Benefits of a Down Market

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:

  1. 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!
  2. 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.
  3. 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!

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