nasty 3%, 4% down days. Haven't had one of those in a while, it seems. Maybe it's only been a few weeks. Just wondering what the conversations you're having with some of your clients at Morningstar, what those are like right now.

CHRISTINE BENZ: Well, one thing we always talk about on, you know, the things I work on morningstar.com is the virtue of retirees, people who are in retirement, holding some cash assets on an ongoing basis to help meet their living expenses. That gives them peace of mind with their long-term portfolios. And of course, you don't want to go overboard with cash, especially given high inflation, given the opportunity cost of that.

But that is a strategy-- we sometimes call it the bucket strategy-- that can help make people-- help people make peace with their long-term plans. For people who are in the accumulation phase, I always say a policy of benign neglect. The less you're paying attention to your portfolio, the better. A good once-yearly or twice-yearly check in on that portfolio is plenty for most people. Just keeping that hands-off policy is the way to go.

- Benign neglect-- I have to agree with that. And hey, I'm in the news business. Thanks for stopping by here. Christine Benz, director of retirement planning and personal finance at Morningstar, thank you and good luck to your Cubs tonight.