It’s common practice for the president or CEO of a company to include a letter to shareholders in the annual report. Berkshire Hathaway’s chairman and CEO, Warren Buffett, doesn’t buck the trend.
Buffett's recently release annual letter captures plenty of attention, and this year was no exception. The focus is on the investments and operating performance of Berkshire Hathaway, but the Oracle of Omaha also includes many sound principles for wealth creation as well as his general thoughts about the U.S. economy.
From 1965-2018, the market value of Berkshire Hathaway has posted a compounded annual gain of 20.5%, more than double the S&P 500’s advance, which averaged 9.5%, including reinvested dividends.
There are two things that pop out here. First, Buffett's enviable record and his ability to create long-term wealth using time-tested principles. Second, the S&P 500’s record illustrates that a well-diversified stock portfolio has been a critical component of a long-term financial plan.
In case you’re wondering, Berkshire Hathaway’s overall gain has been 2,472,627% versus the S&P 500’s still-impressive 15,019%.
One more data point – Buffet continues to perform well, topping the S&P 500 Index in eight of the last 11 years.
Focus on the forest–not the trees
Your financial plan is comprised of many parts. This would equate to what Buffett calls the “economic trees.” In other words, let’s not get to caught up on any one investment.
“A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty,” Buffett writes.
He won’t get every investment right. Neither will we. Berkshire holds a substantial position in Kraft Heinz (KHC), whose shares recently tumbled after the company delivered poor results and slashed its dividend.
But, if we review the portfolio as we’d view the forest, we find a diversity of trees, wildlife, and plants. It’s a work of beauty. This is why we build our client's portfolios from the bottom up. Like the forest, we diversify our client's investments and create a portfolio that's a good fit for them with their financial goals in mind.
As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”
That said, you may recall the market decline just a few short months ago, where we experienced a 19.8% drop in the S&P 500 Index (September peak to Dec 24th trough).
How did that decline sit with you? We do our best to gauge our client's tolerance for risk and build their portfolios accordingly because we know how important behavior is in the investing process. The best portfolio we can create for a client is the one they're going to stick with.
If you found yourself fretting over the volatility a few months ago and we haven't spoken, don't hesitate to call us to see if we need to make any adjustments to your portfolio. If on the other hand, you slept soundly, it would suggest your investment mix in relation to your tolerance for risk is on target.
“At Berkshire, the whole is greater–considerably greater–than the sum of the parts.”
We feel the same way about your financial plan.
The American tailwind
Warren Buffett is bullish on America.
In 1942, he invested $114.75 in three shares of Cities Service preferred stock. At the time, the country was mobilizing for what would be a massive war effort.
If Buffett had invested his $114.75 into a no-fee S&P 500 index fund, and all dividends had been reinvested, his stake would have grown to $606,811 (pre-taxes) on January 31, 2019 (the latest data available before the printing of his letter).
The U.S. was victorious in WWII, but challenges never cease.
We’ve endured the cold war, the divisiveness of the 1960s, OPEC’s oil embargo, double-digit inflation, soaring interest rates, a rising federal deficit, the tragedy of 9-11, the war on terrorism, the financial panic of 2008, the ensuing Great Recession, falling home prices, and more.
Let’s say that you had had the foresight to see the oncoming explosion in the federal deficit, one that is up 40,000% over the last 77 years.
“To ‘protect’ yourself,” Buffett said, “You might have eschewed stocks and opted instead to buy three ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200.” Compare that to the performance of the S&P 500!
What is this nation’s secret sauce? The answer is complex and difficult; yet, the overarching theme lies in front of us.
The experiment called the United States has birthed and attracted the best and the brightest. Freedom and opportunity are its calling cards. Today, we are the wealthiest nation on Earth, and we continue to ride the wave of innovation and enjoy the benefits.
But, is that wave about to crash on the shore?
A recent piece by Morgan Stanley entitled, Millennials, Gen Z and the Coming ‘Youth Boom’ Economy, complements Buffett’s optimistic viewpoint. The population of the Millennials will overtake the Baby Boomers this year, and “Gen Z, born between 1997 and 2012, will overtake the Millennials as the country's largest cohort by 2034,” it said. For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”
Sure, we can’t know when the next recession will ensue or some of the challenges we’ll face as a nation in the coming years. Yet, as Buffett sums up his annual letter, “Over the next 77 years, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky–gloriously lucky–to have that force at our back.”
2019 – A bright start to the New Year
First, let’s go back to December. A headline in the Street.com summed it up well: "Dow Gains on Last Day of Worst December Since the Depression." Even a 7% bounce in the final week of the year didn’t prevent a performance that was compared to the early 1930s.
When the S&P 500 Index touched its bottom on Christmas Eve, the broad-based index of 500 large U.S. companies had shed 19.8% from its September 20 peak. We were barely 0.2 percentage points from officially entering a bear market.
Market turmoil in the fall and December’s action were especially ugly. Steep market corrections are not something we look forward to; they are impossible to consistently predict, but they come with the territory.
As we've repeatedly said, your investment plan must incorporate unexpected detours. The disciplined investor, who divorces the emotional component from the investment plan, chooses the best path to meet his or her long-term financial goals.
That said, 2019 has been much better:
There are no guarantees a deal will be inked, but a March 4 headline in the Wall Street Journal summed up recent sentiment:
"U.S., China Close In on Trade Deal"
Both countries could lift some tariffs imposed last year, and Beijing would agree to ease restrictions on American products
A trade deal that pries open Chinese markets to U.S. products and services, protects U.S. intellectual property rights, and ends forced technology transfers (and one with strong enforcement provisions) would not only benefit the U.S. economy, but a deal between the world’s largest economies would sweep away one cloud of uncertainty that has plagued investors over the last year.
10 years gone
On March 9, 2009, the Dow Jones Industrial Average closed at 6,547. It marked the bottom of the last bear market. On February 28, 2019, the Dow finished the day at 25,916, less than 1,000 points from its prior peak.
The bull market turns ten years old this month. How much life is left in the bull? We are in the latter stages of the cycle, but much will depend on the economic fundamentals going forward. With the Fed on hold, inflation contained, and the economy moving forward, the fundamentals are currently sound.
But never discount volatility. Stocks seem to take the stairs up and the elevator down.
In the spirit of celebrating the last ten years, let’s look at a partial list of the worries that temporarily sidelined the bull market (and caused short bouts of volatility), but didn’t sideline those with a long-term view:
The European debt crisis…Greece... global growth worries…U.S. growth is slowing...China is slowing...the dollar is too strong...Japan earthquake/tsunami/nuclear disaster...U.S. debt downgrade...fiscal cliff...Obama will be re-elected...Trump will get elected...Hillary will get elected...the Fed will end bond buys...Fed will start hiking interest rates...falling oil prices...Ebola scare...Russia invades Ukraine...North Korea...ISIS...Syria...Brexit...trade tensions...acrimony in D.C....and stocks have risen too quickly.
Shorter-term risks never completely abate. But Warren Buffett’s message has been consistent. Don’t bet against America.
Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.
Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.)
Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,600, compared to $12,000 for those 64 or younger.
Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½.
A significant percentage of retirees are carrying education and mortgage debt. The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation.
As retirement continues, seniors become less credit dependent. GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74.
About one in three seniors who live independently also live alone. In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate.
Around 64% of women say that they have no “Plan B” if forced to retire early. That is, they would have to completely readjust and reassess their vision of retirement, and redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers.
Few older Americans budget for travel expenses. While retirees certainly love to travel, Merril Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said they had planned their vacations extensively.
What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better.
We hope you had a wonderful holiday season. Whether you reached your personal goals in 2018, faced challenges, or are looking for a 2019 reboot, let's take a moment to hit on the key themes from the past year.
Flashback. Before we get started, let's reflect back one year ago as we left 2017 and began 2018. To jog your memory, 2017 was an excellent year for stock markets. In the U.S., the S&P 500 had increased more than 19% and global markets fared even better. Perhaps the most remarkable element of the 2017 stock market though was the unprecedented lack of volatility. The entire year, at no point did the S&P 500 have an intra-year drop of more than 2.8%.
To give you some perspective on this, between 1998-2017, the average intra-year stock market pullback was 15.6% (Charles Schwab, Investing Insights, Oct. 2018).
Volatility Strikes Back. So January 2018 began on a firm footing, building on highs in the wake of tax reform, low interest rates, low inflation and strong corporate profit growth. If stocks rise or fall on the fundamentals (and they usually do), the outlook was quite favorable as the year began.
However, while we will always believe no one can consistently time the peaks and valleys of the market, when there’s too much good news priced into stocks, any disappointment can create volatility.
A spike in Treasury bond yields tripped up bullish sentiment early in 2018. President Trump’s decision to level the playing field of international trade created uncertainty in the first half. Then, investors decided trade wasn’t important—until they decided late in the year that it was.
Another bout of selling began in October and the decline accelerated in December. Several factors contributed to the weakness, including fears that continued rate hikes by the Fed might stifle economic activity in 2019 and quash profit growth.
We’re also experiencing heightened uncertainty brought on by the ongoing trade war with China. In addition, key tech stocks (in particular, the FANG stocks – Facebook, Amazon, Netflix, and Google) that had been market leaders for several years lost their mojo and pulled on the major averages.
As the year came to a close, the peak-to-trough decline in the S&P 500 Index totaled 19.8% (St. Louis Federal Reserve thru 12.24.18). We exceeded the long-term average annual peak-to-trough drawdown by 4 percentage points. Still, we’re just shy of the 20% threshold, which is the commonly accepted definition of a bear market.
If Christmas Eve marks the bottom of the sell-off, it won’t be the first time we’ve had a steep correction that side-stepped a bear market. We witnessed similar declines in 2011 and 1998. In both cases, a profit-crushing recession was avoided.
But let us offer a little bit of perspective. The Q4 (quarter four) decline may have been unsettling. Nevertheless, the total decline in the S&P 500, including reinvested dividends, amounted to just over 4% (S&P Dow Jones Indexes) for calendar year 2018.
Overseas stocks fared quite a bit worse, as the global economy shifted into a lower gear earlier in the year, and trade tensions, which are more likely to rattle foreign economies, added to woes.
Many in their 20s and 30s don't even blink at a stock market decline. In fact, these can be some of the best times for younger investors (and if you have more than 10 years before retirement, we'd classify you as a younger investor) to be scooping up more shares at discounted prices.
Take note of this if you fit that description and consider your mindset. If you're still decades out from retirement and maintain a long-term time horizon, the near bear market declines we've recently seen shouldn't scare you, they should excite you. This is especially true if you have 401(k) and Roth IRA contributions on autopilot. By purchasing shares at a fixed interval every month, you take advantage of a strategy called dollar-cost averaging, which allows you to purchase a greater number of shares over time.
As we age though, we can't take such a sanguine view, and a more conservative mix of investments becomes paramount. Though we are unlikely to match major market indexes on the way up, we can still anticipate longer-term appreciation and sleep at night when the unpredictable market sell-offs materialize.
The same can be said of accounts that hold college savings, especially if the beneficiary is in college and doesn’t have the time to recover from a sharp dip in stocks. For those in the most conservative portfolios, the drop in the major market averages had little impact on your overall net worth.
Our recommendations are based on many different factors, including risk aversion. It’s rarely profitable to make decisions based on current market sentiment (i.e., panic selling or euphoria that sends us chasing the latest trends).
What’s in store for 2019
While 2018 began with unbridled optimism, caution quickly entered the picture and most major U.S. indexes had their first downturn since 2008.
In 2019, we have the mirror image. There is no shortage of cautious sentiment. But the fragrance that’s in the air today doesn’t always determine market direction throughout the year. As we’ve seen, markets can be unpredictable as investors try to anticipate events that may impact the economy and corporate profits.
Discerning Market Trends. We've always found it interesting that some analysts hope to discern trends from various calendar-like indicators. We’ve just entered a new year, and typically the so-called January barometer gets some play in that arena. Loosely defined, some say that how January performs sets the tone for the rest of the year.
Of course, if stocks perform well in January, the bulls already have a leg up on the bears. Throw in reinvested dividends and a natural upward bias in stocks, and it helps explain why a positive January usually results in a positive year.
But, that wasn’t the case for 2018. And by the same token, 2016’s weak start didn’t carry over into the rest of the year.
Then, there was this October 4th article in the Wall Street Journal: “Midterms Are a Boon for Stocks—No Matter Who Wins.” On average, the months of October, November and December have been the top-performing months during any year that included a midterm election (1962-2014). In 2018, though, there was a failure to launch.
While there’s still time left on the calendar, history indicates that Year 2 Q4-Year 3 Q2 is regularly the best three-quarter performance period of the 16-quarter cycle that begins just after a president has been elected or reelected. That’s using data on the performance of the Dow going back to 1896.
Finally, we could hang our hat on one other midterm indicator. That is, the S&P 500 has finished in positive territory in every post 12-month midterm period since 1950.
We say “could” because, while reviewing past election-year patterns to gain useful insights can be interesting (or nerdy depending on your perspective), we must stress this doesn't substitute for a well-thought-out plan that takes unexpected detours into account.
Table 1: Key Index Returns
Source: Wall Street Journal, MSCI.com, Morningstar
YTD returns: Dec 29, 2017-Dec 31, 2018
**in US dollars
We know that stocks can be unpredictable over a shorter period, and sell-offs are normal. And they aren’t pleasant. But we take precautions to minimize volatility and, more importantly, keep you on track toward your long-term financial goals.
We came across a recent piece by LPL Research that highlighted this. They found that the S&P 500 has lost an average of 31% every five years since WWII. Yet, the index has registered an annual advance 75% of the time (Macrotrends) and almost 80% when dividends are reinvested (NYU Stern School of Business Stock/Bond Returns).
Further, the S&P 500 has averaged an annual advance of nearly 10% since the late 1920s (CNBC/Investopedia).
During up markets and down markets, we like to stress the importance of your investment plan and the progress you're making toward your financial goals.
Stocks will hit small bumps in the road, and occasionally hit a major pothole, but the long-term data highlight that stocks have easily outperformed bonds, T-bills, CDs, and inflation.
As Warren Buffett opined a couple of years ago, “It’s been a terrible mistake to bet against America, and now is no time to start.” (Investment U, Motley Fool).
We trust you’ve found this review to be educational and helpful. As always, we're humbled to be in a position to serve and provide financial advice and guidance for each and every one of our clients. If you have questions or would like to discuss any matters above, please feel free to give us a call.
As 2019 gets underway, we want to wish you and your loved ones a happy and prosperous new year!
Gary Blom & Michael Howell
The views and opinions expressed herein do not necessarily represent the views and opinions of SCF Securities, Inc. or any SCF-related entity.
This research material has been prepared by Horsesmouth
Things you can do for your future as the year unfolds
What financial, business, or life priorities do you need to address for 2019? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to lowering your taxes. You have plenty of options. Here are a few that might prove convenient.
Can you contribute more to your retirement plans this year?
In 2019, the yearly contribution limit for a Roth or traditional IRA rises to $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $137,000 and joint filers with MAGI above $203,000 cannot make 2019 Roth contributions.1
For tax year 2019, you can contribute up to $19,000 to 401(k), 403(b), and most 457 plans, with a $6,000 catch-up contribution allowed if you are age 50 or older. If you are self-employed, you may want to look into whether you can establish and fund a solo 401(k) before the end of 2019; as employer contributions may also be made to solo 401(k)s, you may direct up to $56,000 into one of those plans.1
Your retirement plan contribution could help your tax picture. If you won’t turn 70½ in 2019 and you participate in a traditional qualified retirement plan or have a traditional IRA, you can cut your taxable income through a contribution. Should you be in the new 24% federal tax bracket, you can save $1,440 in taxes as a byproduct of a $6,000 traditional IRA contribution.2
What are the income limits on deducting traditional IRA contributions? If you participate in a workplace retirement plan, the 2019 MAGI phase-out ranges are $64,000-$74,000 for singles and heads of households, $103,000-$123,000 for joint filers when the spouse making IRA contributions is covered by a workplace retirement plan, and $193,000-$203,000 for an IRA contributor not covered by a workplace retirement plan, but married to someone who is.1
Roth IRAs and Roth 401(k)s, 403(b)s, and 457 plans are funded with after-tax dollars, so you may not take an immediate federal tax deduction for your contributions to them. The upside is that if you follow I.R.S. rules, the account assets may eventually be withdrawn tax free.3
Your tax year 2019 contribution to a Roth or traditional IRA may be made as late as the 2020 federal tax deadline – and, for that matter, you can make a 2018 IRA contribution as late as April 15, 2019, which is the deadline for filing your 2018 federal return. There is no merit in waiting until April of the successive year, however, since delaying a contribution only delays tax-advantaged compounding of those dollars.1,3
Should you go Roth in 2019?
You might be considering that if you only have a traditional IRA. This is no snap decision; the Internal Revenue Service no longer gives you a chance to undo it, and the tax impact of the conversion must be weighed versus the potential future benefits. If you are a high earner, you should know that income phase-out limits may affect your chance to make Roth IRA contributions. For 2019, phase-outs kick in at $193,000 for joint filers and $122,000 for single filers and heads of household. Should your income prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2019 and go Roth later.1,4
Incidentally, a footnote: distributions from certain qualified retirement plans, such as 401(k)s, are not subject to the 3.8% Net Investment Income Tax (NIIT) affecting single/joint filers with MAGIs over $200,000/$250,000. If your MAGI does surpass these thresholds, then dividends, royalties, the taxable part of non-qualified annuity income, taxable interest, passive income (such as partnership and rental income), and net capital gains from the sale of real estate and investments are subject to that surtax. (Please note that the NIIT threshold is just $125,000 for spouses who choose to file their federal taxes separately.)5
Consult a tax or financial professional before you make any IRA moves to see how those changes may affect your overall financial picture. If you have a large, traditional IRA, the projected tax resulting from a Roth conversion may make you think twice.
What else should you consider in 2019?
There are other things you may want to do or review.
Make charitable gifts. The individual standard deduction rises to $12,000 in 2019, so there will be less incentive to itemize deductions for many taxpayers – but charitable donations are still deductible if they are itemized. If you plan to gift more than $12,000 to qualified charities and non-profits in 2019, remember that the paper trail is important.6
If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record or a written communication from the charity with the date and amount. Incidentally, the I.R.S. does not equate a pledge with a donation. You must contribute to a qualified charity to claim a federal charitable tax deduction. Incidentally, the Tax Cuts and Jobs Act lifted the ceiling on the amount of cash you can give to a charity per year – you can now gift up to 60% of your adjusted gross income in cash per year, rather than 50%.6,7
What if you gift appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the investment and donating the proceeds. The non-profit organization gets the full amount of the gift, and you can claim a deduction of up to 30% of your adjusted gross income.8
Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you should ask that charity or non-profit group for a receipt. You should always request a receipt for a cash gift, no matter how large or small the amount.8
If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.
Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2019. You can make fully tax-deductible HSA contributions of up to $3,500 (singles) or $7,000 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older. HSA assets grow tax deferred, and withdrawals from these accounts are tax free if used to pay for qualified health care expenses.9
Practice tax-loss harvesting. By selling depreciated shares in a taxable investment account, you can offset capital gains or up to $3,000 in regular income ($1,500 is the annual limit for married couples who file separately). In fact, you may use this tactic to offset all your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2020 (and future tax years) to offset ordinary income or capital gains again.10
Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts, and your most tax-efficient securities should be held in taxable accounts.
Review your withholding status. You may have updated it last year when the I.R.S. introduced new withholding tables; you may want to adjust for 2019 due to any of the following factors.
* You tend to pay a great deal of income tax each year.
* You tend to get a big federal tax refund each year.
* You recently married or divorced.
* A family member recently passed away.
* You have a new job, and you are earning much more than you previously did.
* You started a business venture or became self-employed.
Are you marrying in 2019? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2019, you will need a new Social Security card. Additionally, the two of you, no doubt, have individual retirement saving and investment strategies. Will they need to be revised or adjusted once you are married?
Are you coming home from active duty? If so, go ahead and check the status of your credit and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still in place. Revoke any power of attorney you may have granted to another person.
Consider the tax impact of any upcoming transactions. Are you planning to sell (or buy) real estate next year? How about a business? Do you think you might exercise a stock option in the coming months? Might any large commissions or bonuses come your way in 2019? Do you anticipate selling an investment that is held outside of a tax-deferred account? Any of these actions might significantly impact your 2019 taxes.
If you are retired and older than 70½, remember your year-end RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs by December 31 of each year. The I.R.S. penalty for failing to take an RMD equals 50% of the RMD amount that is not withdrawn.4,11
If you turned 70½ in 2018, you can postpone your initial RMD from an account until April 1, 2019. All subsequent RMDs must be taken by December 31 of the calendar year to which the RMD applies. The downside of delaying your 2018 RMD into 2019 is that you will have to take two RMDs in 2019, with both RMDs being taxable events. You will have to make your 2018 tax year RMD by April 1, 2019, and then take your 2019 tax year RMD by December 31, 2019.11
Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your adjusted gross income, plus any non-taxable interest income you earn, plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.11
Lastly, should you make 13 mortgage payments in 2019? There may be some merit to making a January 2020 mortgage payment in December 2019. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more.
Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in 2019.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more [11/1/18]
2 - irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions [11/2/17]
3 - irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [7/10/18]
4 - forbes.com/sites/bobcarlson/2018/10/26/7-ira-strategies-for-year-end-2018/ [10/26/18]
5 - irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax [6/18/18]
6 - crainsdetroit.com/philanthropy/what-donors-need-know-about-tax-reform [10/21/18]
7 - thebalance.com/tax-deduction-for-charity-donations-3192983 [7/25/18]
8 - schwab.com/resource-center/insights/content/charitable-donations-the-basics-of-giving [7/2/18]
9 - kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html [8/28/18]
10 - schwab.com/resource-center/insights/content/reap-benefits-tax-loss-harvesting-to-lower-your-tax-bill [10/7/18]
11 - fool.com/retirement/2018/01/29/5-things-to-consider-before-tapping-your-retiremen.aspx [1/29/18]
By Michael Howell
In recent months, you may have read articles highlighting some new and improved benefits to the popular 529 college savings program as a result of the passage of the Tax Cuts and Jobs Act.
Specifically, the new tax law has expanded the use of 529 plans, allowing for up to $10,000 per year to be used to pay for tuition at elementary or secondary private and religious schools.
At first glance, this expanded flexibility is welcome news. After all, more versatility in most cases is a good thing. Except upon deeper inspection of the changes, the updates are of less value than most people think, especially for those of us living in California (keep reading).
A Quick Primer on 529 Plans
As a quick primer (or reminder) of how 529 plans work, the core benefit of the program is it allows owners to invest money using after-tax dollars toward future education expenses and capture tax-deferred growth. Fast forward to when education expenses come due, and withdrawals are tax-free so long as they're used to pay for qualified education expenses as per the IRS.
In other words, you can avoid paying tax on the growth portion of your 529, meaning less money going to Uncle Sam and more money going toward helping your student pay for education expenses.
Why the Change Matters
Prior to the new tax law, 529 assets could only be used to pay for college and higher education expenses. In my interactions with parents and grandparents planning for the future, this restricted usage of 529 assets is often one of the primary deterrents to a would-be 529 investor utilizing the program to save for college expenses. In these case, the driving concern is usually over the potential of a student deciding to skip college altogether and the money becoming subject to taxes and penalties.
So on the whole, expanding the flexibility of the program by allowing withdrawals to pay for K-12 expenses is undoubtedly an improvement, if ever so slight.
The bigger question is whether you should use 529 assets to pay for K-12 expenses?
A few words of caution…
The Funds Can Only Be Used to Pay for K-12 Tuition
You'll notice in the above primer on 529 plans that I mentioned 529 withdrawals are tax-free so long as they're used to pay for qualified education expenses.
Per the federal guidelines, the definition of a qualified education expense now depends on whether your 529 funds are used to pay for college or private K-12 expenditures. If the withdrawal is made to pay for a college bill, qualified expenses include tuition, room and board, books/supplies, and specific technology items like computers. In contrast, withdrawals related to K-12 costs are only applicable toward tuition.
As small as this difference may seem, it's significant enough to get someone in trouble. That means no using 529 assets to pay for your high school student's computer, books, or charging them rent for the privilege of living under your roof (as tempting as that may be)!
In This World, Nothing is Certain but Death & California State Taxes
Remember how I mentioned that 529 withdrawals are tax-free if they're considered qualified education expenses? Well, they're only tax-free if we're talking about federal tax and if the state you reside in follows the same federal guidelines.
Unfortunately for Californians, if a parent withdraws money out of a 529 plan to pay for K-12 expenses, it will be considered a non-qualified distribution for California tax purposes. Without getting too technical here, this means that a portion of any 529 distributions used to pay for K-12 expenses would still be tax-free for federal tax purposes, but would be considered "taxable earnings" for California state tax purposes. Also, the taxable portion of any non-qualified 529 distributions would be subject to a premature 2.5% withdrawal penalty in California.
When the purpose of putting money away in a 529 in the first place is for the tax-advantaged growth potential, this should be a deal breaker for most Californians, at least for now. Should Sacramento decide to update and adopt the federal guidelines at a later date, this would make the benefit worth considering.
Consider the Trade-Off
Lastly, consider the trade-off of using 529 assets to pay for secondary or high school expenses. At its most practical level, dollars used to pay for private K-12 schooling will mean fewer dollars available to help pay for college expenses. Not to mention, dollars withdrawn early from a 529 are no longer invested and compounding over time, which means less money for college and a lower tax benefit.
Remember the primary tax benefit of a 529 plan is tax-free growth. A 529 plan with an investment held for 3-5 years has far less growth potential than an investment held for 15-20 years. So any tax benefit that would come from using 529 funds to cover private K-12 expenses would be negligible at best because the investments just aren't given as much time to compound and grow.
This is why investing early in a 529 plan when a child is a baby makes so much sense. An investment timeline spanning nearly two decades can allow for a more aggressive investment plan. The longer the assets remain in the plan, the higher the growth potential and tax benefit over time.
So in this advisor's opinion – if paying for private school is important to you, you're better off utilizing your cash flow and other means to pay for tuition expenses.
If you're using a 529 plan to save for college—my advice is to save early, save often, and hear the whispered words of wisdom in Paul McCartney and "Let it Be!"
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Urban legends, urban myths, and the latest that’s on everyone’s lips–fake news. Whatever you call it, in our age of information, claims of dubious repute can go viral in minutes. Anyone with a computer can start a blog and offer up opinions on just about any subject, whether he or she is an authority or not. Sources? Who needs sources?
Alright, please excuse the sarcasm, but hopefully you know where we're going.
When it comes to retirement, there are plenty of misleading thoughts, opinions and fake news floating around out there. With that in mind, we'd like to clear up some misconceptions that surround the retirement years.
Myth #1: I’ll never see a penny of the money I put into Social Security.
If we had a nickel for every time we've heard someone utter that phrase, we'd have a lot of nickels. Sadly, if a 40-something says he is confident he will receive monthly checks, he sets himself up for ridicule among his contemporaries.
We wouldn’t disagree with the hypothesis that young people getting started in the workforce will receive a low return on contributions into Social Security, but this is a completely different argument.
Contrary to popular assertions, Social Security is not on the verge of bankruptcy, and we fully believe even those who are many years from retirement will be collecting monthly benefits when it’s their turn.
According to the 2017 annual report from the Social Security and Medicare Board of Trustees, Social Security “has collected roughly $19.9 trillion and paid out $17.1 trillion,” in its storied 82-year history, “leaving asset reserves of more than $2.8 trillion at the end of 2016 in its two trust funds.”
As an ever-larger number of baby boomers continue to retire and collect benefits, the trustees expect the trust funds to be depleted by 2034.
Thereafter, expected-tax-income receipts are projected to be sufficient to pay about three-quarters of scheduled benefits. Put another way, recipients of Social Security would receive about a 25% cut in benefits, if no changes are made to the current structure.
Of course, these are simply projections and much will depend on economic growth, job creation, and wages. Yet, it’s a far cry from, “I won’t see a penny of Social Security.”
We suspect that politicians will eventually settle on some type of compromise that will extend the life of the current system, but it may take a catalyst event that would generate enough political pressure for this to happen.
That said, we recognize that timing and strategies that can be implemented for Social Security may be complex. If you have questions, please give us a call or shoot us an email. We would be happy to discuss your options with you.
Myth #2: The stock market is too risky.
There’s no question about it, the bear markets that followed the dot.com bubble and the 2008 financial crisis were unprecedented in that we saw two steep declines in less than 10 years.
Made fearful by what they see as too much risk, millennials have shied away from stocks, according to a Bankrate survey. There has always been a degree of risk in stocks, even with a fully diversified portfolio. Yet, a well-diversified portfolio is akin to a stake in the U.S. and global economy. Moreover, the U.S. and global economy has been expanding for many decades and history tells us it will likely be bigger in 10 or 20 years.
When it comes to investing in stocks, the only resistance we typically come across is from folks who haven’t seriously entertained the idea before. We listen to their concerns, and answer with an array of factual data that’s not designed to win an argument, but simply to educate. When you have all the facts, then you can make an educated decision about what's best for you.
Myth #3: Medicare will handle all my health care needs in retirement.
If only Medicare did cover everything. But then, the cost to finance it would be much higher.
Medicare doesn’t cover the full cost of skilled nursing or rehabilitative care, according to AARP. Yes, the first 20 days of a stay in a nursing home is covered, but you’ll pay over $160 per day for days 21 through 100. And Medicare doesn’t cover stays past 100 days.
You may be paying out of pocket for personal care assistance, too. The same holds true for miscellaneous hospital costs, routine eye exams, hearing, foot and dental care.
Myth #4: Why save today when you can start tomorrow—there’s plenty of time.
This section is designed for millennials and those who are just beginning their journey in the workforce. There’s no better day to begin saving than today and we can’t stress this enough!
Here's a simple example:
Source: JP Morgan Asset Management
This is a hypothetical example and is not representative of any specific investment. Your results may vary.
In other words, Susan begins 10 years earlier than Bill, saves 20 years less than Bill, and saves $100,000 less than Bill, but winds up with $61,329 more.
For every parent or grandparent reading this, we encourage you to forward this powerful example to your kids and grandkids that are near or have already entered the workforce. It's a teachable opportunity with a simple lesson: The sooner you begin; the better off you may be as you approach retirement.
Take full advantage of your company’s retirement program. If your company doesn’t have a savings plan, there are many simple ways that you can get started. Feel free to reach out to us and we can assist.
Myth #5: Retirement is easy.
Many look forward to the day when they will no longer prepare for Monday mornings at the office. For those who face the work challenges that crop up daily, retirement may seem like a welcome oasis in the distance.
But that oasis sometimes turns out to be a mirage. Often, the transition from decades of working to retirement isn’t so simple.
For a better retirement, set goals, and not simply financial ones. Can you transition to part-time in your job? Consider part-time employment or consulting. It will ease the transition, keep you busy, and extend your savings.
Volunteer with your local church or local community organizations. Look for groups with similar interests. You’ll not only derive an enormous amount of satisfaction from helping others, but you’ll meet like-minded folks and make new friends.
Try something new. Keep up any exercise routines—and it's never too late to start a new one. Check with your doctor, who will be happy to prescribe a fitness plan that’s suited to you.
Have you ever considered taking a class? How about writing a book or mentoring someone young? Expanding your knowledge or sharing your ideas can be quite fulfilling. We've heard of retirees writing books and personal autobiographies for their kids – talk about a legacy!
The most important thing you can do to make retirement enjoyable is to stay active and keep your mind and body sharp.
This research material has been prepared by Horsesmouth
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
By Michael Howell
This last October, 2017 marked the 30 year anniversary of what famously became dubbed, Black Monday. For those unfamiliar with what took place on October 19, 1987, the Dow Jones Industrial Average plummeted by a then-record 508 points—a 22% decline in a single day.
Thirty years later, we look at a very different market as we begin 2018. This market has been anything but volatile and the secular bull market we're currently in now pushes into its ninth year with the last significant market pullback taking place in late 2015-early 2016.
Let's acknowledge this market for what it is. Times are good!
But what about when they're not? We all know the axiom, "What goes up, must come down." If you think rationally, you may be observing this market wondering: How long can we expect this to last?
Even though it's Winter at the time of this writing (and cold outside), from a market standpoint we're figuratively sitting in the sun lounging about on a nice boat in clear waters, and most of us are enjoying this market for what it is. For these reasons, we feel now is a great time to examine where we are in the business cycle and look back on history to draw lessons from days when waters weren't so smooth. Doing so helps us to better prepare for the next storm that inevitably passes.
We begin with today's forecast.
Even as we stand today, many market forecasters are predicting sunny weather going into 2018. American corporations reported strong profits in 2017 and the outlook may be getting better. Many onerous government regulations have been rolled back under the Trump administration, tax cuts have now been passed, economic growth has been accelerating, interest rates (though rising) still remain low, and strong corporate earnings continue to support rising stock prices.
Despite being in the ninth year of this economic recovery out of the Great Recession, if corporate earnings continue to impress, it is very possible for the market to continue rising further.
BUT – we all know the day will come when this market makes a turn. In fact, it's inevitable. Ironic as it may seem, market downturns are a healthy and necessary part of the business cycle. When markets rise, it causes demand for products and services to increase, which in time causes inflation to ensue. Practically speaking, inflation makes every dollar you own less valuable as the prices of homes, cars, and various goods you purchase increases relative to your net income.
To illustrate, can you remember what gas prices were back in the day? Some of you may remember when gas prices were less than 50 cents a gallon. If you do, that means you lived through the 1970's when gas prices were last at this level. It also means you remember when disco, station wagons and 8-tracks were a thing! Of course the days of 50 cents per gallon of gasoline are long behind us, but in the big picture, what matters is price inflation relative to growth in your wages and investments. In other words, if the costs of goods like gasoline or food begins increasing at a rate that’s faster than the growth of your wages or investments (and the same holds true for your friends and neighbors), our economy has a problem.
This is why the business cycle is important – it ultimately helps keep various market forces in check. For those reasons, it's necessary to understand how the cycle revolves.
How does the business cycle keep market forces in check?
In every business cycle, what inevitably happens is the economy over-expands and eventually reaches a peak, where consumers develop a lesser appetite (or ability) for spending and borrowing. When this occurs, demand for products and goods decreases and sets the stage for the economy and market to contract.
This period of contraction typically reduces inflation, affords consumers and businesses opportunities to repay debt, and helps stimulate greater demand for goods once again – which then begins a new business cycle for the next leg. Though the cycle expands and contracts, historically the contractions set the stage for another leg higher.
Where are we in the current cycle?
Overall, we've moved into the maturing phases of the current expansion, but we're still experiencing some areas of recovery. According to LPL Financial Research, we currently sit in a business cycle that has displayed elements of multiple stages all at the same time.
Source: LPL Financial Research Outlook 2018 Chartbook
One of the remarkable elements of the economic growth we've seen over the last eight years is that the primary driver of economic growth was largely dictated by the actions of the Federal Reserve through extraordinarily accommodative monetary policy (via quantitative easing). Through this period, our economy and markets have certainly grown, but the rate of growth has been slow in comparison to prior economic expansions. Today, these forces are no longer as influential and the forces that have historically supported economic and market growth, such as deregulation, infrastructure investment, and entrepreneurial risk taking have moved into the driver's seat.
What does the business cycle have to do with my investment portfolio?
As we've stated in multiple writings, over time, stock markets will follow where corporate earnings lead. Stocks are shares of ownership in businesses, and since businesses expand and contract through these cycles, any ownership you have in stocks will see its price action expand and contract along this cycle. More importantly, it's these contractions or downturns that ultimately create the conditions necessary for the market to move into its next leg of growth.
In a way, think of it similarly to a forest fire. Though destructive, fires are also a natural and healthy part of an ecosystem. Its fire that kills off dead trees and decaying matter in the forest, and the ashes add nutrients back into the soil to support new growth.
Those of us Californians know we can't control the dry wind and periodic drought conditions that occur in our state. Similarly, it behooves us as investors to recognize we can't control the expansion and contractions of the business cycle—we can only control our behavior along the ride as we go through them.
Back to Black Monday
Taking us back to where we started, Black Monday was a terrifying day for many investors. You can even watch old news footage to get a feel for the sentiment on October 19, 1987. Nobody had ever seen a 22% drop in the stock market in a single day, and it caused widespread panic and selling of stock shares. On that day, more than 595 million shares were traded (the prior record was 302 million). To give you a comparison, the crash that occurred on Tuesday, October 24, 1929 (dubbed Black Tuesday) that preceded the Great Depression dropped only 13%. Needless to say, many felt like the sky was falling and pandemonium ensued. Many people wanted nothing to do with the stock market at that point and sold off the investments they held.
What caused the market to drop so significantly? Various reasons have been cited, but the consensus reporting on the 1987 crash was that it occurred as a result of a combination of forces: Exacerbated selling activity, ill-equipped computer trading systems, a weak dollar, inflation, the trade deficit, and Middle East conflict.
Putting it all in perspective.
Oppenheimer Funds did an analysis of someone receiving a $100,000 inheritance and investing it in the U.S. market on the eve of the crash. After Monday's 22% decline, the investment would have dropped in value to $77,420. However, by the following October 20th of 1988, the investment would have once again grown and surpassed $100,000 and 30 years later (today), would be worth more than $2.1 million.
Putting it in visual form and to scale, the 1987 Black Monday crash looks like a blip on the radar from where we are today.
In fact, the Dow Jones Industrial Average has increased more than 1,400% since that day 30 years ago. When looking at a mountain chart like this, it's clear a long-term perspective is essential and necessary for us to make wise investment decisions. Even so, we don't minimize the risks involved with stocks, particularly for those nearing retirement. Why? Because it takes time to recover from downturns.
For example, if someone had an investment that declined 50% in value, a 50% gain would not bring the portfolio back to break-even—rather a 100% gain would be needed to get the portfolio back to where it started. Historically, this recovery can take several years, time a pre-retiree or retiree may not have to wait.
Four Lessons to be Learned from Turbulent Markets
1. Recognize that pursuing a successful outcome in investing has more to do with our behavior than the return on our investments. We are, human, after all. When markets are rising, the human response is to have a high tolerance for taking risk. When markets turn south and stocks are tanking, the emotional response is to sell everything and go to cash. Unfortunately, these knee-jerk reactions rarely result in positive outcomes and time after time, we've historically seen markets go through the cycle and lead on to another leg of recovery.
2. View your investments in mutual funds, ETF's, stocks and bonds similarly to how you view ownership in a home—as an asset. Picture owning a home that's worth $400,000 today, but the following year changes in value to $350,000 due to a downturn in the real estate market. Though you're probably not happy about it, you likely don't look at your circumstances thinking you lost $50,000. After all, you don't lose $50,000 in this scenario unless you were to sell your home.
Yet for many, the opposite mentality is true with their investments in stocks. If the same $50,000 drop in value were to occur in a person's stock or mutual fund portfolio, many would claim they had lost $50,000. Remember, the only time you take a loss is when you sell your investment, and if you can wait on touching your investment dollars for enough time to give the market a chance to recover, the best decision is often to sit tight.
3. Be realistic about your investment risk tolerance. We recognize the advice to sit tight in circumstances similar to the above might not sit well for the retiree or soon-to-be retiree, but that's only if they're invested in a portfolio that's too volatile and aggressive for their needs. A mixed portfolio of stocks and bonds can help weather these inevitable storms and allow for enough principal growth in the portfolio to last a 20-30 year retirement.
Similarly, if you claim to have a high tolerance for risk in rising markets (because you want to maximize your returns), this means you also need to tolerate the downside during recessionary periods of the cycle. Trying to time when to be in the market and when to be out is attempted by many, but is difficult to accomplish consistently. Be realistic about how much risk you can really tolerate.
4. A financial plan will help you respond to turbulent markets rationally instead of emotionally. When you see your overall financial picture at a 30,000 foot level, your perspective changes. Depending on what you want your financial future to look like and what season of life you're in, a good financial plan will help you make wise decisions. For the retiree, it will help you draw income from the resources you have more efficiently. For the working family, it will help you see if you're on pace to maintain a similar standard of living for a future retirement.
Seeing your financial life at this level helps you balance saving for the future and spending on the present. It helps you know if you need to be saving more, but also can help you determine what rate of return you need on your investments to experience the financial future you'd like to see.
Remember, financial planning is not a science—rather it is a fluid activity. From saving money for the future, managing life after the loss of a family member, living out your retirement, and all of the life events in-between, we're here to help guide our clients through these decisions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Successfully Managing A Financial Windfall
We’ve all heard the stories. If not first hand, at least in various news reports and anecdotes.
Some “lucky” person picks the winning numbers, prances before the cameras in what can only be described as a media lovefest, and lives happily ever after, free of financial worries.
OK, the first two points are correct, but the happily ever after doesn’t always materialize. In fact, in most cases, sudden money leaves the winner worse off than prior to their windfall.
Many winners, who aren’t used to managing a large sum of money, mismanage the funds and wreck their lives in the process. As it turns out, it’s a variation on the theme of the Prodigal Son. Only the names and the details change. Of course, odds of winning life-changing cash in a lottery are incredibly low.
We are more likely to be the recipient of an inheritance or an insurance settlement. And it’s the unexpected pile of cash that may create an initial sense of euphoria and a false sense of security.
“The vast majority of people blow through [a financial windfall or inheritance] quickly,” said Jay Zagorsky, an economist and research scientist at The Ohio State University and author of a study on receiving an inheritance.
Whether large or small, it can seem like “play money.” And that is where the danger may lurk. So, that brings us to the next question. What should you do if you happen to be the beneficiary of a financial windfall?
10 steps to creating a firewall around your newfound stash of cash
1. First, do nothing. That’s right, do nothing. The temptation may be to buy a new car, take a luxury cruise, or upgrade your living arrangements. That can begin an unwise cascade of purchases that will likely leave you feeling regret. A suggestion is to wait at least six months before embarking on any life-changing decisions. The time spent waiting and planning allows the “shock” of your newfound wealth to wear off.
Besides, you need to take time to learn exactly what you’ve inherited. Is it all cash? Is it stocks and bonds? Have you just become the owner of a business or real estate?
2. Talk to a trusted advisor. Find someone who has your interests at heart, not his or hers. If you are expecting to receive a windfall or have already received an unexpected inflow of assets, let’s talk and see how we can incorporate it into your overall financial plan.
The suggestions we provide below are basic fundamentals. They may not apply directly to you, but they are common sense tools designed to help you make smart decisions and prevent an expected or unexpected windfall from being squandered.
3. Doing nothing also means not quitting your job. It may be tempting, but lost wages and the lack of social interaction from your coworkers may lead to remorse, even if you don’t especially enjoy your job. Besides, without work, you run the risk of blowing through your money much quicker than you had anticipated.
4. Reduce debt. We’ve always provided a holistic approach to financial planning. Once things have settled down and you have a better understanding of your inheritance, it may be time to pay down or pay off high-interest debt. Once eliminated, you no longer have that onerous outflow of interest payments on your loans.
5. If you don’t have an emergency fund, now is the time. Set aside reserves of at least three to six months' worth of your expenses, preferably the latter. The future can sometimes throw you an unexpected curve ball. Having reserves set aside will reduce your financial stress.
6. Additionally, you may decide to allocate additional funds toward savings and retirement. Again, every one of our clients is unique, with various goals, personal circumstances, and financial resources. What our team recommends for one person may vary significantly from what's best for another.
7. Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year or next. But it’s critical that you get a handle on the tax ramifications of your inheritance in order to maximize the financial benefit.
For example, did you know that you may be required to take distributions if you inherit an IRA? What if you are already taking required mandatory distributions? You see, things can get tricky rapidly, but sound advice can quickly ease any concerns. Additionally, life changes are a great time to update your estate plan, especially if the inheritance increases the complexity of your financial situation.
8. Be cautious. Less-than-reputable salespeople and relatives may suddenly warm up to you, with the unspoken goal of separating you from your cash. That’s why a trusted advisor is critical. If you have a well-thought-out financial plan, it’s much easier to pass on potentially exploitative offers.
9. Consider charitable giving. Do you have a favorite charity? Would you like to help a niece or nephew finance their education? Now is the opportunity to explore the possibility of helping others.
10. Have some fun. There’s nothing wrong with treating yourself. As we provide counsel, we would like to leave some room for self-indulgence. Do you like to travel? Have you thought about an addition to you home, finishing your basement, remodeling your kitchen, or upgrading appliances? Maybe it’s those top-of-the-line golf clubs you’ve been eyeing, or a new car.
Or, maybe you’d like to spend money catching up on the everyday things of life you’ve been putting off. Everyone has a hot button.
With a financial plan in place that manages your windfall, you’ll feel much more secure enjoying the benefits of your wealth without the nagging worries that you might run through your nest egg with not much to show for it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation
Happy New Year to you! We hope you and your family had a truly joyous Christmas and holiday season.
The world in motion.
As we put 2016 behind us, we head into 2017 recognizing life is continually on the move. In a matter of days, Donald Trump will be inaugurated the 45th President of the United States. On the world stage, the media is intently focused on Trump's cabinet, policy matters, Russia, hacking, foreign policy, race relations and of course the buzz phrase of 2016—fake news.
We're certainly not diminishing the significance of what's taking place in the world today, but we think everyone can collectively agree the news cycle over this last year has simply been exhausting! Amidst all the voices and the magnitude of the noise, we know these matters can create anxiety, uncertainty, and cause you to perhaps look at the future with apprehension rather than anticipation.
So we hope to put some matters into perspective and encourage you in this – stay focused on the vision for your future and don't let any of the tumultuous events of the day derail you from that vision. You may be encouraged or discouraged by the outcome of the election season, but know that investment success has historically depended more on the strength and resilience of the American economy than on which candidate was in office.
The good news is there are many reasons for optimism about the economy.
Remember, we are not market timers. Market corrections, friction, and uncertainty come with the territory of investing, but corrections and market volatility historically have always come and gone.
Overall, we're encouraged by the prospect of an economy going forward that will be driven less by Federal Reserve policy and more on free market principles.
Your future will be determined by what transpires in your own home.
Most importantly, putting aside the market and economy, recognize your success in life has more to do with what takes place in your own house than any external forces. Your dreams for your family, your occupational goals, how you serve your community, and what you aspire to do recreationally are not fake news – they're real aspirations.
Thank you for allowing us to guide you in your vision for your future!
Truly, this is what drives us to work every day. Picture your financial life as a puzzle with pieces you put together as life unfolds. We recognize our role is to use our financial planning process to help you put these financial puzzle pieces together as needs evolve. It gives us great joy to serve you in this way and we wish you a happy, fulfilling and prosperous year ahead!
Gary Blom & Michael Howell
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Have you ever met or approached a professional at a social event and been tempted to ask a personal question that relates specifically to your circumstances?
We know we have.
Whether it’s a physician, attorney, or CPA, when in need of assistance, we benefit from receiving additional insight from the experts. Of course, you typically want to shy away from any direct questions. But the temptation sometimes arises.
While reluctant to pry a bit of free information from someone who has painstakingly developed their specialized skill set, we find most are very open to discussing financial planning when we are out and about. For starters, we truly enjoy what we do and receive a tremendous amount of satisfaction assisting those who seek our advice.
However, there is one topic we’ll shy away from–and it’s one we get questions about quite often: Where do we believe the market is headed?
Long term, stocks are an integral part of most portfolios, and the historical data bear this out. But many folks who ask for our opinion want to know the market’s direction over a much shorter period.
Questions such as: “What’s going to happen after the U.K.’s Brexit vote?” Or, “how will stocks perform before and after the election?”
We understand the inquiry. Financial advisors have their fingers on the pulse of the market, the economy, and there is this expectation that we have some sort of inside information.
Although we did not expect what happened in Europe to have a lasting impact at home, admittedly, we were surprised by the sharp bounce in stocks and subsequent all-time highs in the Dow Jones Industrials and the broader-based S&P 500 Index.
In some respects, the political earthquake in the U.K. shook up our markets for just two days before cooler heads prevailed and shares began an upward ascent.
While we have reiterated in the past that we have no magic crystal ball (and let us remind you, neither does anyone else), we’d like to take a moment to explain why our approach leans heavily on diversification and eschews market timing.
Irving Fisher was called “the greatest economist the United States has ever produced” by none other than Milton Friedman, who won the 1976 Nobel Prize in economics.
Yet, Fisher’s record is stained by his 1929 remark that “stocks have reached what looks like a permanently high plateau.” Making matters worse, his comment came just three days prior to the crash (CNBC: “Spectacularly Wrong Predictions”).
"By itself, a new high isn't a reason to sell."
Every so often, we’re reminded of another blunder from Business Week.
In 1979, the respected periodical ran a cover story entitled, “The Death of Equities.” The article included this line, “The old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared…The death of equities is a near permanent condition.” (Forbes: “6 Doomsday Predictions That Were Dead Wrong About the Market”).
Three years later, stocks went on an 18-year bull run.
While we could continue with the anecdotes, the above examples illustrate that market timing is ultimately an exercise in frustration and is likely to be a detour that takes you further from your financial goals.
AN ALL-TIME HIGH - HOW SHOULD I REACT?
During July, the S&P 500 Index finally eclipsed its prior all-time closing high set back on May 21, 2015 (St. Louis Federal Reserve).
By itself, a new high isn’t a reason to sell.
Since the bull market started in 2009, there have been 45 record highs for the S&P 500 Index in 2013, 53 in 2014, and 10 in 2015 (LPL Research). Since topping the prior high on July 11, the S&P 500 has gone on to close at six more highs during the month (St. Louis Federal Reserve).
Again, by itself, a new high isn’t a reason to go to cash.
What we do counsel is to avoid emotionally based decisions. In our experience, they rarely work.
A LOOK BEHIND THE CURRENT RALLY
It’s somewhat counterintuitive, but a post-Brexit world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.
But it’s not all gloom. While the U.S. economy is expanding at a subpar pace, it is growing, and the consumer is leading the way (U.S. BEA), which supports corporate earnings.
Speaking of earnings, once again Q2 earnings are topping a low hurdle (Thomson Reuters). More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.
Finally, a cautious Fed has been a plus for equities simply because low interest rates create less competition for stocks. If we were in a recession and profits were sliding, low rates would likely do little to support equities, in our view. But again, the economy is expanding, albeit modestly.
WHAT'S AN INVESTOR TO DO?
We recognize that we are in an uncertain period. As the economic recovery enters its eighth year (National Bureau of Economic Research), the expansion is no longer young.
It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.
One of our goals has always been to assist you as you reach for your financial goals. That is why we strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad.
As we’ve mentioned in previous writings, we will eventually enter a recession, and recessions have historically brought about a downturn in stocks. We don’t know when it will happen, but it will. It’s an inevitable byproduct of a free market economy.
While declines in the major averages that exceed 20% can be unnerving, they have always run their course historically, setting the stage for another upward cycle that takes shares to new highs.
As always if you have any questions, we encourage you to contact us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
This research material has been prepared by HorsesMouth