It’s been a year of unconventional politics, yet the investment markets have held strong. Despite the occasional blip in reaction to a political event, investors who have stayed the course have, for the most part, recovered. However, the markets have experienced an unusually long bull run, leading some analysts to consider a correction — a 10 percent drop from recent highs — on the horizon. Retirees and those on the cusp of retirement should consider their current investment risk and have a potential fallback plan in the event that market losses impact their retirement income.
- One common bit of advice is to make sure your basic living expenses are covered. This means ensuring you have enough Social Security and pension income to cover housing, food and other essential expenses. If you do not, you may want to consider using a portion of your retirement assets to purchase an annuity that guarantees* a minimum level of income to help cover the balance. Expenses such as entertainment, travel and gifts can always be scaled back after a market decline to adjust for any loss of discretionary income.
- Another strategy is to keep a store of cash, not just for emergencies but also to help cover income losses due to a market correction. In this scenario, an individual can use his cash to cover living expenses to give his portfolio time to recover, rather than selling securities for a loss just to make ends meet.
- For individuals using their investments to generate income to help fund retirement, it’s important to stay on top of your allocation mix and consider making adjustments as needed due to market conditions.
- Finally, if a retiree’s portfolio takes a market hit, he or she may consider looking for other temporary sources of income rather than cashing out investments. Options may include taking a part-time job, renting out a vacation home or selling a spare car or other high-ticket item.
IRS Rules for Claiming Investment Loss
When an investment is sold for a loss, the difference between the price the investor originally paid and the amount he or she sold it for is referred to as a capital loss. A taxpayer may be able to deduct this amount from his or her income taxes in the year he or she sold the asset, per the following IRS rules:
- When the amount of investment capital losses exceeds an investor’s total capital gains, he or she can usually claim the amount of the excess loss as a deduction on his or her income tax return — up to $3,000 ($1,500 if married filing separately).
- When net capital losses exceed this limit, they may be carried forward to later years.
Capital gains and losses are classified as long- or short-term, depending on how long the investor held the asset before he or she sold it. If held more than one year, the capital gain or loss is long-term. If held one year or less, it is considered short-term.
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