Mid-year disruptions in the financial markets can raise questions about how to include sudden market gains or losses in your MaxiFi plan.
- If there is a change in your current-year labor earnings, certainly you should go ahead and enter that change to your wages so that MaxiFi will accurately reflect your annual earnings come Dec 31st.
- If you receive an unexpected bonus in the middle of the calendar year, just add that to labor earnings if it does not involve FICA tax, create a Special Receipt taxable at ordinary rates.
But in order to account for dramatic market activity, up or down, you can use either of the following two approaches to adjust for your updated expectation about a safe return assumption for the current year:
Changing Return Rates
Use Settings & Assumptions to change the current year safe return expectations (for regular and/or retirement assets) to a percentage you think you will "for sure" earn for the entire current year. For example, if your current plan uses 4% nominal return, but by mid-year or later in the calendar year you feel confident that 8% will be your total return for the current year, you can change the return rates for regular and/or retirement assets in the current year and then use the change of return check box to set them back to the default safe return rate for the next calendar year.
Remember, the return rate you enter using the approach above is for the entire current year, not just year-to-date, and it's not an assumption about "market return" (which often refers to the DOW or S&P index) but rather your assumption is about your personal return based on your asset allocation.
Keep in mind the lessons of 2018 when the stock market lost about 10% of its value, most of it after October. One market observer wrote near the end of 2018, that "The vast majority of losses have come since October, when the stock market, which was experiencing the longest bull run in history, took a turn for the worst. The stock market is on pace for its worst December since 1931." So . . . are you sure that your YTD gains will still be there by the end of the year? In other words, keep in mind that even in October it's hard to know for sure how it's all going to shake out for the year. Corrections in the market can be dramatic but reversals can be just as dramatic as they were mid-year in 2020.
From a practical perspective, will your spending change if you go ahead and bake in now your optimism (or pessimism) about what your year-end returns will be by December 31? You can make a case for doing so, but one can also make a case for waiting for those return chickens to hatch. Only on December 31 will you know for sure what your return will be for the current year. See also: Two Approaches and Two Purposes to Planning (why be so cautious?)