We generally think one of the worst things that could happen to us financially right after quitting our job and having no income would be for a major drop in the market. Well, I quit my job in September 2021. The market was booming and 6 months later the market started dropping to the tune of negative 20% over 2022.
I could have panicked and applied for jobs, but instead focused on the benefits of a down market, which I’d like to share:
- I was able to make around $40k in Roth conversions this year. With the market being down, I was able to convert even more shares of my funds and I paid taxes on that lower value. Plus, I get the benefit of tax-free growth on those extra shares over the next 40+ years!
- I was able to do some tax-loss harvesting while converting money into the funds I wanted long-term. When I started my savings in a taxable account, I invested with Betterment. However, I discovered that in my draw down phase, this wasn’t the best brokerage account since Betterment doesn’t allow clients to turn off automatic dividend reinvestments, which I want to use to live off of. I’m still paying taxes for the dividends received, but if they’re reinvested and then I sell shares to live off of, I could have extra tax ramifications with capital gains on top of dividends. This prompted me to do an in-kind transfer to another brokerage firm, then reassess which funds I want long-term. With that comes capital gains/losses, so the market being down helped me reallocate that money into index funds with lower expense ratios.
- I’ve gained confidence to be able to withstand market down turns.
My portfolio is still down. The drop in my net worth is kind of scary to see, and the 4% safe withdrawal rate doesn’t seem great. Luckily, I can weather these types of downturns because of the previous work I did. Even though the market dropped, the number of shares I have in my funds didn’t drop, and now I have more shares in Roth than I would have if the market was up — and that will benefit me in the long run!