Are You Leaving Money On The Tax Table?

By Shelley Murasko

It’s tax season! As you work to finish your return, did you know you might be missing out on valuable tax breaks that could save you thousands of dollars?

In fact, a tax break could save you up to 50% of the deduction if you live in a high-income household. This is a result of the high tax brackets that top incomes can hit — 47% or higher in California — as well as the valuable credits and deductions that can be phased out.

Therefore, it’s well worth your time each year to maximize all possible tax breaks. Check out the list below of nine proven tax break opportunities that are often overlooked. Then consider which ones might be right for you. Just be sure to consult with your tax professional before implementing the following concepts as unique circumstances often apply.

1 – Accumulate Money in a Health Savings Account (HAS)

For working professionals, the HSA is the most misunderstood tax shelter. Interestingly, it ranks as one of the best ones out there. Why? It’s the only tax-friendly account that gives a tax deduction going into the account AND when the money comes out for use with health expenses.

When enrolled in an eligible high-deductible, health savings plan in 2022, you can contribute $3,650 as a single filer or $7,300 as a family. If you’re 55 and over, you can also make a $1,000 catch-up contribution.

Ideally, you’ll accumulate money in an HSA and let it build for retirement where it can then be used for Medicare premiums. Along the way, you can access it at any age for medical expenses, from sunscreen purchases to out-of-pocket doctor fees. In the event of a large expense, such as braces or a visit to the emergency room, you can tap your HSA to offset the financial challenge of these one-time expenses.

Most people mistakenly believe they must use up their account balance before the end of each year. While this is true of a Healthcare Federal Spending Account (FSA), it’s not the case with an HSA. Your money remains in your account until you’re ready to use it.

Another misnomer is that you can’t invest the funds that are in your HSA. In most cases, HSAs allow for an investing option once you have at least $2,000 in your account.

2 ‑ Maximize Your 401(k) or 403(b) at Work

Many of my clients truly believe they are maximizing their 401(k). After reviewing their accounts, however, I often find this is not actually true. Here are a few tips for rectifying this.  

If you’re under 50, you can contribute up to $20,500 into your 401(k) in 2022. This is in addition to the allowed employer match. If your employer gives you a $5,000 employer match, for instance, you can contribute an additional $20,500 for a total of $25,500. On top of that, you can bump this up in the year you turn 50 with a “catch-up” contribution of $6,500.

3 ‑ Choose a Roth 401(k) Over a Traditional 401(k)

The share of 401(k) plans offering a Roth savings option grew to 86% in 2020. This is up from 75% in 2019 and 49% a decade ago, according to the Plan Sponsor Council of America.1

The Roth 401(k) popularity does not mean it’s right for everyone, though. It’s best to work with a tax professional to determine if your tax bracket is lower now than it will be in retirement. If it clearly is lower now, then a Roth 401(k) contribution makes sense. If not, stick to the traditional 401(k) option.

Not sure which way the tax bracket will go for you in retirement, even after working with a CPA? Consider tax diversification where you divert half your contribution to the Roth 401(k) and half to the traditional 401(k).

4 – Make a Backdoor Roth Conversion

Ever heard of a backdoor Roth Conversion? This is a Roth IRA contribution that was originally added to a traditional IRA without deduction and then moved into the Roth. A backdoor Roth IRA is a legal way to get around the income limits that normally prevent high earners from owning Roth accounts.

When a regular IRA contribution is not deducted from income due to income limits, a smart move is to convert it to a Roth IRA before the contribution is invested. Since the money went into the traditional IRA after-tax, it’s allowed to be converted tax-free.

This tax opportunity has been getting some headlines lately as Congress debates on whether to remove this option. I hope they don’t as it’s one of the few ways that higher income individuals can smartly get savings into a Roth IRA.

The Backdoor Roth IRA conversion works best when there are no other assets in IRA accounts. If there are, then you will be subject to the “pro-rata rule.” It specifies how the IRS will treat pre-tax and after-tax contributions when you carry out a Roth conversion. Before proceeding, speak with your tax professional to understand your best option.

5 – Set Up a 529 College Savings Plan

Before you know it, your kids, or perhaps your grandkids, will be closing in on the college years. Hopefully you’ll be ready with ample college savings to get them off to a great start! Along the way, you can save some serious tax dollars by growing those college savings in a tax deferred 529 account.

According to Morningstar, the top 529 plans over the past decade include:

·         Utah: Utah Educational Savings Plan (UESP) at my529.org

·         Michigan: Michigan Education Savings Program (MESP) at misaves.com

·         Illinois: Bright Start 529 Plan at brightstart.com

The 529 plan you choose has nothing to do with the state where your child will attend college. However, in certain states you might earn an even higher deduction by using their state plan. Check with your state to understand their incentives. Also, while 529 savings must be used for college costs to avoid the 10% penalty, the savings can be transferred to alternate beneficiaries who are related to the current one. This built-in flexibility makes these plans a great way to pass on a legacy.

6 ‑ Use Tax-efficient Index Funds In Your Taxable Accounts

A capital gains distribution is a payment made by a mutual fund. This includes a portion of the proceeds from sales of the fund's stocks and other assets from within its portfolio. It’s the investor's pro-rata share of the proceeds from the fund's transactions.

You can find the capital gains distribution on your 1099 tax form from your taxable investment account under the dividend section.

Some capital gains are necessary, especially in a year like 2021 that recorded strong stock market performance. Yet you might find the distributions from actively-managed funds to be excessive relative to a low-cost, passively-managed, better-performing index fund.

This is just one more reason why low-cost index funds can make good sense in your investment portfolio.

7 ‑ Take Advantage of Qualified Charitable Distributions

Once you are age 70½, the IRS allows you to distribute up to $100,000 from your IRA tax-free that would normally be a taxable distribution. In addition, this distribution can count toward your Required Minimum Distribution (RMD).

Since there are not many ways to get money tax-free out of your traditional IRA, you might find this to be an appealing way to do so.

8 ‑ Give Money Through Donor-Advised Funds

The U.S. government wants you to give to charity. Thus, they offer many ways to donate your wealth while saving on taxes.

One of the most convenient ways to give to charity as tax-efficiently as possible is to open a donor-advised fund. You can give a lump sum to a dedicated charity account in one year to claim the tax deduction. Then you can distribute the charitable gifts out over several years.  

In a year where you have a lump sum of income from a sale of property or inheritance, you might find the donor-advised fund most useful for bringing your income down to a more reasonable level.

Clients also find it interesting that they can give an appreciated stock to a donor-advised fund. Check with your tax professional as income limits do apply.

9 ‑ Make the Most of Roth IRA Conversions

In a low-income year — perhaps you lose your job or retire early — it’s worthwhile to study whether converting your traditional IRA to a Roth IRA could make sense for your taxable future.

Although you still pay taxes on the amount converted, you avoid paying taxes on that same income in a future year when you are in a much higher bracket.  

Albert Einstein once said, “The hardest thing in the world to understand is the income tax." When he said that, our tax code was likely much simpler than it is today. While paying taxes is a necessary part of being an adult, taking advantage of tax breaks may ease the burden.

Have questions or concerns? Give us a call or send us an email. We’re here to help!

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. Please consult your tax professional on all tax-related matters.

Sources:

1. Iacurci, Greg. (Dec. 27, 2021). CNBC. "Employers adding Roth 401(k) option at fast clip.” Retrieved from https://www.cnbc.com/2021/12/27/roth-401k-availability-grows-rapidly.html

Navigating the Turbulent Waters of Investing

By Shelley Murasko

“The true investor welcomes volatility ... a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”

– Warren Buffett

Last summer, I decided to take my preteen kids on an ocean boat excursion. As the children of a father who suffers horrible seasickness on the water, they had never experienced deep sea boating. So on a beautiful morning in late July, we boarded the Catalina Express in Dana Point Harbor and set off for Catalina Island’s gem of a town, Avalon.

With family genetics in mind, I considered the possibility of nausea. Since the trip was only 90 minutes long, I figured we could overcome the turbulence by sitting on the outside deck and focusing on the horizon. Thinking back, I should have devised a better plan.

Although the large Catalina Express boats usually offer a smooth ride, every wave felt like a roller coaster. Within minutes, my daughter was nauseous, and my son was turning green. The sea’s turbulence made it impossible to enjoy the beauty of the day. In fact, friends who had planned to visit Catalina that same day canceled their trip due to the high waves.

Throughout the journey, I kept reminding the kids to stay calm and keep their eyes on the horizon. After all, once we were Catalina bound, our choices were limited. Jumping overboard was the least desirable option, so staying the course as calmly as possible was really all we could do.

As the seconds ticked by like hours, I hugged my kids tightly, continually searching the skyline for the craggy, emerald island of Catalina.

When we finally arrived, the day became quite joyful. We swam at Catalina Beach, hiked the hills, and took a Jeep® tour of the island that included a buffalo sighting. As evening approached and we prepared to head back to the mainland, we were sad the day was over.  

To avoid the discomfort of our previous boat ride, I vowed to be better prepared for the journey home. Before boarding the boat, I picked up some Dramamine® to head off any bouts of seasickness. As a result, my kids were much happier on the return trip. It helped that the evening waters were significantly calmer. Despite our rocky start, the trip was a success and a positive experience we will never forget.

The “Seasickness” of Stock Markets

Managing seasickness is similar to managing volatility during rough stock markets — like the one we’re facing now. The month of January got off to a very turbulent start, continuing into February. At the worst point, the U.S. stock index, the S&P 500, had dipped 12% while the NASDAQ had plummeted by 20%.

During times like these, I often wish I could send some metaphorical Dramamine in the mail with brokerage account statements. It would help clients shake off their lower statement balances more easily. Instead, I’ll share a few pointers for you to keep in mind as we endure this rocky ride.

Human Nature Abhors Loss

First, it helps to acknowledge that we humans are wired to feel distress when we see statements decline in value. Research has shown that investors often react more strongly to investment losses than gains.

In fact, a landmark study in 1995 found that investors felt 2.5 times worse about a $1 loss than the good feelings they experienced about a $1 gain.  1

Volatility Is Part of the Investing Experience

Just like choppy waters are a common occurrence during an ocean boating experience, volatility is inherent in investing. Since there’s risk when investing in businesses, there’s also an eventual return. After all, if this investing stuff was easy, the return would be very low. It’s by taking on stock market risk that we eventually get to experience the reward of capital gains.

Consider this example: From 1984 to 2018, the S&P 500 Index experienced a median intra-year decline of -9.9%.2 In other words, at least once a year, stocks dove about 10%. Yet they still posted positive returns in 29 of those 35 years with a median annualized total return of 13% and an average annualized return of 11%.2

Bear markets are always scary, but only devastating if you sell amid them. There have been 12 bear markets since 1901. The average duration was 22 months with an average decline of 42%.3 Navigating through turbulent waters can be unnerving, too. And yet the only way to get to your destination is to keep on cruising.

Turbulent Waters Won’t Tip Over a Balanced Boat

In case of an emergency or rough seas, it helps to keep a ship balanced. This counters the waves and reduces rocking. That’s why large cruise ships usually house several ballast tanks well under the waterline. These serve as a center of gravity to help maintain steadiness in bumpy seas.

If your portfolio features a reasonable asset allocation—somewhere in the range of a 60% to 40% stock/bond split—market corrections will only affect a portion of your overall nest egg. In addition, sensible retirement portfolios have a ballast just like the big cruise ships, which includes investment-grade bonds of various terms and varieties.

Additional balancing strategies are used for stock-heavy portfolios with much longer time horizons. They commonly include international and REIT funds in the structure to incorporate holdings that correlate differently to the U.S. stock market.  

Remember, This Too Shall Pass

Each generation has faced its share of challenges. While experiencing today’s choppy waters, it’s easy to become overwhelmed by the severity of the moment. History has dealt serious blows before, from the Global Depression to cold and hot wars to presidential assassinations and pandemics.

When viewed through the lens of history, we know that even the worst turbulence has not stopped the inevitable climb of the stock market. Why is this? Humans are remarkably resilient. In our free market system, the human potential for solving problems will eventually rise to the occasion once again. 

Your Future Self Is Counting on You to Stay the Course

Most financial plans—whether saving for college, retirement, or a house—are based on achieving a rate of return that can only be realized by staying the course through stock market waves. Your plan is no different.

Take a page from storied investor Warren Buffett. When asked by CNBC in 2009 how it felt to have lost 40% of his lifetime accumulation of capital, he said it felt about the same as it had the previous three times. The bottom line is that market corrections do not equal a financial loss unless you sell.

What Can You Do Now?

Now that we’ve seen a dip, here are a few sensible steps you can take to ride out the turbulence.

·         Keep a positive view of corrections. If you have high-quality investments, don’t be tempted to tinker with your portfolio. Experience shows that a correction’s “bark” is worse than its “bite.” Long-term investors can view a correction as an opportunity to add new money to proven investment positions at favorable prices.

·         Be less interested in your statements. Checking them once a quarter is more than enough for long-term investors. I am often amazed by the number of people who tell me they check their accounts daily. This is one more way the internet does investors a disservice.

·         Resort to stock market history. Refresh your memory on other near-death investment moments that turned out okay. Two interesting reads in this category are Stress Test (Geithner, 2015) and Boom and Bust: Financial Cycles and Human Prosperity (Pollock, 2010). Check them out to expand your learning.

·         Stay true to your allocation. Though it takes discipline and a degree of courage, check your percentage of stocks relative to bonds. If it’s under target, reallocate more to your stock funds.

·         Invest more. Once you have high-interest debts like credit cards paid off and an emergency fund established, add money to your investments consistently over time. You may even want to take advantage of market dips to maximize results.

·         Control what you can. There are many actions you can take, including a review of your spending priorities, tax planning such as adding to IRAs, or Roth IRA conversions at lower asset values. Another wise move might involve harvesting tax losses in taxable accounts.

Once a portfolio incorporates stocks to attain long-term growth, abandoning them in a during a correction is the worst option. The sea will eventually calm down. Though the ocean might offer calmer waves sooner than the stock market, it’s best to carry on as competently and as calmly as you can. Throughout the investing journey, sensible investors keep emotions in check and their eyes on the horizon.

Do you have questions or concerns? Call us, we are here to help.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. 

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

Sources:

1. Hammond, Chris. (2015.) Southeastern University. "Behavioral finance: Its history and its future." Based on a 1995 study by Benartzi and Thaler.

2. Invesco. (Oct. 17, 2019.) Compelling Wealth Management Conversations 2018. Retrieved from https://www.invesco.com/us-rest/contentdetail.

3. JP Morgan. (Dec. 31, 2019.) JP Morgan Asset Management “Guide to the Markets,” p. 14. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/.

Enough - Finding True Wealth

By Shelley Murasko

Celebrated authors Kurt Vonnegut and Joseph Heller once attended a Shelter Island party hosted by a billionaire hedge fund manager. As the two chatted, Vonnegut remarked that their host had earned more money in one day than Heller had over the entire lifetime of his extremely popular book, Catch-22. At that, Heller replied, “Yes, but I have something that he will never have — enough.”1

The Idea of Enough

In one word, Heller made a profound statement that has resonated for generations. While the Merriam-Webster Dictionary defines “enough” as “equal to what is needed,” the word also implies satisfaction with your current situation. In other words, you have enough if you are content with your money situation, your job title, your home’s square footage, and so on. Ultimately, having enough enables the possibility of other life pursuits and priorities.

We live in a society where the idea of enough is often elusive. To some extent, capitalism thrives on the idea of pursuing “more.” For example, marketing experts estimate that most Americans are exposed to around 4,000 to 10,000 advertisements each day that prompt untold amounts of consumption.2

In addition, the American Dream tells us that any person can reach a successful standard of living by working harder. Although there are debates about whether our current society has a successful standard of living, most people agree that we have quite a bit more today than past generations had.

Take my Grandmother Francis, for instance. She raised six kids on an Iowa farm during World War II. The family had one car (not a BMW), one TV (eventually), one phone, and communal beds in shared bedrooms.

The standard of living my grandmother earned through hard work over decades was attainable in my generation by age 25. Plus, we no longer had to share beds!

The Pros and Cons of Pursuing More

To some extent, pursuing a higher standard of living is part of fulfilling dreams. But where does it end or slow down? Is it possible that we are eventually held captive by our careers or retirement portfolios?

If individuals can cover their basic needs and still set aside savings for present and future financial requirements, then why is it that some people sacrifice well-being or family time in pursuit of more?

The truth is that some people experience great joy from work. Achieving goals can deliver a major dose of contentment. Work can also provide a sense of purpose.

In certain cases, work might be the “family” that some individuals lack in their personal lives. Thus, their network of support and social fulfillment derives from the work environment. Clearly, there are worthwhile reasons to dedicate time and energy toward work and career beyond the basic need for financial stability.

On the other hand, some people struggle with the balance between work and other priorities, especially if they dislike their job or coworkers.

If you’re in this situation, perhaps you’ve woken up in the night worried about employee hiring or customer complaints. Or maybe, after working another 12-hour day, you’ve found yourself looking in the mirror and realizing that you’re missing out on important life moments. Perhaps you’re tired of saying no too often to opportunities like rafting down the Grand Canyon with your friends or taking time to help a family member in need.

Your body may even try to tell you that enough is enough. We’ve all heard about a colleague who developed an ulcer triggered by a stressful working environment or suffered a heart attack while on a business trip.

An imbalance between your home and work life can also affect your personal relationships. Your loved ones might lose patience with your quest for more as they face another evening without you while you’re physically or mentally absent.

Pursuing More for the Right Reasons

In this quest for more in life, be wary of the danger of comparing yourself to others. As former President Theodore Roosevelt once said, “Comparison is the thief of joy.”

I can think of few things sadder than the immense lengths some people will go to impress others. This idea is reflected in the movie, Fight Club, when Tyler Durden says, “We buy things we don’t need to impress people we don’t like.”

For the self-aware, there is acknowledgement that some material pursuits are sought to impress friends, colleagues, and neighbors. Yet our psyches are not as good at recognizing when the new Lexus® is bought merely to make a statement in the employee parking lot or the Botox® injections are deemed necessary to look a certain way at the grocery store.

The Pursuit of Happiness

Many people spend their lives in a never-ending pursuit of happiness. You may write out a list of desires, then start chasing them down. The problem is that each desire, once satisfied, tends to get replaced by a new one. Thus, the cycle begins again.

After a lifetime of pursuit, you could end up no more satisfied than at the beginning. In fact, the quest for money, status, and material goods often makes life more stressful.

Ultimately, the quest for more may prevent you from having the energy or time to build a meaningful life — one spent strengthening relationships, discovering new passions, and digging into the well of deeper learning. In truth, the act of pursuing happiness may become the real thief of true joy.

Thus, it might be worth taking the time to reflect upon what enough really means to you. If your quest for more begins to feel like a prison sentence where you’re locked in a silo of career or money worries, that’s a big red flag!

What Is True Wealth?

If you don’t want to end up like the hedge fund manager at the beginning of this article, take a moment to be grateful for all you have. By doing so, you may be able to see that you likely have enough, and perhaps even more than enough.

In life, true wealth is more than bank accounts and toys and houses. It involves waking up to a day where you enjoy the task at hand.

As Steve Jobs once said, “I have looked in the mirror every morning and asked myself: If today were the last day of my life, would I want to do what I am about to do today? And whenever the answer has been ‘no’ for too many days in a row, I know I need to change something.”

Having control of your schedule, whether it’s working shorter workdays to have more free time in the evening or taking lunch breaks to see your kids’ concert, may be more valuable than a prestigious job title and globe-trotting lifestyle. Being able to say “yes” to important life moments, knowing work can wait, is a critical facet of a balanced life.

Along with more personal time, true wealth often comes in the form of good health. When asked what surprised him most about humanity, the Dalai Lama said: “Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

The Satisfaction Mindset

Ultimately, how you think about what you have in life is essential. Satisfaction often boils down to mindset. True happiness comes from the inside, the inner knowledge that you can get through any situation that arises.

It’s a given that the stock market will fluctuate, surprise expenses will happen, and your political party won’t always reign supreme. Rather than allowing yourself to worry about these likely scenarios, learning how to deal with the unknown in a healthy way will allow you to be a happier person.

Author Nick Murray addressed this idea in his book, Simple Wealth, Inevitable Wealth, when he wrote, “No matter how much you have, if you’re still worried, you aren’t wealthy.”  

At the end of the day, it’s important to remember that you’re not your job. You’re not the amount of money you have in the bank. You’re not the car you drive or the clothes you wear. Rather, your personal wealth is made up of many things that don’t cost a dime.

So how can you know if your current mindset is setting you up to live a satisfying life? Take a few moments to consider the following questions: 

·       How grateful are you for what you do have?

·       How thankful are you for those in your life?

·       How often do you show them?

·       How rich are your conversations with your loved ones?

·       How often do you smile at a stranger?

·       How do you make people feel?

·       How generous are you with others and the causes you care about?

·       How often do you extend a hand to a neighbor in need?

·       How do you show up in life?

·       How gentle are you with yourself?

·       How do you view your situation in life?

On the eve of this beautiful new year, forget about creating a list of new goals and to dos for yourself. Instead, accept that you are enough, that others around you are enough, and that you have enough.

Then think about this: If constant striving for more was no longer a central axis of your daily existence, how happy and satisfying would your life be?

Sources:

1.      Booren, Steve. (July 18, 2021). “Improving Investory Behavior: Deciding on Enough!” Denver Post. Retrieved from https://prosperion.us/commentary/improving-investor-behavior-deciding-enough/.

2.      Simpson, Jon. (Aug. 25, 2017). “Finding Brand Success in the Digital World.” Forbes. Retrieved from https://www.forbes.com/sites/forbesagencycouncil/2017/08/25/finding-brand-success-in-the-digital-world/?sh=571602cb626e.

Why Compound Interest Is Your Most Powerful Financial Tool

There’s an often-told story that when Albert Einstein was asked what mankind's greatest invention was, he replied, "Compound interest." There's even one claim that Einstein called compound interest the "8th Wonder of the World."

While there’s some debate on whether Einstein really said any of this, there’s no doubt that compounding interest is an amazing financial tool.

As one Wall Street Journal article emphasized, compound interest is the “great equalizer.” Whether you’re a low-paid cashier or a highly successful investment banker, almost anyone can build great wealth with time and consistent investing.

What is Compound Interest Anyway?                           

Quite simply, compound interest is interest earned over time that gets added to the principal. Because interest builds on interest on the actual money you put aside, it grows at an exponential rate. 

What else grows exponentially? Human populations. Invasive plants. Pandemics. Fires. The mold in my refrigerator. Among these options, I’ll take the compound interest!

Despite several examples of exponential growth in our world, it’s been proven that the human brain has a hard time comprehending what it is and how it works. Which is why several smart people have tried to come up with different ways of teaching compound interest. Here are a few of those examples.

Ben Franklin and His Gifts to Boston and Philadelphia

When Ben Franklin passed away in 1790, he left behind a small gift of $4,000 each to the cities of Philadelphia and Boston. But using his gift came with a caveat: The cities must leave most of the donation invested for 100 years. After that time, 75% could be spent on public works and loans for tradesmen. In addition, the remainder must be invested for an additional century.

After the first 100 years, a portion of Franklin’s gift was used to fund a museum, a library, and thousands of scholarships for apprentices and medical students.

At the end of the 200-year period, the two cities combined still had $6.5 million to spend as they wished. Franklin’s experiment taught an important lesson about how money grows over time.

The Snowball Approach by Charlie Munger

Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, has likened compound interest to a snowball rolling down a hill. Munger teaches investors to roll a well-packed financial snowball (in his opinion about $100,000) down the longest hill you can find and watch it grow!

In the beginning, the initial lump of “snow” (the principal) may seem small. Adding layer upon layer of additional snow (interest) on top of the lump, however, quickly amasses into a huge ball worthy of becoming the base of a large snowman (your nest egg).

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things,” says Munger.

Math Lessons on the Golf Course with Tony Robbins

Tony Robbins, master communicator and author of MONEY Master the Game: 7 Simple Steps to Financial Freedom, is known to take people out on the golf course to teach them about compound interest. Here’s how he does it:

Robbins begins by suggesting to his golf buddies that they make the game more interesting by betting a dime a hole.

Since $0.10 multiplied by 18 holes is only $1.80, Robbins’ golfing buddies are usually quick to agree. 

Then, Robbins takes it to the next level. “I have an even better idea,” he says. “How about we start with $0.10 to the winner on the first hole, but then we double the award at each hole?”

A long pause. Most golfers do some quick math, maybe noting that by the 5th hole they’ll have to come up with about $2, and they nod their heads again.

Often it’s not until Robbins beats them on hole 15, and they’re each paying $1,600 to the winner, that the weaker golfers start to realize how badly they’ve been had. By the 18th hole, the winner receives a little over $13,000 from each golfing buddy.

For any doubters, here’s the math:

With this powerful example, Robbins teaches the power of compounding and how it can help you double your money. If you’re a good golfer, you might try this next time you’re out for a round!

How to Double Your Money and Understanding the “Rule of 72”

How often can you expect your savings to double? It depends on one number: the rate of interest or, in investment speak, the “rate of return.”

In investment circles, there’s a formula called “The Rule of 72.” This rule dictates that the number of years it takes to double your money is equal to the number 72 divided by the interest rate. If you can grow money at a 10% rate of return, which has resembled the stock market for several years, you simply take the number 72 and divide it by 10. The result is 7.2, which means it will take 7.2 years for your money to double. At an interest rate of 9%, you can expect to wait 8 years before your money doubles (72/9 = 8). 

If you started at age 0 and lived to age 80, you could double your savings 10 times. Thus, a $5,000 deposit at birth doubled 10 times grows to $5 million by age 80.

If your parents didn’t have the foresight to put $5,000 into an investment account when you were born, you still have an opportunity to use compound interest to expand your wealth later in life. Let’s say you invest $5,000 at age 25. As your investment’s interest builds upon itself, your money will continue to grow until you retire at 65, doubling five times. That $5,000 you started with balloons to $160,000. Not bad for one year’s savings of $5,000!

Holly Hippie vs. Lonny Lawyer by Shelley Murasko

My favorite story is the one where Holly Hippie decides at age 12 to collect cans every day at her local beach. She then invests her daily can-collecting earnings of $5 into the S&P 500 index fund. She does this until age 32 when she decides to stop worrying so much about saving extra. Fast forward to age 65. Holly Hippie now has $1.6 million put aside for retirement, despite her actual savings of only $36,500 (20 years of saving $5/day x 365 days = $1,825/year).

Holly’s new friend across the street, Lonny Lawyer, takes a very different approach and decides to live it up in her 20s and 30s. She always wears the latest fashions, owns the hottest car, and eats out daily at the fanciest restaurants. Lonny doesn’t start investing until age 40. Fortunately, as an attorney, she is now making over $200,000 a year and can set aside $15,000 each year into savings until she retires at 65.

Who do you think amasses the larger amount of retirement savings? If you guessed Holly the Hippie, you’re right! Lonny accumulates $1.2 million, but Holly retires with $1.6 million, a whole $400,000 more! To add insult to injury, Holly actually put $263,000 less into savings. Clearly small amounts set aside for a long time pack a very big punch!

The moral of all these stories is to start saving something, do it consistently at a decent rate of return, and give it as much time as you can to grow. In many cases, the length of time something is invested is just as meaningful, if not more meaningful, as the actual amount saved.

If you’re a 50-something reading this article, you may feel some regret if you didn’t start saving earlier. However, with a lifespan that could go into your 90s, you still have plenty of years to benefit from the incredible power of compound interest. As the saying goes, “You’re never going to be any younger than you are today!”

With all this said, now is a great time to re-examine your financial goals. Especially if you have goals that are creating funding concerns, such as paying for college, covering 30 years of retirement, or buying a car.

By understanding the power of compound interest and the difference it can make in your financial future, you’ll feel more confident about your goals. You may even be more motivated to find money to put aside now that you or your loved ones can benefit from down the road.

For help devising an investment strategy that allows you to get the most out of compound interest, give me a call or send me an email. I’m happy to answer any questions you may have.

Source: McGee, Suzanne. August 6th, 2021. “The 6 Concepts You Should Know to Be Financially Literate” Wall Street Journal. Retrieved from The 6 Concepts You Should Know to Be Financially Literate - WSJ

Making Smart Social Security Decisions to Boost Your Financial Security

As you approach retirement, there may be financial decisions you wish you could go back and redo. Saving more. Starting earlier. Investing in a diversified index fund instead of Enron. Asking for that raise. The list goes on and on.

While you can’t change your past financial decisions, there’s one very important decision you can still get right. That decision is when to claim social security.

Why Is It So Critical to Get Social Security Right?

Social security is the best longevity insurance for most individuals.

Not only does it pay you income for the remainder of your life, but the income paid rises with the cost of living. In addition, social security has tax-favorable treatment in most states. For married couples, it will often be the main source of income for a surviving spouse after the first spouse passes.

In most cases, your social security income is deemed fully available at age 66 or 67, depending on your birth year. After that, it grows an additional 8% for every year you wait to claim up until age 70. You’re eligible to claim as early as age 62. Unfortunately, this is when mistakes are often made.

For a dual-working married couple with decent earnings over a lifetime, waiting until 70 can be the difference between receiving $55,000 instead of $75,000 each year. Once you factor this over twenty years, the incremental dollars really add up!

For the typical American household, the value of social security represents 60% of retirement assets.1.  

Longevity Insurance Provides Long-Term Income

It’s important for you to think of social security as your key longevity insurance. Yet you may have false notions about the program, such as:

·   I can’t retire until I start social security. (Pensions, investments, and other savings can be applied to cover expenses until your optimal claiming age.)

·         I’m afraid the government will take this away. (This has never happened since the program began in 1935.)

·   I probably won’t live past the break-even age of 802. (The average life expectancy for those who have reached age 60 is 85.3 A 65-year-old couple has a 45% chance — almost 50/50 — that one of them will survive to age 90.4)

·   I want to start social security early so I can invest the extra money. (Despite good intentions, most people won’t do this.)

Social security is longevity insurance, plain and simple. It offers protection against running out of money as we age. People rarely do break-even calculations when they buy home insurance to protect against a catastrophic event like a fire. They shouldn’t do them with social security either.

Inflation-Adjusted Benefits Help You Retain Your Purchasing Power

Unlike many annuities that are sold as “longevity insurance,” social security increases based on a consumer price index each year. This annual adjustment has been in place since 1975. In recent years, the increase has ranged from 1–2%. However, for 2022, the increase is on track to be about 4–5%. 

This means you won’t lose purchasing power with this part of your retirement income. For a retirement that can last over 30 years, this is a very big deal! As one financial advisor said to me once, “My annuity payment looks pretty good now, but I doubt it will even buy a movie ticket for me in my 90s.” With your social security income, it will keep you on track to enjoy movies and more.

Favorable Taxation Keeps More Money in Your Pocket

At the federal level, each dollar of social security paid is not taxed completely. Depending on your income, anywhere from 15–50% of the income received will not be taxable.  

Forty-one states, including California, give tax-favorable treatment to social security income. In fact, in California, social security income is not taxed at the state level. I know what you’re thinking: “Wow! A tax break in California.” Yes, miracles do happen.  

Even in states that do tax social security (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia), there’s usually a tax credit or deduction that offsets the cost of the tax.

Financial Security for the Surviving Spouse

Once a spouse passes, the surviving spouse loses one of the social security incomes. They do, however, get to keep the income that is the higher of the two social security incomes paid out. If your spouse pre-deceases you at an early age, this can be a really big deal! No one anticipates losing their spouse or a chunk of their income at 75, but it does happen. In many cases, it leaves the surviving spouse feeling much poorer.

For example, a woman I know was married to a doctor who passed away at 69. The social security benefits that would ultimately flow to the wife were seriously compromised in two ways. During the doctor’s working years, the doctor minimized W2 income like many business owners are encouraged to do in order to minimize payment into the social security system. Then, upon retirement, he decided to fire up his social security benefits at 62, the earliest age possible. As mentioned previously, this reduced his social security income by over 8% per year between ages 62 through 70. (Important note: spouses claiming spousal benefits do not get increases after their full retirement age of 66/67)

The end result was that the wife had to figure out how to manage on a much tighter budget than expected. It is very rare for me to see a client whose social security won’t cover their core living expenses like housing, utilities, and food. In this case, the surviving wife was left with a suboptimal income.

Optimizing Your Social Security Benefits

As a professional who has reviewed hundreds of social security claiming scenarios, I believe the best way to calculate the optimal claiming strategy is to use social security optimizer software. My favorite is Social Security Analyzer because it does an excellent job keeping up with the legislative changes in social security claiming options. 

While it often makes sense for at least one person in the household to wait until age 70 to claim social security benefits, there are several situations where claiming early might be a smart move. A couple of examples include having a disabled child claiming through you or being single and in poor health.

The software may also identify a welcome situation. I have worked with divorced clients who learned they could surprisingly claim benefits on their deceased ex-spouse while letting their own benefits grow until 70.

Ultimately, deciding when to claim social security should be made within the context of a retirement plan, ideally assembled by a certified financial planning professional who is doing the analysis with your best interest at heart. In addition to enhancing benefits, delayed claiming can open up the opportunity to do Roth IRA conversions in the years preceding social security.

The unfortunate truth is that many Americans mismanage their social security income. Considering that it’s often your largest retirement asset, this decision can have dire costs for both you and your spouse. Before you claim social security, be sure to take the time to get an appropriate analysis done so you can set yourself up for success in your retirement years.

For help devising your social security strategy, give me a call or send me an email. I’m happy to answer any questions you may have.

Sources:

1.        Templin, Neal. (May 9, 2021). “The Biggest Mistakes People Make With Social Security.” The Wall Street Journal. Retrieved from https://www.wsj.com/articles/the-biggest-mistakes-people-make-with-social-security-11620561601.

2.         Peterson, Jonathan. (2015). “How to Perform a Break Even Analysis for Your Social Security Benefits. “Dummies. Retrieved from https://www.dummies.com/personal-finance/retirement-options/how-to-perform-a-break-even-analysis-for-your-social-security-benefits/.

3.        Social Security Administration. (2019). Period Life Table, 2019. Retrieved from https://www.ssa.gov/oact/STATS/table4c6.html .

4.        Vernon, Steve. (June 24, 2013). “Living Too Long Is a Risk!” CBS News (Money Watch). Retrieved from https://www.cbsnews.com/news/living-too-long-is-a-risk/.

Exploring Life Goals While Going Off the Grid

I went to the woods because I wished to live deliberately, to front only the essential facts of life and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived...I wanted to live deep and suck out all the marrow of life.”

– Henry David Thoreau, Walden

Back in January, my dear friend and hiking partner Sharon and her boyfriend invited me and my husband Mike to join them on hike. But not just any hike! This was to be a five-day, 35-mile hiking and backpacking trek in the Sierra Nevada Mountains from Thomas Edison Lake to Florence Lake.

It took me about a second to decide that, yes, I wanted to go. Mike, on the other hand, required a few days of thought before he too agreed. After that, preparations went into full force!

Beginning in April, the four of us planned out a training calendar to ensure we increased our mileage and elevation as the trip approached. Hikes during those months took us to Cedar Creek Falls, Mount Baldy, and Nevada Falls-Yosemite. We also scaled El Cajon Peak, a 14,000-foot mountain in Colorado, by way of the Grays and Torreys Trails.

Training hike at Cedar Creek Falls in San Diego. Yes, there are big falls in San Diego in the spring!

Inevitably, there were gaps in training from unexpected family events, illnesses, and busy lives; yet we still managed to log some tough miles prior to the trip.

Gearing Up for the Trip

In addition to conditioning our bodies, we had to do a fair amount of gear research. It was crucial to understand how to pack just enough to get us through the five days without overpacking. The goal was to put together two backpacks per couple that each came in under 30 pounds. Not a small feat considering we needed to carry five days of food, bear cannisters, bedding, and shelter!  

Thankfully, there’s a surplus of online hiking and backpacking information. Between a knowledgeable local blogger named “The Hiking Guy” and four hours of conversations with REI employees, we were able to pinpoint exactly what we needed for optimal packing.

By the time of our trip, we’d invested in the following equipment:

·         Backpack for Mike: $150

·         REI Co-op Quarter Dome Tent: $237 (REI Memorial Day Sale Price)

·         2 REI Co-op Magma Sleeping Bags: $462 (REI Memorial Day Sale Price)

·         Therm-A-Rest® NeoAir® Xlite™ Sleep Pads: $320

·         Sawyer® Squeeze Water Filters: $60

·         Jetboil® Cooking System and fuel: $98

·         Clothes (SPF shirts, quick-dry fabric hiking pants, Crocs™ shoes for after-hike wear, hiking socks, and a gently used Poshmark Puffer Coat): $250

Along with gear costs, we spent approximately $150 on permits and the cabin we planned to stay in after we finished our trek. All told, the grand total came to almost $1,800.

At first glance, spending that much for a backpacking trip may seem excessive. But it was critical to meet our basic needs like food, shelter, and clothing without packing so much weight that we had to quit after the first day.

Knowing that Mike and I can no longer sleep “anywhere” like we did in our 20s, we invested in equipment that we hoped would ensure a good night’s sleep. In addition to emphasizing lightweight, high-quality, sleep-friendly gear, I justified the expense knowing that we would have easily spent $2,000 on a typical week-long vacation. Besides, now we would have great gear to last us for future trips.

Luckily, it was an investment that paid off. And the trip itself? Even better than we expected!

As it turns out, we chose the best possible hiking partners for a challenging trip like this. Billy is a professional musician and nature lover with an uber-calm demeanor. He hails from the Yosemite area and grew up in these mountains, so we were able to tap into his local knowledge during our adventure. Sharon, an Aussie by birth, is his positive, photography-loving, outdoorsy soulmate who is very patient, calm, and stoic. In fact, she quietly endured a bunion and blisters for much of the hike without a single complaint.  

The Journey Begins

We began our journey from the Thomas Edison Lake area with a seven-mile, mostly uphill climb to our first camp spot. This proved to be our most difficult day of hiking. Upon joining with the John Muir Trail, the conditions improved and the steepness declined while we grew accustomed to carrying our packs.

We were amazed by the beauty and utter silence at the Edison Lake Campground.

As the days passed, we began to develop a routine that included:

• ·         Waking to the sunrise and birdsong

• ·         Enjoying coffee and oatmeal while soaking in gorgeous views

• ·         Practicing basic yoga on a granite slab

• ·         Packing gear at a leisurely pace and reviewing navigation

• ·         Hiking 4 to 8 miles with ample stops for water and snacks

• ·         Swimming in nature-made lakes, creeks and rivers

• ·         Setting up the fishing poles

• ·         Settling into camp by mid-afternoon

• ·         Enjoying “happy hour” with tea and hot cocoa

• ·         Setting up camp for the evening

• ·         Communing over freeze-dried meals like pad thai and spaghetti

• ·         Playing cards or watching the sunset while indulging in M&Ms or other “fancy” desserts as the days came to a close.

• ·         And, oh yes, getting an increasingly good night’s sleep, especially as the week progressed.

Along the way, we experienced occasional wildlife, natural hot springs, poetry readings, campfires, abundant stargazing, conversations with hard core 212-mile John Muir Trail hikers, and plenty of laughter.

We also spent ample time brainstorming trail names. This activity is a common tradition for endurance hikers, and we enjoyed playing with multiple ideas until the official trail names finally stuck: Back Story (Shelley), Four Seasons (Mike), Lil’ Wallaby (Sharon), and Air Dry (Billy).  

What I found most interesting was how, once you stripped away all the daily distractions of life such as emails, texts, work tasks, laundry, bills, and cooking, the most valuable aspects of life came to the surface. Living so deeply in the here and now enabled me to feel like I could be a much better person, friend and spouse. The conversations were richer. The moments of joy so much more stunning. Perhaps the fresh air, the deep quietude, and the plentiful endorphins created some sort of natural high. After a while, I was surprised to feel a longing to stay in the wilderness for longer as the miles progressed.

A Fresh Start

When our journey ended at the Florence Lake ferry, I felt compelled to make some changes. I found myself urgently unsubscribing from emails as we drove home. I especially wanted to brush aside anything that had to do with shopping. No more Target or Gap emails for me.

In addition, I found that I did not miss the news. I’ve since taken up a habit of only skimming the headlines unless a financial topic requires more attention. Once we reached home, I felt pressed to clean out unloved items from my closet.

While very much missing our kids over the trip, I recommitted myself to focusing a good part of every day on making a special moment with them. Lastly, I made a goal to enjoy time outside every morning. Even if it’s just a short walk with the dog or a spirited jaunt around the backyard, there’s something so grounding about spending time in the outdoors.

As the days pass, I keep going back to the trip photos that show Mike and me with such big smiles on our faces. It makes me wonder when our next adventure will happen and where it will take us.

Mike and me on the last day of our hiking trip, returning via the Florence Lake ferry.

So what does this have to do with money? Admittedly, this is quite a variation from my typical financial topic of the month. Don’t worry. I have plenty of those lined up for the future.

As I think back to my recent trip, I’m reminded of how important it is to be grateful. For good health, great friends, and the beauty of nature.

I’m also incredibly grateful for each of you who made this possible. After getting my email a month ago mentioning my “off the grid” trip, you took it in stride. That’s because you had the same confidence I did that the investing and financial planning process we’ve employed would keep your finances safe while I was away.

I’m also extremely grateful for my mentor, Paul, who offered to take urgent calls during my absence.

I hope hearing about my journey inspires you to seek your own adventure that sparks joy for you in new ways and wakens your spirit. After all, what good is a financial plan if it doesn’t give you the foundation for enlightenment in the pursuit of your highest values and goals?

Thoreau offered a challenge in his book Walden that he wrote while immersed in nature for two years. And it’s this: “Only one in a hundred million people is awake enough to experience a poetic and divine life. To be awake is to be alive.”

Will you accept his challenge and be that one?

Inflation and Investments

With the economy starting to recover from the COVID-19 pandemic and investor concerns turning increasingly toward inflation, Dimensional Fund Advisors Founder David Booth talked with Nobel laureate Eugene Fama about inflation and how investors should think about it in their portfolios. Excerpts from their conversation have been edited for clarity.

ON PREDICTING INFLATION

David Booth: Gene, you are a founding Director of Dimensional and have been involved in our research and corporate governance for more than 40 years. People may not know that you’ve also done a lot of research on inflation and interest rates.

We always tell people, “We don’t try to forecast. We try to be prepared for various outcomes.” Inflation is one of those things you want to be prepared for. There’s a pickup in inflation risk that wasn’t there, say, 10 years ago. Does that cause you to worry?

Eugene Fama: Historically what’s happened is, when there’s a spike, the spike persists for a long time. Inflation tends to be highly persistent once you get it. Once it goes down, it tends to be highly persistent on the downside. You’ve got to be prepared for that. Predicting next month’s inflation may not be very hard because this month’s inflation can be a pretty good predictor of next month’s inflation, or next quarter’s inflation, or even the next six months’ inflation. Persistence is a characteristic of inflation.

We haven’t been in a period of high inflation, or even moderate inflation, for at least 10 years, so I’m not particularly concerned that inflation will be high soon.

On How Investors Should Think About Inflation and their Financial Goals

Booth: Conditions change, so is there anything about the current environment and the risk of inflation heating up that would cause you to change your portfolio?

Fama: I don’t think anybody predicts the market very well. Market timing is risky in the sense that you’ve always emphasized: You may be out of the stock market at precisely the time when it generates its biggest returns. The nature of the stock market is you get a lot of the return in very short periods of time. So, you basically don’t want to be out for short periods of time, where you may actually be missing a good part of the return.

 I think you take a long-term perspective. You decide how much risk you’re willing to take, and then you choose a mix of bonds, stocks, Treasury Inflation-Protected Securities, and whatever else satisfies your long-term goals. And you forget about the short term. Maybe you rebalance occasionally because the weights can get out of whack, but you don’t try to time the market in any way, shape, or form. It’s a losing proposition.

Booth: As you get to the point in life where you actually need to use your portfolio, does that change the kinds of allocations you’d want?

 Fama: The classic answer to that was, yes, you’d shift more toward short-term hedges, short-term bonds. Once you had enough accumulated wealth that you thought you could make it through retirement, you’d want to hedge away any uncertainty that might disturb that. That’s a matter of taste and your willingness to take risk and your plans for the people you will leave behind, like your charities or your kids. All of that will influence how you make that decision. But the typical person who thinks they’ll spend all their money before they die probably wants to move into less risky stuff as they approach retirement.

 Booth: The notion of risk is pretty fuzzy. For example, if I decide that I want to hold Treasury bills or CDs when I retire, and you did that 40 years ago, when we started the firm, and you’ve got that 15% coupon, that’s pretty exciting. With $1 million at 15%, you’re getting $150,000 a year. Today you might get less than 1%.

 Fama: Right, but I remember when inflation was running at about 15%, so not much better off!

 Booth: Those are different kinds of risks.

 Fama: When you approach retirement, you’re basically concerned about what your real wealth will look like over the period of your retirement, and you have some incentives to hedge against that. You face the possibility, for example, that if you invest in stocks, you have a higher expected return, but you may lose 30% in a year and that might be devastating for your long-term consumption.

 Booth: I think part of planning is not only your investment portfolio, but what to do if you experience unexpected events of any kind. We’re kind of back to where we start our usual conversation: “Control what you can control.” You can’t control markets. What you can do is prepare yourself for what you’ll do in case bad events happen. Inflation is just one of many risk factors long-term investors need to be prepared for.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Yoga and Investing

By Shelley Murasko

Over the years, I’ve become particularly fond of yoga as an exercise. After too many miles of distance running in my 20s, yoga ended up being a nice contrast to the years I spent pounding the pavement.

I practice a form of yoga called Bikram Yoga. Held in a studio heated up to 100 degrees, the teacher leads us through a series of 26 postures over the course of an hour. As you can imagine, it’s not hard to work up a sweat!

In one session, I can put my strength, flexibility, and cardiovascular system to the test. While all the classes are challenging, there’s one instructor who really pushes his students to hold poses longer and with more effort. When I leave his class, I feel like I might collapse on the way to the car. Now that’s a workout!   

Requiring a minimal amount of poses, “hot” yoga is simple but not always easy to adhere to. In many ways, a dedicated yoga practice reminds me of disciplined, diversified, low-cost index investing. As master investor Warren Buffett once said, “Investing is simple, but not easy.”

Simple at First Glance

On the surface, yoga can seem super simple. In fact, if you walked into a hot yoga studio while the heat was off and someone quickly showed you the 26 postures, you might think, “What’s the big deal? I can do this in my sleep. They call this exercise?”

Furthering this idea of simplicity, yoga requires a minimal amount of gear. You need only a yoga mat, towel, and big bottle of water to take part in a typical class. In fact, you don’t even need to go to a studio. You can perform yoga by following along with poses from a book or online course. While a heated studio is nice, you can get similar benefits in a non-heated room.

To reap the greatest rewards, however, attending a class at least three days a week is recommended. Dedicated yoga students make it a daily practice over several years. Instructor-led yoga, where poses and their benefits are explained in great detail, lead practitioners to work their heart, lungs and muscles more deeply.

Over time, yoga students memorize the sequences of the various postures. Yet most find they achieve greater benefits with an instructor who can guide them and offer hands-on adjustments versus working at home alone.

Similarly, investing on one’s own may sound simple at first. Just choose a brokerage company and a few funds and away you go, right? Sure, you can read a basic investing book and pick up enough information to become a do-it-yourself investor. For some unique individuals, investing on their own might work. However, the overall data tells us that having a financial advisor will usually lead to better investing results.

DIY-based Investments Tend to Underperform

Studies conducted by Dalbar showed that typical DIY investors earned an average 2.5% return on their investments from 1999 to 2019, barely beating inflation. A 50% stock/50% bond portfolio would have returned 5.5%.1 The simple aspects of smart investing, such as portfolio diversification, dollar cost averaging investment dollars, and steady asset allocation, are often not followed.  

DIY investors might also find themselves doubting the simple nature of their investment approach.  Questions like the ones following might arise that challenge their courage and consistency:

• Do I have enough funds?

• Are the funds high quality?

• Do the fund managers invest in their own funds?

• What will the Dow do this year?

• Can these low-cost funds really get me to a good retirement?

• Why does my neighbor seem to have it so easy with his GameStop® pick?

It’s only after years of investing that a person comes to appreciate the nuances and complexities of structuring an investment portfolio with high-quality funds. After all, it takes time to acquire a deep understanding of how to achieve not only return but reliability of return. Educated investors also must learn the importance of putting systems in place for every decision. This helps lessen emotional and behavioral tendencies that can eat away at returns.

Over time, a dedicated investor learns how to enhance return by staying diversified, focusing on structure, and keeping expenses low — not by relying on luck or “shooting from the hip.” This takes years of disciplined investing that is closely monitored.

These keen investors know how small and large company stocks interplay. They can identify gaps in performance between value and growth stocks. They have systems in place to take advantage of market drops, and they follow their systems with a high level of discipline.

In addition, these investors have likely reflected deeply on how much global exposure they really need, and they know that investing is about more than picking good funds or stocks. They understand why investing works best within the context of a current financial plan, and they update their financial plan consistently to ensure investments are in alignment with cashflow projections.

A Disciplined Approach Leads to Greater Rewards

A sensible investing discipline is highly effective and, over the long term, capital markets will reward patient investors. Historically, over decades, a broadly diversified U.S. stock fund has averaged about 9% to 10% annual return while a U.S. small cap value fund has averaged closer to 11% to 12%.

To achieve a solid return, a diversified U.S. stock investor must endure stock market drops of 30% to 40%. With experience, an investor embraces volatility as an opportunity to rebalance or get more money into the stock market. They see the market drops as a door opening, saying “Come on in! It’s a good time to enter and make some money.”

An investment-grade bond fund investor would have attained about 4% average return over the various time periods. The level of volatility here is much less.

When reviewing investment results like the “One Page Report” by Morningstar, you’ll see that a basic 60% stock fund and 40% bond fund like the Vanguard Wellington (VWENX) has averaged 10% return over the past ten years. Thus, a $10,000 investment would have grown to $25,000. Investing in a fund like this is a simple, yet very effective approach.   

There’s no one investment strategy that will perform well every year. But over enough time, with a good dose of courage to stay the course during tough times, capital markets have rewarded investors.

A yoga practitioner who is dedicated daily to performing the 26 key poses in a heated studio over several years will also reap rewards. In this case, the return is a moderate blood pressure, steady blood sugar control, muscular strength and flexibility.

In fact, a study done by the NIH concluded that Bikram Yoga improves the ability to process sugar, reduce cholesterol and fat and improve bone density. Most practitioners also report lower levels of stress and improved sleep as byproducts.2

Advisors Make It Easier to Stay Dedicated

Adhering to an exercise program like yoga over many years is never easy. Whether it’s time, cost or energy, there are many factors that can make it difficult to remain dedicated.

There have been times where I wanted to give up yoga because I felt I was no longer progressing. After falling out of a posture or feeling extra stiff in that same spot, I have asked myself, "What’s the point?"

This really became obvious during COVID times when the yoga studio was closed for months on end. I was left to my own devices to continue my practice at home. My first attempts of DIY, video-led yoga led to boredom, in which I switched to just walking or jogging each day. While great exercises, walking and jogging primarily offer benefits only to the legs along with a cardio boost. They also can occasionally result in sore hips and knees.

After starting to feel stiff and sore from running, I gave yoga another attempt and overdid it. I rushed into headstands one day and came away with a sore neck for weeks. Being at home made me feel like I could push my limits more than I should, and I suffered the consequences. 

Investors can feel the same way if they experience a series of false starts that lead to lackluster results. A common practice is putting money into what may be considered a good fund or stock. If a stock doesn’t show glowing results after a month or two, though, DIY investors often ditch it and move on to the next hot idea they read about in the newspaper — without taking the time to understand why the stock didn’t perform as expected.

This cycle of chasing performance is very common among DIY investors, and it can destroy returns. These same investors might have done a better job staying the course or, at least, ensuring no major changes were made if they had an advisor guiding them.

That’s because an advisor who is tapped into the pulse of the market can often explain its behavior based on historical data. For instance, perhaps a certain market segment is temporarily trailing. An advisor would be able to point this out to an investor and provide advice on how to manage a portfolio with this in mind.

If another investment was necessary, the advisor could guide the client to find the right investment without giving up on the investment category at the wrong time.

While yoga and investing are simple in principle, they can be rather challenging in practice — especially when it comes to sticking it out through thick and thin. Yet the only way to achieve the optimal health or wealth benefits is to stay disciplined and give your particular approach time to show results.  

Buffett once said that “achieving his first million was the hardest thing to do.” The right approach and help from an advisor can make it easier.

Whether you’re attempting your first million or are simply curious about an investment question, I’m here for you. Don’t hesitate to reach out.
 
Sources:

1. JP Morgan Chase. (March 31, 2021). “JP Morgan Chase’s Quarterly Slides, Guide to the Markets.” Pg. 80. DALBAR study of investor behavior based on data from mutual fund flows recorded annually.

2. Hewette, Zoe. (Oct. 5, 2015). “The Effects of Bikram Yoga on Health: Critical Review and Clinical Trial Recommendations.” NCBI – U.S. National Library of Medicine, NIH. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4609431/.

The ARP Act: A Breakdown of the Key Provisions

It’s been more than a year since the pandemic hit, and the country is still struggling to regain an economic foothold. Despite past efforts to stimulate the economy, 9.7 million people remain out of work and 200,000 businesses have closed permanently.

To help trigger a recovery in 2021, the government passed the American Rescue Plan (ARP) Act on March 11. The $1.9 trillion legislation intends to deliver a wide range of pandemic-related financial relief for citizens by providing a cash stimulus and reducing the tax burden for individuals and families. Here’s a list of the key aspects of the Act and how they can help you.

2021 Recovery Rebates (aka Stimulus Payments)

One of the most popular provisions of the ARP is a third round of cash stimulus payments. If eligible, you’ll receive $1,400 for yourself and an additional $1,400 for each adult or minor dependent. The new act expands the eligibility to all dependents in a household, including aging parents living with you and college-age dependents. Previously, only dependents under age 17 were eligible.

The ARP has made it more difficult to quality this time around, though. To see if you qualify, check out the income ranges below. If your income falls below the minimum range number, you’ll receive the full payout of $1,400 per qualifying person. If your income falls within the range, you’ll get a partial payment. If your income is equal to or greater than the maximum amount, you won’t receive anything. The phaseout income ranges are:

·         Single or married taxpayers filing separately: $75,000 to $80,000

·         Heads of household: $112,500 to $120,000

·         Married taxpayers filing jointly: $150,000 to $160,000

Child Tax Credit Enhancements

Families with children under age 18 at the end of this year will benefit from temporary changes to the Child Tax Credit in 2021. The ARP boosts the maximum credit from $2,000 to $3,000 for each qualifying child. For children under age six, the amount increases to $3,600 per child.

The ARP also makes the Child Tax Credit fully refundable. This means you can receive the full amount even if you don’t earn enough to pay taxes.

Another welcome benefit of the revised Child Tax Credit is that the IRS has been charged with paying 50% of your estimated Child Tax Credit between July 31 and December 31. In a sense, it’s like getting additional stimulus checks.

However, you may be required to pay back the credit if your actual income for 2021 ends up exceeding the phaseout restrictions, which are markedly lower than in the past. The phaseout ranges are listed below. If you make more than the amount listed, you’ll have to pay back your credit come tax time next year.

·         Taxpayers filing jointly: $150,000

·         Heads of household: $112,500

·         All other filers: $75,000

Child and Dependent Care Tax Credit Enhancements

Another positive for parents with young children is an upgraded Child and Dependent Care Tax Credit, which can mean money back for parents using a licensed care provider that enables the parents to work, including kids attending day camps. The ARP significantly increases the expense amount that is used to calculate this tax credit. The amount for taxpayers with one qualifying child has skyrocketed to $8,000 from the previous limit of $3,000. For two or more qualifying children, the amount goes up to $16,000!

To qualify, a child must be age 13 or younger for the entire year. The credit also applies to a spouse or other dependents who are unable to care for themselves and reside more than six months out of the year with you.

Another important change is the increase of the Applicable Percentage. To determine if you’re entitled to the Child and Dependent Care Tax Credit, your eligible expenses are multiplied by your Applicable Percentage.

Previously, the Applicable Percentage ranged from a low of 20% to a high of 35%. Under the ARP, the maximum percentage has been increased to 50%. Due to these changes, more people will receive the Child and Dependent Care Tax Credit on their 2021 taxes. And the amount they may receive is drastically higher. In fact, it’s nearly quadrupled compared to the regular parameters!

While these changes are great for many taxpayers, high wage earners with an average gross income (AGI) over $125,000 will see the amount of their tax credit decrease. Those who earn more than $440,000 won’t get any tax credit — even if they were able to claim it in past years. Those who fall below the $440,000 threshold but earn more than $125,000 may qualify, but they will see reductions in their Applicable Percentage of 1% for every $2,000.

If you happen to fall into the eligible range, you could be the recipient of fairly high credits.  What makes this even better is that the ARP makes the credit fully refundable whereas before it was not.

Unemployment Compensation Enhancements

At this point, many workers who were laid off or furloughed last year have been reinstated or have started jobs with new employers. While this is good news, there are more than 4 million who fall into the “long-term unemployed” category. This means they have been jobless for 27 weeks or more. The ARP helps job seekers by providing the following benefits through Sep. 6, 2021:

·         Expands the unemployment benefit period from 50 to 79 weeks

·         Extends unemployment compensation to self-employed workers

·         Continues the increased benefit amount of $300 per week

If you received unemployment compensation in 2020, up to $10,200 of it may be tax-free. To qualify, your AGI must fall below $150,000. If your spouse also received unemployment benefits in 2020 and your AGI was below the $150,000 threshold, you both may be able to claim the tax-free benefit for a total of $20,400.

Insurance Enhancements

Having medical insurance is always important, but it’s especially crucial now when dealing with the physical, mental and financial challenges spawned by the COVID-19 pandemic. If you’re laid off and don’t have Medicare or Medicaid, the ARP allows you to keep your current health insurance through COBRA between April and October 2021 at no cost. Considering that COBRA premiums can cost four times more than an employer-subsidized plan, this is a welcome benefit for many.

For those who purchase health insurance through a state-run health insurance Exchange, the ARP increases Premium Assistance Tax Credits to help them pay the fees. These changes make it possible for taxpayers whose incomes are up to 150% of the poverty line to receive free coverage. Under previous legislation, they’d have to pay up to 4% of their income for coverage.

Even those who make higher wages can receive partial credit, thanks to newly established premium percentage caps. For example, wage earners who are at 400% or above the poverty line(example = less than $106,000 annual income for family of four) will be capped at 8.5%. This means they won’t be required to pay more than 8.5% of their income for insurance premiums. Under these new provisions, which are in effect through 2022, nearly 15 million Americans are now eligible for subsidized health care coverage. Visit healthcare.gov for more details.

The ARP also expands Medicaid coverage for home- and community-based services as well as coverage for COVID-19 testing, treatment and vaccination.

Emergency Education Grants and Future Tax-Free Student Debt

If you have college-age students, the ARP offers a couple of provisions that may apply to you.

It adds an additional $40 billion in grant money to the Higher Education Emergency Relief Fund that was established as part of last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. Colleges and universities are required to distribute at least 50% of that money in financial grants that do not need to be paid back. They may award grants to any student, though they must give priority to students in financial need.

The ARP also makes an attempt to help those with education-related loans. Though the act doesn’t offer debt forgiveness of student loans, as some had hoped, it does set the stage for making the forgiveness of this debt tax-free in the future. Under normal circumstances, forgiven loan debt would be considered taxable income. ARP provisions make it possible to discharge student debt, such as federally backed or private student loans. Since the canceled debt wouldn’t count as income, it reduces taxpayer burden. However, this applies only if the debt is forgiven between 2021 and 2025.

Additional Noteworthy ARP Provisions

Along with the key features noted above, the ARP also includes a few additional provisions that may apply to you.

·         Provides emergency rental and homeowners assistance for renters struggling to pay rent and utilities or homeowners who need help paying mortgages, utilities, homeowners insurance, and other homeowner expenses as a result of the pandemic. To learn more, visit the National Council of State Housing Agencies website to learn how individual states are distributing funds.

·         Extends the Employee Retention Credit through December 2021 and allows certain startup businesses to qualify for the credit. It also makes it possible for “severely financially distressed employers” to consider most of their wages as “qualified wages” when calculating the ERC.

·         Extends Limits on Excess Business Losses for Noncorporate Taxpayers through 2026. This provision allows taxpayers to offset non-business income (up to $500,000 for joint filers and $250,000 for single filers) with business losses. Normally, offsetting is not allowed.

Striking a Path Toward a Stronger Economy

The ARP offers many helpful financial advantages. From stimulus checks to tax credits to free health insurance coverage, this wide sweeping legislation offers much-needed financial aid to many Americans. 

Due to the intricate details woven into this piece of legislation, it can be difficult to determine if you qualify for certain aspects of the ARP. A smart move is to consult with your CPA or tax advisor to find out if you’re eligible for various credits, rebates, and payments provided under the new act.

Hopefully the provisions laid out in the ARP will bring you some financial relief and peace of mind as we move toward a stronger economy in the coming months. As always, I’m here to help if you have questions or need assistance with your financial planning. Feel free to email or call to get the conversation started!

Sources:

Levine, Jeffrey. (March 10, 2021). “The American Rescue Plan Act of 2021: Tax Credits, Stimulus Checks, and More That Advisors Need to Know!” Kitces.com. Retrieved from https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/?utm_source=rss&utm_medium=rss&utm_campaign=the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=fc0995e3ad-NEV+MW&utm_medium=email&utm_term=0_4c81298299-fc0995e3ad-57130829.

Medintz, Scott. (April 16, 2021). “How the American Rescue Plan Can Help You.” Consumer Reports. Retrieved from https://www.msn.com/en-us/lifestyle/lifestyle-buzz/how-the-american-rescue-plan-can-help-you/ar-BB1eVnSr.

Moran, Jim. (April 14, 2021). “A Breakdown of the American Rescue Plan Act of 2021.” BusinessWest.com Blog. Retrieved from https://businesswest.com/blog/a-breakdown-of-the-american-rescue-plan-act-of-2021/.

Simon, Ruth. (April 16, 2021). “Covid-19’s Toll on U.S. Business? 200,000 Extra Closures in Pandemic’s First Year.” Dow Jones. Retrieved from https://www.morningstar.com/news/dow-jones/202104166182/covid-19s-toll-on-us-business-200000-extra-closures-in-pandemics-first-year.

U.S. Department of Labor. (April 2, 2021). “News Release: The Employment Situation – March 2021.” Bureau of Labor Statistics. Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf

The Top Habits of Wealth Builders

Happy New Year! January 1 is the day many of us go about jotting down New Year’s resolutions designed to help us improve ourselves and our lives. Popular themes include getting in shape, eating healthier, and improving relationships. All great options! Here’s another I recommend: developing good money habits that improve your financial situation.

After serving more than 90 families and writing financial plans for hundreds of clients, I’ve had a front row seat to all kinds of interesting money behaviors. If I had to boil it down to the two things my multi-million dollar clients do that set them apart from others, it would be the following:

·       Spend way less than they earn, even when they don’t have to

·       Invest as much as they can in stocks 

Most everything else that people worry about, like which stocks to pick, when to get in and out of the market, whether or not to clip coupons, or what the tax laws are going to be in five years, prove to be rather insignificant in the grand scheme of wealth building.

As you think about your own money behaviors, here are five important habits to consider if you want to grow your wealth in 2021.

Spend Less Than You Earn

Let’s start with maximizing your savings by minimizing spending. Data tells us that the average U.S. citizen generally directs about two-thirds of after-tax income to four main areas: housing, cars, food, and health insurance/costs.1  

If you can get these four things right while collecting a modest income, you will put yourself on a path to major wealth. After all, it’s never too late — or too early — to develop smart money habits.

As a case in point, I recently worked with some of my ten-year-old daughter’s friends on a game called the “Life Budgeting Project.” The winner of the game was the person who saved the most. In a matter of minutes, most of the girls went from living alone in a three-bedroom house and working in low-earning careers to commuting by public transport and choosing to become managers. In fact, the winner originally selected artist as her profession and then opted for CEO. Second place went from buying brand-name cars, clothes and cell phones to renting an apartment with two housemates and taking her food to work.

Of course, playing a game on paper is a lot different than real life. But if you learn to establish good habits with housing, auto, food and health, it can transform your ability to save.

Housing

While thinking about how to minimize housing costs, I was reminded of Thomas J. Stanley’s book, The Millionaire Next Door. Throughout its pages, Stanley covers many habits of the wealthy. The main idea of the book is that people who “look the wealthiest” rarely are.

When you consider housing, Stanley emphasizes the following: choose neighborhoods with tall trees and stay there for at least 20 years.

For those intent on buying a home, Stanley offers these guidelines: “The market value of the home you purchase should be less than three times your household's total annual realized income…and most millionaires rarely have a mortgage more than two times their income.” 2

I admire Stanley for his observations, and I would go even further to emphasize that there is no weakness in having roommates, buying a “starter home,” or retiring into a smaller residence. For sure, there may be years as a parent where choosing a neighborhood with great schools or a home with a large yard take priority. Outside of the child-rearing years, however, consider right-sizing to that which is a better fit for your priorities.

By the way, the cost of living in places like California and New York would probably not fit Stanley’s model. Yet there are still ways for you to manage your housing costs if you reside in these states. For example, you can compromise on house size or proximity to desirable communities to get started in the higher end housing markets. In addition, you might consider building and/or renting a backyard studio or portion of land.

While housing costs are certainly higher in prime states, you may find that other costs are lower, like heating, cooling, maintenance, a one-season wardrobe and property taxes.

Cars

With cars, Stanley emphasizes buying over leasing, driving the same car for at least 10 years, and choosing cars for reliability. He also says that the typical millionaire buys cars made by Toyota® or Honda®, rarely leases, and typically opts for used. Interestingly, he cites that 67% of BMW owners are not millionaires.

Food

As far as food budgeting goes, you can take simple steps to keep a lid on expenses. Across households, I’m shocked when people with minimal savings buy most of their groceries from expensive grocers like Whole Foods®. On the other hand, those with abundant savings are content with stores like Ralphs® and Sprouts®. Could food budget control really be that simple? Absolutely!

Another strategy is to minimize eating out. While working with one individual on reducing his sizeable debt, I noticed that he was eating out multiple times per day. This daily habit was routinely driving up his expenses.

When it comes to food, eating in and shopping at traditional, no-frills grocery stores are key to reducing your spending and boosting your savings.  

Health

High insurance premiums and unexpected health care costs can take a big bite out of any budget. By far the most effective lifetime strategy for keeping health costs low is to strive for good health. It’s important to get daily exercise, including strength training, and to eat plenty of veggies and fruits, especially as we age.

As far as health insurance, the costs have increased significantly over the years. To avoid overspending, follow these tips:

·       Obtain insurance through an employer, if possible, for lower health costs

·       Consider the Affordable Care Act options for lower income households (Important to note that the current act does not consider a household’s assets in the subsidy calculation)

·       Put aside funds in a Health Savings Account (HSA) to take advantage of tax deductions, which can offset healthcare costs

·       Embrace T.G.I.M. – Thank God for Medicare – if you’re 65 or older and in good shape, a healthy individual can expect lower costs

Investing in stocks

After developing strong savings habits by following the four strategies above, the next step is to put your money to work in diversified stocks.

Jeremy Siegel, a finance professor at the Wharton School of Business, is a proponent of this strategy. In his book, Stocks for the Long Run, he shines a light on the fact that, during most time periods, stocks have beaten other publicly traded investments like bonds, commodities and real estate investment trusts.

He specifically provides key data on annual “real” (after inflation) returns going back further in history than anyone has published before. From 1871–2001, for example, U.S. stocks averaged 6.8% real return, compared to bonds at 2.8% real return. Gold averaged a paltry -0.1% real return. In his book published in 1994, Siegel projected that stock returns in the future would be somewhat lower for at least a couple of decades, but they would still surpass bonds.

It’s important to note one period of abnormal underperformance in Siegel’s book: From 1966–1981, gold beat stocks due to very high inflation. In addition, Treasury bills beat stocks over this same period. Under typical inflation circumstances, however, stocks remain high performers.

So why not just throw in the towel, and put all your money in stocks?

For one, there can be a lengthy period of time where stocks run negative. From 2000–2010, for instance, the S&P 500 returned a -1% average annual return.

To offset these negative periods, sensible investors balance their goals of allocating strongly to stocks with the importance of holding enough in bonds and cash to cover their cashflow needs over a five to 10-year bleak stock performance period. The exact percentage to hold in these more conservative funds is very specific to your cash flow needs in the near term and your risk tolerance.

Of course, your ability to withstand a bear market crash like this past spring is also extremely relevant. Not everyone has the courage to stay the course during the volatility that will most definitely occur. There’s a reason typical retirees hold 40–50% of their savings in bonds.

Siegel’s book also faced a great deal of criticism from reputable economists like Yale’s Robert Shiller. He warned that 20 to 30-year holding periods were not necessarily risk free, and that purchasing stocks at a high price-to-earnings ratio could yield poor returns. Of course, putting your money into stocks all at one time can be minimized by dollar cost averaging. This tends to apply to most individuals who are steadily saving.

While there is no guarantee that stocks will offer superior returns to other investments, especially in the short term, there are compelling reasons why stock return will likely persist. The building blocks of stock market return continue to be dividend yield (currently averaging 1.8% across the S&P 5003) and corporate earning’s growth. The latter results from many factors, including population growth, inflation, innovation and household wealth expansion. Not just in the U.S., but globally as well. Also, we can’t forget that the extremely low interest rates of our times offer few other options. 

As you head into 2021, keep your money management habits in mind. Perhaps this is the year to amplify core wealth-building practices. There are so many possible behaviors to consider, and I encourage you to keep it simple by answering two questions:

·       Are you maximizing your savings with smart housing, car, food and health choices?

·       Are you putting each and every one of your spare dollars to work with emphasis on allocating to stocks?

If you can answer “yes” to both of these, then 2021 may be the year you stick to your New Year’s resolutions and start building your wealth significantly.

All trademarks are the property of their respective owners.

References

1.       U.S. Bureau of Labor Statistics. (Sep. 9, 2020.) “Consumer Expenditures – 2019.” U.S. Bureau of Labor Statistics. Retrieved from https://www.bls.gov/news.release/cesan.nr0.htm.

2.       Stanley, Thomas. (Dec. 8, 2009.) “$1 Million: Something or Nothing (Part 1).” Thomas J. Stanley blog. Retrieved from http://www.thomasjstanley.com/2009/12/1-million-something-or-nothing-part-i/.

3.       J.P. Morgan Chase. (Sep. 30, 2020.) “Guide to the Markets” presentation (page 4). Retrieved from Guide to the Markets | J.P. Morgan Asset Management.

Proven Ways to Access Cash if Your Emergency Fund Has Run Out

As we enter the third month of 2021, the pace of the U.S. economic recovery continues to be sluggish. Some of the slowdown is the result of continued lockdowns in many states, which are keeping businesses in certain sectors from reopening or functioning at full capacity.

Industries like leisure and hospitality, for example, continue to struggle with 61,000 jobs lost in January. Retail operations also took a hit as 38,000 jobs went on the chopping block during that same timeframe1.

The good news? The unemployment rate continues to fall, dipping slightly in the first two months to 6.3% with the addition of 49,000 jobs1. Even so, this is still far short of last year’s 50-year low of 3.5%.

Today, many Americans who were laid off or furloughed in 2020 as a result of the ongoing global pandemic are still looking for work. Currently data show the number of unemployed is somewhere between 10 and 20 million people2.

If you’re among them, staying afloat financially is likely one of your most pressing concerns right now. So what can you do if you’ve exhausted your emergency fund, are no longer eligible for unemployment benefits, or both?

Reducing Expenses Is Your First Priority

The first thing you should do is look for ways to reduce your spending. Evaluate how much you need to pay for essentials like food, shelter, and medical insurance. At the same time, consider how to cut non-essential items. Eat out less often and instead prepare food inexpensively at home. Reduce the frequency of services like housekeeping and landscaping. Ask service providers for loyalty discounts.  Shop around for lower car and home insurance premiums. Find out what else you can do by checking out these articles on living below your means and handling a sudden drop in income.

Painless Ways to Live Below Your Means — Wealthrise Financial Planning (wealthrisecfp.com)

How To Handle A Sudden Drop In Household Income — Wealthrise Financial Planning (wealthrisecfp.com)

If you’re still coming up short financially after going through this process, here are a six additional options to help you manage your expenses.

401(k) Loans

While it’s usually not recommended to borrow from your 401(k), these are unusual times. When you take a loan against your 401(k), you can borrow the amount you need to cover your immediate expenses without losing that portion of your investment account forever. Since you’re required to pay yourself back, you will restore your pre-pandemic balance once your financial situation improves and pay yourself back with interest along the way.

With a 401(k) loan, you avoid loan fees, high and/or adjustable interest rates, and unnecessary taxes. Not all plans allow loans, so be sure to check with your plan provider to find out if this is an option for you. As an alternative, you may qualify for an IRA hardship withdrawal. Check with this IRS link to see if you are eligible: Hardships, Early Withdrawals and Loans | Internal Revenue Service (irs.gov)

Zero-Interest Credit Cards

Another smart way to manage your expenses when your income is tight is to apply for a credit card that offers an introductory 0% APR on purchases. Some interest-free periods can last a year or longer, which means you can use your credit card to pay for essentials like food, medical expenses, and monthly bills without racking up huge interest fees.

To qualify for one of these offers, you need to have good credit (690 or higher), and you’ll be required to pay the minimum monthly amount. Here are a few that NerdWallet suggests3:

·       Citi® Diamond Preferred® Card: 0% APR for 18 months with no annual fee

·       U.S. Bank Visa® Platinum Card: 0% APR for 20 billing cycles with no annual fee

·       Wells Fargo Platinum card: 0% APR for 18 months with no annual fee

·       HSBC Gold Mastercard® credit card: 0% APR for 18 months with late fee waiver and no annual fee

If you currently have debt on a high-interest credit card, transferring that balance to a zero-interest card can keep you from piling up even more. Just keep in mind that the 0% APR won’t last forever, and you will eventually have to pay off the balance. Also, some companies charge transfer fees of 3% to 5%.

Credit Card Points and Programs

You can also increase cash by participating in credit card rewards programs as long as you pay your card balances completely and on time each month. Basically, when you make purchases, you earn points that you can then redeem for cash and other items. Before COVID-19, you may have held a credit card or two that allowed you to use your accumulated points for travel. But as the pandemic has raged on, credit card companies—even those whose primary focus has been travel—have shifted their programs to allow you to use points to pay for food, bills and online shopping4.

Start by checking with your card company to see if they, too, have shifted the focus of their plans to allow points to be spent on every day needs usually through the purchase of gift cards. If you don’t have a credit card that rewards points, here are a few cash back options recommended by NerdWallet that you may want to look into3:

·       Chase Freedom Unlimited®: 0% APR for 15 months with 1.5% to 3% ongoing cash back rewards + $200 bonus and no annual fee

·       Blue Cash Everyday® Card from American Express: 0% APR for 15 months with 3% grocery and 2% gas rewards + $200 cashback bonus and no annual fee

·       Capital One Quicksilver Cash Rewards Credit Card: 0% APR for 15 months with 1.5% non-expiring cash rewards + $200 cash bonus and no annual fee

·       Citi Double Cash Card: 0% APR for 18 months with 2% cashback rewards and no annual fee

You may have noticed that several of the rewards credit cards listed above also offer 0% APR introductory rates for a limited time. When you combine interest-free purchases with tax-free rewards program benefits, it’s like getting a double-bonus. You avoid paying interest fees while earning money for buying the essentials you need during these challenging times. Importantly, however, you need to make sure that you can pay off your balance either monthly or once the 0% period ends.

Taking advantage of the programs offered by credit card companies is a simple and easy way to put some extra cash in your wallet. But what if you’re seeking a truly significant source of cashflow? If you’re a homeowner, tapping the equity you’ve built in your home is another way to obtain a cash infusion.

Use the Hidden Cash in Your Home

Experts predict that the housing market will stabilize in 2021, and a tight housing supply will likely keep home values high. Because of this, your home’s market value may rise, and you’ll have more equity to access. On top of that, home equity interest rates should stay relatively low—ranging from 4.61% to 5.05%—so now is a good time to consider taking out a home loan5 if you are pressed for cashflow.

There are three different loan types you may want to consider: a home equity loan, a home equity line of credit (HELOC), and a retirees line of credit (ReLOC) also known as a reverse mortgage line of credit.

Home Equity Loan

A home equity loan allows you to obtain cash at a relatively low cost by using your home as collateral. If you’re able to secure a loan of this type, you’ll receive the payout as a lump sum. It also comes with a fixed interest rate. This means your monthly payment will be about the same each month, which makes it easier to budget.

Usually lenders will let you borrow up to 80% (and sometimes more) of your home’s current market value, not including yet-to-be-paid mortgage balances. As an example, let’s say you have a $600,000 home with $200,000 left on the mortgage. The amount of equity in your home would equate to $400,000. Eighty percent of that is $320,000, which is the amount you could access.  

To apply, you’ll follow the steps that are typical with any loan. You’ll need to ensure your credit is in good standing to prove you have a solid track record of paying your bills. You’ll also need to provide documentation showing that you can afford to pay back the loan.

The latter may be problematic if you’re currently unemployed. It’s still possible to obtain a loan of this type, but you’ll likely have to do one or more of the following: prove you have unemployment benefits or other streams of income, get a cosigner, provide collateral, or borrow money from a friend or relative.

Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan, but it tends to be a bit more flexible. Instead of getting a one-time, lump sum of cash, you take out money as you need it, up to a pre-approved maximum. A downside of a HELOC is that the interest rate varies, so the amount you pay can change month to month. This can make it difficult to budget; and ideally, you treat a HELOC as a very temporary loan.

Like a home equity loan, the lender will usually allow you to borrow 80% or more of your home’s value. The process to apply is the same as well.

Once your HELOC is set up, you can draw funds from it over a predetermined period of time. After that, you’ll enter the repayment period where you’ll have monthly payments to make over a designated timeframe. During this phase, the HELOC acts much like a standard mortgage loan.

Retirees Line of Credit (ReLOC)

For homeowners over age 62, there’s a third option to consider: a ReLOC. Also known as a reverse mortgage line of credit, it’s a way to turn your home’s equity into cash while you still live there. To qualify, you must own your home, and it must be your primary residence.

A ReLOC is similar to a HELOC with several advantages. Some of these include6:

·       Your line of credit continues to grow each year

·       You don’t make monthly mortgage payments – the lender pays YOU

·       The payments you receive are non-taxable because they’re considered loan proceeds, not income

·       You don’t pay back the money until you no longer live in the house permanently

·       The loan can’t be canceled, reduced or frozen – as long as you keep up with mortgage-related obligations such as HOA fees, property taxes, homeowner’s insurance, and standard home upkeep

·       You owe only what you borrowed, even if your home’s value decreases

There are a few disadvantages to be aware of as well. You’ll be required to pay for mortgage and homeowner’s insurance as long as you have the loan. If you fall behind on property taxes or insurance premiums, it could trigger a loan default or home foreclosure.

As with a traditional loan, you’ll also need to pay closing costs that may include servicing and appraisal fees. You can also expect to pay origination fees, which can run as high as $6,0007. These expenses can be taken out of the loan, but it will reduce the amount of cash you can withdraw. ReLOCs also tend to have higher interest rates versus traditional loans.

The loan will also become immediately due if you don’t maintain the house, you fail to pay property taxes or insurance premiums, or you move out, live outside the home for a year or more, or pass away.

The latter could put your heirs in a bind since they will be responsible for repaying the loan. In this case, they’ll have the option of selling the house, paying off the loan with their own funds in order to keep the house, taking out a new traditional mortgage to pay off the loan, or allowing the lender to proceed with foreclosure if they choose not to keep the property.

However, tapping into your home equity may be a necessity as it can serve as a viable source of income during this time of need. Whether you opt for a home equity loan, a HELOC or a ReLOC depends on your individual financial situation. For help deciding on the best choice for you, speak to a lender about your options.

Economic Recovery Is On the Horizon

Whether your strategy to make ends meet includes obtaining a 401(k) loan, applying for a rewards program credit card or taking out a long-term home loan, things will likely improve as the year progresses.

As more vaccines become available and the number of COVID-19 cases decreases, the economy will likely begin to recover. When that occurs, closed businesses will reopen and return to full capacity, and they’ll be looking to hire new employees like you to help them grow. If you’re a business owner, you’ll finally be able to welcome your customers back and once again start to prosper.

Remember that wealth is the result of smart spending, discipline, a lifetime of hard work, and good planning — even when times are tough. By reducing your expenses and consistently using strategies like budgeting and saving, you’ll be able to manage your money more effectively so it can grow over time.

In the meantime, please reach out with any questions about your finances. I’m always happy to help!

Trademarks are the property of their respective companies.

Sources:

1 - Thorbecke, Catherine. (Feb. 5, 2021.) “Unemployment rate dips to 6.3% as employers add 49,000 jobs last month.” ABC News. Retrieved from https://abcnews.go.com/Business/unemployment-rate-dips-63-employers-added-49000-jobs/story?id=75667033.

2 - Long, Heather. (Feb. 19, 2021.) “How many Americans are unemployed? It’s likely a lot more than 10 million.” The Washington Post. Retrieved from https://www.washingtonpost.com/business/2021/02/19/how-many-americans-unemployed/.

3 – NerdWallet. (Feb. 23, 2021.) “Best 0% APR and Low Interest Credit Cards of February 2021.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/best/credit-cards/low-interest.

4 – Tsosie, Claire. (Mar. 19, 2020.) “3 Ways Credit Cards Can Help You Ride Out a Crisis.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/article/credit-cards/ways-credit-cards-can-help-ride-out-crisis

5 – Wichter, Zach. (Jan. 4, 2021). “Home Equity Rates 2021 Review and Forecast.” Bankrate.com. Retrieved from https://www.bankrate.com/home-equity/home-equity-rates-forecast/.

6 – Paris, Mayra. (Feb. 1, 2021.) “What is a Reverse Mortgage? Pros and Cons.” Money.com. Retrieved from https://money.com/what-is-a-reverse-mortgage/.

7 – Branson, Michael G. (Dec. 2, 2020). “Reverse Mortgage Closing Costs & Fees Explained.” All Reverse Mortgage, Inc. Retrieved from https://reverse.mortgage/closing-costs.

On the Verge of Economic Recovery?

by Shelley Murasko, originally posted 11/01/2020

By all indications, 2020 was supposed to be a bounty year.

In February, the unemployment rate dropped to its lowest mark in 50 years.1 At 3.5%, it was a sign that businesses were doing well.

We were in the midst of the longest-running bull market, and it was showing no signs of ending. In fact, all three major stock indexes—the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index—were on the rise in mid-January.2

On top of that, the American economy was on the upswing after posting a 5.8% jump in retail sales in 2019. According to the Department of Commerce, this was an improvement over the past 30 years’ average.                        

The Pandemic Effect

Three months later, the world had turned upside down. The coronavirus continued to spread, prompting a pandemic and a subsequent shutdown that swept the globe.

With American businesses closed, consumer spending halted and the economy plummeted as the country recorded one of its sharpest downturns since the Great Depression.1

Unemployment skyrocketed, reaching a historic high of 14.7%.3 By May, more than 20.5 million Americans were out of work.

The previously soaring stock market suffered deep losses, forcing the end of the 11-year bull market. The S&P 500 experienced one of the most extreme swings, hitting a record high on Feb. 19, then nosediving by 35% for a new low on March 23.4

After months of dealing with the challenges brought on by COVID-19, you’re probably wondering: When will things return to normal or, at least, something closer to it?

Growing Optimism Amid the Current Crisis

It may be sooner than you think.

Despite the recent turmoil, the economy is already showing signs of recovery led by a strong turnaround in the technology sector.

Big tech companies like Apple, Microsoft and Google parent Alphabet are recording big gains. Apple, in particular, has had a banner year. The largest company in the U.S., Apple saw an increase of 111% and is now worth $2 trillion. 

A dozen companies in the NASDAQ 100 also saw share prices more than double since the market low.6 Here are a few of the top performers:

·         PayPal – stock price jumped from $85.26 to $198.18

·         Tesla – recorded an astounding 360% recovery

·         eBay – up markedly to 118%

These strong performances have propelled a rapid market rally. In just five months, the S&P 500 went from its lowest point in March to setting a new record high on Aug. 18.

Since then, stocks have rebounded by more than 50%. In early October, the Dow advanced 3.3% to record its best weekly gain since Aug. 7. Following suit, the S&P 500 moved up 3.8% and the Nasdaq Composite surged 4.6% for their best weekly finish since July 2.5

 Small-cap companies are also performing well, fueled by the possibility of additional government aid.7

Another positive sign is that second quarter corporate profits were better than expected for some major retailers. Walmart and Home Depot, for example, both exceeded the earnings expectations of Wall Street.1

A continual drop in unemployment has also generated national optimism. In September, the jobless rate dipped to 7.9%. Today, about half the jobs lost as a result of the shutdown have been recovered.3 The reopening of businesses has played a key role in this improvement.

“We remain hopeful that many of those job losses could be reversed quickly once the virus is brought under control—after all, the surge in the number of unemployed was due to temporary, rather than permanent, layoffs,” K.C. Mathews, executive vice president and chief executive officer at UMB Bank, said in a Yahoo! Finance article.8

As more businesses reopen, it’s likely the unemployment numbers will continue to fall. In fact, workers seeking employment may do well to apply at e-commerce and direct-to-consumer companies. The reason? These businesses have performed exceedingly well despite the economic downturn.

“As an advertising agency, Narrative has seen a revenue bounce for our e-commerce and direct-to-consumer clients that now exceed pre-COVID levels,” said Ken Chen, co-founder and managing partner at Narrative.8

More positive news is coming from the real estate sector. According to a USA today article, the housing market is showing signs of growth with new home construction figures up by 22.6% in July.1

Progress on a COVID-19 vaccine has also spurred a significant amount of optimism. The hope that we will have a viable serum soon seems to have pushed the markets toward more positive results.

Former Federal Reserve Chair Ben Bernanke shares this optimistic attitude. “The U.S. economy will recover and within a few years will show only modest marks of this experience,” he said in a Brookings Institute online event, Reuters reported.8

Potential for a Quick Economic Turnaround

No one knows when the coronavirus crisis will end. Right now we’re seeing signs of economic improvement, but a full recovery may not occur until an effective vaccine is developed. Once that happens, though, the economy could see a quick turnaround.

“If we solve the virus, we’ll quickly get our groove back,” Mark Zandi, the chief economist of Moody’s Analytics, told Kiplinger. “There will be pent-up demand, and interest rates will be low. Assuming the finance system is not taken out, we’ll see a period of good strong growth in the second half of 2021 going into 2022.”

The Best Strategy for Investing During a Crisis

As the wait for an approved vaccine continues, how should you be managing your investments? Should you stay in the market or get out until the crisis ends?

David Swensen, CIO at Yale University, believes that staying in is the best approach.

“When you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover,” he said during a recent NPR interview.10

As an illustration of this, investors who “sat it out” in the spring due to the market turbulence missed out on substantial gains. According to S&P Dow Jones Indices, an investor who put $10,000 in an S&P 500 index fund on Dec. 31, 2019, would have seen it increase to $10,594.57 with dividends by Aug. 17, 2020.1

Investment guru Warren Buffett, who is confident the U.S. economy will bounce back from the current crisis9, is also a proponent of this investment strategy. He believes your smartest move is to stay in the market, even when it’s doing poorly.

“Nothing can basically stop America,” said Buffett during Berkshire Hathaway's online shareholders meeting earlier this year. “We haven’t really faced anything that quite resembles this problem, but we faced tougher problems. The American miracle, the American magic has always prevailed, and it will do so again.”

If you’d like to discuss your current investment strategy, I’d love to talk with you. Feel free to reach out to me at shelley@wealthrisecfp.com.

Sources:

1 - Menton, Jessica. (Aug. 18, 2020). “The stock market closes at a record high, defying the COVID-fueled recession battering the US economy.” USA Today. Retrieved from https://www.usatoday.com/story/money/2020/08/18/s-p-500-hit-record-optimism-economic-recovery/3390056001/.

2 - Zacks Equity Research. (Jan. 17, 2020). “Stock Market News for Jan 17, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-jan-17-143302943.html 

3 - Rushe, Dominic and Sainato, Michael. (Oct. 2, 2020). “US unemployment rate falls to 7.9% in last look at jobs market before elections.” The Guardian. Retrieved from https://www.theguardian.com/business/2020/oct/02/us-unemployment-numbers-elections-economy-jobs.

4 - Belvedere, Matthew J. (Apr. 16, 2020). “The March low may have been the market bottom, says CEO of the world’s largest money manager.” CNBC.com. Retrieved from https://www.cnbc.com/2020/04/16/larry-fink-coronavirus-low-last-month-may-have-been-the-market-bottom.html.

5 – Zachs Equity Research. (Oct. 12, 2020). “Stock Market News for Oct 12, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-oct-12-135501433.html.

6 - Canellis, David. (Aug. 21, 2020). “Apple worth $1 trillion more since COVID-19 crashed the NASDAQ 100.” The Next Web / Hard Fork. Retrieved from https://thenextweb.com/hardfork/2020/08/21/apple-tesla-stock-covid-bounce-nasdaq-market-index-crash-market-values/.

7 - Wang, Lu and Ferro, Jonathan. (Oct. 9, 2020). “Never Mind the Narratives: ‘This Market Wants to Go Higher’.” Yahoo Finance. Retrieved from https://finance.yahoo.com/news/never-mind-narratives-market-wants-200732205.html.

8 – Olya, Gabrielle. (Oct. 9, 2020). “25 Experts’ Predictions on When We Will Bounce Back From COVID-19.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/17-experts-predictions-bounce-back-183000197.html.

9 – Whiteman, Doug. (Oct. 7, 2020). “Warren Buffett says this is the way you get through COVID financially.” Yahoo! News. Retrieved from https://news.yahoo.com/warren-buffett-says-covid-19-151000444.html.

10 – NPR Life Kit Podcast. (Aug. 21, 2020). “How to Invest – Even During a Pandemic.” NPR. Retrieved from https://www.npr.org/transcripts/904280484.

 Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.  Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

Eight Strategies for Enjoyable Gift-giving this Season

Winston Churchill once said, “We make a living by what we get, we make a life by what we give.”

2020 has marked one of the toughest years for many across the world. After several months of quarantining and careful social distancing, some have managed to set aside extra cash. At the same time, these same people feel limited by what they can do over the holidays.

Perhaps this is the year where you totally rock your gifting strategy. Below are eight gift-giving options you can try.

1.       Check out charity websites. Have the means to give, but don’t know how to find a worthy charity? Guidestar.org can help you find or verify charity information. You can also discover new charities and filter for those with gold or platinum ratings.

2.       Take advantage of tax-favored charitable giving. Just remember to vet any ideas you’re considering through your tax professional first.

a.       Qualified charitable distributions. Over age 70? You can do a tax-free distribution from your IRA to a 501(c)(3) organization (e.g., churches, COVID-19 aid organizations, hurricane or fire relief agencies) up to $100,000. The IRS allows very few tax-free distributions from an IRA, so you should take advantage of the few that do exist. Contact your financial advisor to learn how easy this is. In a year where you have to take your Required Minimum Distribution, this counts towards the requirement.

b.       Donor-advised funds. These charitable giving accounts were created to manage charitable donations on behalf of an organization or individual. Contributions are particularly helpful in years of sizeable income (property sale, business liquidations). In this case, you can lump all your giving into one year to get a maximum itemized deduction. As such, charitable deductions are most relevant for those who itemize.

To participate in a donor-advised fund, open an account in the fund and deposit cash or securities. While you must surrender ownership of anything you put into the fund, you retain the ability to invest the funds. You receive the tax deduction in the year that you give to the donor-advised fund, and you can distribute to the charities over time.

c.       Appreciated stock. Instead of cash, give shares of appreciated stock. This allows you to avoid the capital gain on the stock shares you give.

3.       Keep your focus on affordability. Even if 2020 has not been a stellar year for you financially, you can still give without breaking your bank account. Get creative on maximizing the fun while minimizing the cost! Here are a few ideas

a.       Play Secret Santa. With Secret Santa, a group of friends or colleagues exchange presents anonymously. To set up, each participant draws or is assigned a group member’s name. Each person then makes or buys a gift—spending limits are set ahead of time—for the person whose name they drew. But be sure to keep your recipient’s name a secret. That’s part of the fun!

b.       Organize a White Elephant gift exchange. The goal of a White Elephant gift exchange is to entertain party-goers rather than to gain a genuinely valuable or highly sought-after item. In fact, amusing, impractical and odd gifts make for biggest laughs! Social distancing keeping you apart? No problem! Organize a White Elephant gift exchange via Zoom! You may even explore White Elephant Online - Your Online Gift Exchange

c.       Share the gift cost. If your gift idea is too expensive for you to manage on your own, go in on the gift with others.

d.       Give your time. You don’t need to buy a gift to show you care. Instead of exchanging presents, meet up for coffee, go for a walk, or schedule a Zoom call. Odds are your recipient will enjoy simply spending time with you.

e.       Think homemade. For some people on your holiday list, a homemade gift may be more meaningful than a store-bought item. Create a photo album filled with photos of you and the recipient. Build a shadow box that contains special mementos of your times together. Or package holiday cookies or other food items in a decorative box or basket. Need help getting started? Etsy and Pinterest offer a bounty of homemade gift ideas.

f.        Set a limit. If you love giving gifts, consider setting a gift quantity or spending limit. That way you still get to experience the joy of giving while keeping your spending under control.

g.       Offer your help. Another way to give is by offering to help others. This could mean setting up a friend’s internet TV, fixing a broken gutter, or making a gourmet dinner. Whatever your special skills are, put them to the task.

4.       Remember that it’s the thought that counts. Take the time to sit and ponder what to give your loved ones for Christmas. In some cases, they might appreciate a hand-written card or a customized photo book rather than yet another gift card to stick in their wallet. Get started with these ideas:

a.       Engage in a buddy brainstorm. Spend time brainstorming gift ideas with a trusted friend. Tap the power of Google or Amazon for tips on what to buy someone who likes a certain activity like yoga, baseball or board games.

b.       Make a list throughout the year. When visiting friends or relatives, pay attention to items they might need around the house or things they mention during conversations.

c.       Request to view Amazon wish lists. Many people keep a public “wish list” on Amazon. Ask to review it, so you can discover items they’d like to receive.

5.       Consider core values. Are your recipients big on saving time? Maintaining good health? Partaking in novel experiences? With this in mind, consider gift ideas that address their core values:

a.       Tickets to outdoor activities like the zoo or botanical gardens.

b.       Gift card for a cleaning service or handyman through Handy.com.

c.       A week of meal prep from a service like Blue Apron.

d.       Babysitting services for a family with young children.

e.       A customized calendar of top coronavirus-conscious adventures in your local area designed to inspire fun times in 2021.

6.       Give gift cards. If you find yourself running out of time, a gift card is still a safe bet. Many people appreciate being able to choose their own present, especially when someone else is footing the bill. Just be sure to choose gift cards at stores where your pals are likely to shop.  

7.       Manage the hard-to-buy-for people. What about giving to the person who has everything? We all have someone in our lives who is impossible to buy for. For that person, you might consider the following:

a.       Tasty gifts. Make something homemade or order from a specialty food company like Harry & David, Baker & Olive, or Ben & Jerry’s.

b.       Category-specific gifts. You can almost never go wrong by sending flowers to a woman. Men are more likely to appreciate a meat treat from Omaha Steaks or Dan the Sausage Man. For your vegan friends, gift them a sampling of Beyond Meat products.

c.       Buy one, donate one gifts. Combine utility with charity by purchasing from a site like Coffee4kids, Bomba Socks, Uncommon Goods, or Tom’s who donate items to those in need along with each purchase.  

d.       Comfort gifts. When the weather cools off, there’s nothing better than a cozy blanket, winter-scented candle, or a warm pair of socks to offer your special someone comfort during the chilly winter months.

e.       Gifts that keep giving. Buy your friend a subscription to a magazine or video service like Outside Magazine or Hulu that they can enjoy all year long.

8.       Put it on hold. Getting stressed out just thinking about the holidays this year? Take a year off. That’s right. You heard me. Give yourself a break. Spend your weekends in December meditating, traveling, journaling and catching up with old friends. Then choose to leave the shopping for everyone else. Reach out to your fellow gift exchangers now, and give them a break too. Skip sending the annual holiday cards or try an ecard like those designed by Jacquie Lawson.

Whatever you end up doing this holiday season, make sure it comes with a healthy dose of self-care. This has been an extremely challenging year, and you deserve to savor the coming months without breaking the bank or burying yourself in more stress.

Homeowners are buzzing about it...

Subject line:   Homeowners are buzzing about it ...

Is Now A Good Time To Refinance Your Mortgage Loan?

By Shelley Murasko

If you have been looking for a way to access extra cash or to save thousands in interest, refinancing your home may be a sound strategy. With interest rates plunging to their lowest point in 50 years, homeowners with good credit are snagging average interest rates of 2.98% for 30-year fixed rate mortgages.1

By securing one of these ultra-low interest rates, you could be saving tens of thousands of dollars over the life of your home loan. And that’s money you could put toward investments that will further grow your nest egg.

If you haven’t refinanced yet, here are a few reasons why you should be considering it.

Why should you refinance?

When you refinance, you replace your old loan with a new one. This transaction allows you to settle your current mortgage and set up a new loan with better terms to pay off the remaining balance.

Homeowners refinance their mortgages for many reasons, and your best friend’s or your neighbor’s motives may differ from yours. Here are some of the most common reasons to refinance your home:

·         Lower your interest rate and monthly payments
When you lower your interest rate, you could save thousands of dollars throughout your loan’s lifetime. Depending on the length of your loan, you could reduce your monthly payments too. If your income has decreased due to the current economic downturn, lower monthly payments would leave extra cash to pay for essential items like food, utilities and gas or help you reduce debt from credit cards and car payments.

For example, let’s say you have a 30-year fixed rate loan with a remaining balance of $350,000. Your current interest rate is 4.125% and you have excellent credit. If you refinanced with a 30-year fixed rate loan at 3.125%, you’d reduce your payment by $350 per month while also saving $16,000 in interest over the life of the loan.

·         Shorten the term of your loan

If you’ve been paying off your loan for a decade or more, you may want to consider swapping your 30-year loan for one with a shorter-term such as a 10-year, 15-year, or 20-year. While this may drive up your monthly payments, you’ll increase your equity at a faster rate and reduce interest fees, saving you money in the long-run.

Using the same example from the bullet above, you could save a significant amount of money if you swapped your 30-year loan for a 15-year fixed rate loan at 2.75%. In this case, you’d increase your monthly payment by $500 per month, save $130,000 off the interest over the life of the loan, and pay off your mortgage seven years earlier.

·         Cash-out refinance

If you’ve built up equity in your home, you can cash out and use it to invest the money in other ways. For example, you could use the funds to strengthen your investment portfolio, start a business, or save for a child’s education. The cash you receive in this type of transaction is tax-free and you can spend it however you want.

·         Change loan type

If you currently have an adjustable rate mortgage (ARM) and are worried about rates increasing in the future, refinancing offers the opportunity to switch to a fixed rate loan. With interest rates at an all-time low, you could lock in an excellent rate that will save you money and give you peace of mind.

·         Get rid of mortgage insurance

If the down payment on your original loan was less than 20%, you’re likely carrying private mortgage insurance (PMI) on top of your monthly mortgage payment. This can exceed 1% of your loan principal. To get rid of this liability, you can refinance into a conventional loan and reduce the lifetime borrowing costs. To remove the PMI, your home must have increased in value and/or you must have built up at least 20% in equity.

·         Consolidate debt

Some homeowners opt to refinance to consolidate debt and pay it off at a lower rate. While this may work in theory, you may find yourself in the same situation in the future if you don’t change your spending habits. The danger here is that you could end up losing your home if you default on your loan. Only refinance for this reason if you can commit to making your monthly payments and ideally preserve 20% equity in your home.

Whatever reason you have for refinancing, the most popular goals are to save money by reducing monthly payments and/or pay less interest over the life of the loan. Just keep in mind that there are hefty closing costs you’ll have to pay to establish the new loan, which can range from $3000-$10,000. Some of these costs include:

·         Loan origination fees – can be as high as 1.5% of the loan value

·         Appraisal fees – usually $500 or less

·         Mortgage discount points – each point costs 1% of the loan value to get a 0.25% rate decreas

·         Title insurance premiums – ranges between $400 and $1,000

·         Title insurance changes, if needed – varies depending on loan size

·         Upfront fees to impound mortgage insurance and property taxes, if needed – varies

As you can see, these costs can add up quickly. That’s why it’s important to clearly understand what you’ll be paying before you commit to a refinance. In addition, be sure to add in any prepayment penalty on your current loan to get the full view of your potential payout.

When should you refinance?

Under normal circumstances, experts say it’s a good time to refinance if you can lower your interest rate by at least 2%. Some even believe a 1% savings is enough incentive to proceed.2 With interest rates sinking below 3% in July and August, it’s a wise financial move to at least look into it.   

But don’t wait too long. Interest rates won’t stay this low forever, and the sooner you act, the better your chances are of locking in a competitive rate.

To decide if refinancing is an option for you, start by running an analysis using these mortgage refinance calculators:

·         https://financialmentor.com/calculator/mortgage-refinance-calculator

·         https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

What items do you need to refinance?

If you decide you do want to pursue a refinance, a lender is far more likely to approve you for a loan if you can show you’re a low-risk prospect. Here are a few items that will increase your chances:

·         Good credit

If you have a high credit rating, you’re more likely to get approved for a loan with a low interest rate. You typically need a minimum credit rating of 620 for a conventional loan or 580 for a Federal Housing Administration (FHA) loan. If your credit rating is too low, you can increase it by fixing errors, paying down credit card balances and staying below your spending limits.

·         Steady stream of income

Lenders want proof that you’ll be able to repay the loan. If you’re gainfully employed, you have an advantage because you’re more likely to get approved. If you’ve been laid off or furloughed, this will count against you. Unemployment payouts are not considered steady income, so they won’t help your case. The exception is if you are a seasonal employee who receives unemployment consistently during your off-season working periods.

·         Sufficient equity

When assessing risk, lenders use the loan-to-value (LTV) ratio as an indicator. This is the loan amount you owe compared to your home’s current market value. A high LTV ratio means you’re a risky investment because the lender would lose a greater amount of money if you defaulted on the loan. A low LTV ratio means you have ample equity and owe less on the loan than your home is worth. This makes you a better candidate.

For a home mortgage, you can quality if you have at least 20% equity and an LTV ratio of up to 80%. Equity of at least 20% also removes the need for private mortgage insurance, which can eliminate fees of 1% or more over the lifetime of your loan.3

What’s the process to refinance?

If your credit, equity and source of steady income are in good shape, you’re ready to begin the refinancing process. Here’s what you’ll need to do:

·         Gather income-related documents. This includes items like your most recent pay stubs, bank statements, tax returns, proof of insurance, and personal identification.

·         Prequalify for a loan. Reach out to lenders for a “soft credit inquiry” that won’t harm your credit score. This can tell you what loan amount you’ll qualify for along with the interest rate and terms you can expect to get. Be sure to shop around to at least three lenders to determine which lenders provide the lowest mortgage rates.

·         Apply for the refinance loan. Contact your selected lender and provide the appropriate paperwork about your income, identity and current loan parameters.

·         Schedule the closing. During this phase, you’ll need to get a home appraisal, and the lender will proceed with the needed paperwork.

·         Sign the closing documents. You’ll get your closing paperwork about three days before closing. At this point, you’ll need to sign multiple documents to complete the transaction.

·         Get set up with your new lender. Once the loan closes, your new lender will pay your former escrow and mortgage companies. From that point on, you’ll be dealing only with your new lender to make payments.

Normally, you’d be able to close on your refinance loan in about 30 days. With the favorable interest rates, however, multitudes of homeowners have been clamoring to refinance over the past six months. This means you’ll likely find a backlog awaiting you, so expect a longer wait time.

What if you don’t qualify?

If you’ve been laid off or furloughed due to the current economic situation, you’ll find it hard to qualify for refinancing. Lenders require proof of a steady stream of income before they’ll grant you a mortgage. Fortunately, you have other options that could still get you the loan.

·        Get a cosigner

If you’re unemployed or your credit score is low, you may still be able to refinance your home if you have a cosigner. This is a person with a steady income who promises to pay the loan payments if you’re unable to. If he or she has a strong credit rating, the odds of you getting the loan increase.

·         Research government loan programs

If you don’t have enough home equity built up, refinancing programs through the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs may be able to help. You must meet certain criteria, but it’s worth looking into.

Federal loans backed by Fannie Mae and Freddie Mac are another option. These government lenders allow you to use unemployment benefits as income, but only if you’re a seasonal worker.

A third route is to ask your lender or mortgage servicer about coronavirus mortgage relief options. Learn more about them at these links: https://www.investopedia.com/how-to-get-mortgage-relief-4800539 or https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/mortgage-relief/.

·         Discuss options with your current lender
Lenders want to get repaid, so they’re often willing to negotiate a new payment plan or a loan modification. The latter is a change in your current loan terms, which can reduce your monthly payments and make them more affordable. Give your lender a call and see what they can do to help you.

·         Talk to a HUD-approved housing counselor
A housing counselor can help you figure out the options available to you, based on your current situation. Many of the services offered are free or at low cost, and you can access help online or via phone. Get more details here: https://www.hud.gov/i_want_to/talk_to_a_housing_counselor.

·         Prepay your mortgage by sending in extra payments on a periodic basis instead.

For many homeowners, the higher monthly cost of a shorter loan term isn’t in the budget. This is why some homeowners skip the refinance and opt to “prepay” their mortgage instead. You don’t get access to new, lower rates, but you take better control of your loan.

·         Prepaying your mortgage means to send “extra” payments to your lender each month, which chips away at the amount you owe faster than your amortization schedule prescribes.

How to avoid refinancing pitfalls

Refinancing your home can be a complicated process, so be sure you understand what you’re getting into if you decide to proceed. You can avoid the traditional pitfalls if you follow the tips below.

·         Factor in the closing costs. While refinancing can save you in terms of monthly payments or overall interest fees, it also comes with hefty closing costs.

·         Don’t refinance if you’re planning to move soon. After your refinancing goes through, you’ll want to stay in your home long enough to recoup your closing costs. For example, let’s say you save $200 in monthly payments by refinancing but incur $5,000 in closing costs. As a result, it will take you 25 months to break even.5 If you’re planning to stay in your home for two years or more, refinancing is a smart move. If not, it would be wiser to forgo refinancing so you don’t lose money.

·         Boost a low credit rating before applying. You won’t be able to get a competitive interest rate with a low credit score. In this case, take some time to boost your credit rating to at least 620 (or 580 for an FHA loan) before applying for a refinance.

·         Be sure to seek out multiple offers. If you take the first offer you get, you might miss out on a better deal. Instead, shop around. Get offers from at least three different lenders, so you can select the one who offers you the best terms.

Note: Applying for a refinance can temporarily reduce your credit score. To lessen the damage, a good tactic is to apply to multiple lenders in a short time frame, say between 30 and 45 days. This will count as a single inquiry and will have less impact on your score.

·         Avoid so-called “no-cost” refinancing. This is a ploy to lure loan seekers. In reality, a no-cost refinance doesn’t exist. There are costs associated with refinancing, and lenders simply roll them in to your loan or charge you a higher interest rate to recoup these fees. You can still consider a no-cost refinance; just realize that you’re not really getting anything for free.

·         Consider mortgage prepayment penalties. Before refinancing, ask your lender if you’ll be penalized for paying off your current loan early. If you will, find out how much the penalty will set you back so you can decide if the refinance is worth the cost. 

·         Rethink refinancing if you’ve already got a good rate. If you’ve already got a rate around 3%, refinancing may offer little benefit. To see if it makes financial sense, assess how much you’ll save each month and compare it to your closing costs and the interest savings over the life of the loan. If the savings is trivial, you may be better off sticking with your current loan and simply making extra payments against the principal each year instead.

·         Assess the remaining lifespan of your current loan. If you’re within the last 10 years of paying off your current loan, the benefits might be too slight to make it worth the effort.

Is refinancing really worth it?

With interest rates at an all-time low, experts continue to trumpet the news that now is an ideal time to refinance your home—primarily, if you have steady income and your current interest rate is more than 4%. If this applies to you, refinancing could provide you with a way to lower your housing costs on a long-term basis.

However, you will want to put some effort into determining if refinancing is right for you. The best approach is to do the math and let the numbers tell you if the potential benefits outweigh the costs.

Have questions about how the interest rate drop may affect your finances? Let’s talk! Get in touch with me by replying to this email.

Sources:

1 - Backman, Maurie. (July 16, 2020). "The 30-year mortgage has reached a record low." The Ascent. Retrieved from https://www.fool.com/the-ascent/mortgages/articles/30-year-mortgage-has-reached-record-low/?utm_source=usa-today&utm_medium=feed&utm_campaign=article&referring_guid=349ea544-ae0d-47e0-b06e-181ef9745622.

2 - Investopedia staff. (Mar. 16, 2020). "When (and when not) to refinance your mortgage." Investopedia. Retrieved from https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/.

3 - Pritchard, Justin. (Mar. 10, 2020.) "What qualifications do you need to refinance a loan?" The Balance. Retrieved from https://www.thebalance.com/can-i-refinance-315504.

4 - Martucci, Brian. (Apr. 27. 2020). "When should I refinance my mortgage loan?" Money Crashers. Retrieved from https://www.moneycrashers.com/should-i-refinance-my-mortgage/.

5 - Backman, Maurie. (Aug. 16, 2020). "4 mortgage refinancing mistakes to avoid." The Ascent. Retrieved from https://www.fool.com/the-ascent/mortgages/articles/4-mortgage-refinancing-mistakes-to-avoid/.

6 - Gumbinger, Keith. (Feb. 8, 2013). "I have 3 years left on my loan, should I refinance?" HSH. Retrieved from https://www.hsh.com/refinance/i-have-3-years-left-on-my-loan-should-i-refinance.html.

How To Put Your Lazy Cash To Work For You

It’s official. The United States hit a record savings rate of 33% in April. This was due in part to the coronavirus shutdown ... along with billions of stimulus dollars dished out by the government.

This is great news!

A high savings rate means more Americans are on the path to financial freedom or, at least, financial security. So what’s the best way to handle these extra savings?

Putting money to good use really comes down to mindset. Think of each dollar as an “employee” ready to go to work for you. If you were running a small company, you’d make sure you were getting peak output from your employees.

So put on your boss hat and get to work directing those dollars! You don’t want your savings eating donuts lazily in the breakroom. Do you?

Prep for the unexpected with an emergency fund

I’m often shocked by how much “lazy” cash a person will hold. Often, it’s because he or she claims to be waiting for the right time to invest. Since not even financial wiz Warren Buffett knows how to time the market reliably, it’s pretty safe to assume you don’t either. With that in mind, a good principle is to invest when you have extra money to invest.

So how do you know if you have enough extra cash to do that? Start by setting aside enough to cover 1-2 months of your household spending needs.

Once you’ve settled on a reasonable stash to cover bills, you can move on to the next step: establishing your official emergency fund. This is an account full of money to help you through a job layoff or major unexpected expense, like a car accident or home repair.

An emergency fund should cover 3-6 months of your spending needs if you’re currently working. If you’re retired, it should include about one year of spending coverage.

Hold this emergency fund in the highest interest bearing, FDIC insured account you can find. For help with this, search websites like www.bankrate/banking. Or you can consult directly with your brokerage account advisor.

In the current interest rate environment, you can expect about 1% on 6-month CDs and 1.35% on money market accounts that are FDIC insured up to $250,000. This paltry rate of 1-1.5% isn’t much, but the return is backed by government insurance. This means your emergency fund interest rate is basically guaranteed.

Eight money-making ideas for building wealth

Once you’ve set aside your emergency fund, move the rest of your excess cash to one of the options below. These “hard-working dollar” ideas allow you to earn returns by investing your money, avoiding interest payments on debt, and/or earning return from an employer match or IRS tax break. Generally, these ideas are in order of priority:

1.       Get the 401(k) employer match - Approximate return opportunity: 69%

If your company offers a 401(k) match, contribute up to that point. This allows you to earn return from the employer, which is typically 50%. You’ll also receive investment return by putting money in low-cost index funds. These may include target date funds, if available, at a rate of about 6-8% per year over time. You may get an additional 10-15% return based on the difference in your marginal tax bracket between now and retirement, but best to confirm this with your tax professional.

2.       Open a Health Savings Accounts - Approximate return opportunity: 38%

If you’re in an HSA-eligible medical plan, contribute up to the limit ($7,100 for families and $3,550 for individuals). This results in a tax break at your marginal rate going in (up to 25-35%). It’s also tax-free coming out if used for medical expenses. In addition, these dollars can earn return in mutual fund investments, giving you another 6-8%.

3.       Pay off credit card debt - Approximate return opportunity: 12-22% (depends on interest rate)

Most credit cards charge interest at a rate of 12-22%. Paying off this debt automatically delivers you a double digit return. Most individuals should ALWAYS pay off their credit cards, preventing debt in the first place. Think of it this way: Any recurring balance is like a small fire burning down your financial house. Put it out as quickly as you can.

4.       Exceed the 401(k) match limit - Approximate return opportunity: 19%

If you’re already getting the 401(k) employer match, consider investing up to the maximum limit ($19,500 in 2020 if under age 50, and $26,000 if over age 50). By going beyond the match savings described in #1 above, you’ll get an additional tax break now. If you’re in your low earning years (annual income of less than $40,000 for individuals and $80,000 for families), you might opt for a Roth 401(k) or Roth IRA instead.

5.       Pay off additional debt - Approximate return opportunity: 6% (depends on interest rate)

Do you have outstanding college loans, helocs or car loans with an interest rate of 6% or more? Pay them off and recoup the money that would have gone toward the loan interest.

6.       Invest in a college savings plan - Approximate return opportunity: 6-8%

If you’ve got kids or grandkids heading to college in the future, put funds in a 529 plan that grows tax-free. The plans offered by Utah and Virginia are worth a look. They consistently rank in the top five, based on Morningstar’s annual review of the country’s top 529 plans. Be sure to check your state’s plan too. You may be able to get state tax deductions. Important note: Grandparents should NOT open these plans in their own name. It could lower the amount of financial aid their grandchild receives. (Contact me to learn more.)

7.       Invest in a taxable investment brokerage account - Approximate return opportunity: 5-7%

Planning to make a large purchase far into the future? Perhaps you’re saving up for a new car or house. Or maybe you want another way to increase your retirement fund. Putting money into this type of account can help your money grow on autopilot. That way you’ll have the cash you need when it’s time to pay for that big item. Err on the side of conservative investment allocations, depending on your timeframe.

8.       Pay down part of your home loan - Approximate return opportunity: 3-5% (depends on interest rate)

If you’ve got cash to spare, consider paying down your mortgage. It’s an easy way to get an instant return equal to your interest rate. Keep in mind this is minus the tax benefit if you’re itemizing deductions.

Time in the market matters most

When you put your money to work using one or more of the options above, you’re setting yourself up to grow more wealth. You’ll also be ahead of many others who hoard their cash, waiting for the perfect time to invest.

People who wait act as if a beacon from outer space is going to come down and alert them when to act. Something that top investors insist is very unlikely to go well most of the time.

What matters most in the world of investing is time IN the market. Not timing the market, despite what the TV commentators push on their daily shows. If you follow the ideas I’ve mentioned and sensibly direct your dollars, you’ll earn returns ranging from 3-69%.

An average return of about 7% will set you on a path to doubling the dollars you save every 10 years. This is how you can take a mere $10,000 saved per year, and build it to $20,000 10 years later.

Over time it will continue to grow, even while you sleep. Before long it will be at $40,000, then $80,000 and so on. Time and careful direction of your dollar bill “employees” can build to over 1 million before you’re 50.

 At that amount, your team of hard-working dollars will give you about $40,000 annually for the rest of your life. Hopefully, you’re beginning to see the tremendous amount of freedom you can get with time and patience.

If you’re in the fortunate position of having extra savings after months of shutdown, make the most of this opportunity now and put those lazy dollars to work!

Need help investing your “lazy” dollars? Let’s work together to build your investments. Reply to this email or call me at 760-508-0368.

References:

Fitzgerald, Maggie. (May 29, 2020.) “U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash, curb spending.” CNBC. Retrieved from https://www.cnbc.com/2020/05/29/us-savings-rate-hits-record-33percent-as-coronavirus-causes-americans-to-stockpile-cash-curb-spending.html

Ignoring the Rebalancing Investment Strategy?

Rebalancing is a key part of the investing process. It’s also one of the hardest strategies for an investor to commit to. That’s why it often goes ignored, despite the benefits it offers.

What is Rebalancing?

Rebalancing is the process of adjusting the asset allocation of a portfolio that’s gotten off track. It starts with a review of your current investment weightings to see if they’ve strayed from their original targets. If they have, then you may want to buy or sell assets to bring your portfolio back into balance. 

For example, say your original target asset allocation is 50% stocks and 50% bonds. After this past March’s market rout, you might find you are now at 45% stocks and 55% bonds. To reset the balance, you’d sell 5% of your portfolio value from bonds and use it to buy more stock funds.

Why Is Rebalancing Important?

Rebalancing plays a central role in managing a portfolio’s risk and return. Unless investors take action to boost underweight asset classes and trim overweight ones, actual portfolio behavior may differ from original portfolio goals. Most importantly, failing to rebalance exposes you to a risk return profile that deviates from your desired profile. In short: Careful investors rebalance.
Rebalancing Leads an Investor to Buy Low and Sell High

If you’re a disciplined investor who has set up asset allocation targets—and you review actual holdings to those targets—you’ll identify underperformers with ease. Despite their underperformance, embrace them, as they are key building blocks of your portfolio.

Remember that there was a reason you included them in the first place. As a sensible investor, it would be wise to add more money to them. Why? Because they are under-weighted and have under-performed. That means they’re a bargain that will pay off in the long run.

Here’s an example:

When I conducted a recent portfolio review for a client, it revealed that a rebalance would mean moving about 4% of her mix from investment-grade bonds into international stocks, both developed and emerging.

At the time, international stock categories were trading at Price to Earnings ratios of 30% or lower than the U.S. stock market. That’s like walking into a department store where everything is 30% off.

Also, the dividend yield on international stocks was nearly double that of U.S. stocks. This higher dividend payout is like a renter paying you twice as much as another tenant on your rental property.

With these benefits in mind, rebalancing the client’s portfolio seemed like a smart move.

Yet returns had been quite low on international stocks over the past 10 years. In fact, they’d produced a paltry 1-2% average return. Because of this, the investor hesitated to make the shift.

But what if international stocks reverted back to their historical return of 8-9%? The investor would miss out on significant returns and likely regret her inaction.

In the end, she did end up making the changes. I just had to educate her so she better understood the reasons behind my recommendation:

·         First, I explained the importance of rebalancing.

·         Second, I, reviewed the minor adjustment I was proposing.

·         Third, I revisited international stock performance during the “lost” U.S. stock return decade of 2000-2010, where stocks averaged a -1% return while international outperformed at 6%.

This is what I meant earlier when I said rebalancing was a difficult strategy to commit to. Many investors simply don’t understand why it works and how it can benefit them.

Rebalancing May Improve Return

But wait ... rebalancing has yet another benefit: it may boost returns.

As proof of this, Vanguard completed a study in 2015 that confirmed rebalancing added about 0.5% a year to returns between 2005-2014.2 Half a percent might not sound like much, but it can amount to 10-15% higher asset values over several years on $100,000 invested. This can add $15,000 more money to your nest egg in later years.

Other studies suggest that rebalancing during certain time periods may further increase returns.

“In markets characterized by excess volatility, rebalancing holds the potential to boost returns,” said Investment Manager David Swensen in his book, Unconventional Success.1

Dimensional Fund Advisors, an investment management company led and driven by academic research, has a different take. They concluded that rebalancing might not boost returns but is relevant to maintaining risk.

While opinions differ on whether rebalancing improves return, all agree that it’s crucial in managing risk.

Rebalancing Ensures an Investor Stays True to Risk Tolerance and Capacity

Managing a portfolio is like walking a tightrope. When it’s well-structured, a balance exists between investment categories that allows investors to achieve their goals. Elements get added to the portfolio to either reduce risk or enhance returns.

When a portfolio is over-weighted in bonds, it increases the risk of too little return. This means a client may not have enough cashflow through the end of life.

When a portfolio is under-weighted in bonds, the client might face much steeper volatility during bear markets. In this past quarter, a 60% stock / 40% bond investment portfolio would have experienced an 8% decline compared to an 80% stock / 20% bond ratio with a 16% decline. That’s nearly double the decline in a bear market!

How Do You Rebalance a Portfolio?

The most cost-effective way to approach rebalancing is to work on maintaining asset allocation as money comes in and out of a portfolio. This can done using dollar cost averaging or distributions. If no money is being added or withdrawn, conduct a rebalance about once a year or after a portfolio has moved about 5%. Both techniques are equally effective.

When doing a rebalance, it’s important to keep an eye on tax implications. Thus, it may benefit you to conduct rebalancing in a tax-deferred account like an IRA.

Trading costs should also be a relevant factor. They lead you to assess the most efficient way to adjust the portfolio with the lowest number of trades. In times of extreme volatility, like bear and bull markets, rebalancers must also show unusual determination and fortitude.

In spite of the importance of rebalancing, investors appear largely indifferent to the process. In fact, it’s a point Swensen addresses in Unconventional Success: “Contrarian behavior lies at the heart of most successful investment strategies. Unfortunately for investors, human nature craves the positive enforcement that comes from running with the crowd.”1

Evidence indicates that, at best, investors allow portfolios to drift with the ebb and flow of the market. This may cause strong relative performance to increase allocations and weak relative performance to diminish holdings.

If you don’t have the discipline to rebalance, then doing nothing happens to be the next best option. The worst approach is when investors behave in a perverse fashion, deciding to add to strong performers and shun weak performers. Buying high and selling low provides a poor recipe for investment success.

As it turns out, there’s no reliable way to identify a market peak or bottom. Thus, the best strategy is to find an asset allocation you can live with, rather than making moves based on fear or speculation, even in the face of traumatic events.

At times it can be hard to stay the course. But remember, there are always alternatives.

If you’d like my help adjusting your holdings, please reach out. Meanwhile, stay safe and healthy.

References:

1.       Swensen, David. (2005) Unconventional Success. Simon & Schuster. Pages 183-200.

McNamee, Jenna; Paradise, Thomas; Bruno, Maria. (April 10, 2019.) “Getting Back on Track: An Approach to Smart Rebalancing.” Vanguard Publications.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.  Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

How To Handle A Sudden Drop In Household Income

The COVID-19 pandemic has changed our world.

Employees are working from home. Students are attending school online. Face masks have become best-sellers on Amazon. And stores with everyday items like hand sanitizer, toilet paper and eggs in stock have replaced bars and restaurants as the hot spots in town.

While these changes have altered the way we live—at least for now—the biggest financial impact has stemmed from the closure of non-essential businesses.

As a result, more than 40 million American workers have been either laid off or furloughed by their employers1, driving the U.S. to its highest unemployment rate since the Great Depression2.

It’s an unnerving turn of events, considering we were at a 50-year-low unemployment rate of 3.5% a few months ago2. With the unemployment rate now up to 24.9%, experts predict it could soar even higher in the near future3.

Nine ways to take charge of your finances

Even when businesses reopen, it could be months, if not years, before the economy fully recovers. For those affected, a sudden drop in monthly household income adds more tension to an already stressful situation.

If you’re among the laid off or furloughed employees dealing with a sudden drop in your monthly household income, you may have a flurry of questions racing through your mind: What will I do for income? How will I pay my bills? What do I do about benefits? What if I get sick with COVID-19 ... or one of my loved ones? With so many businesses closed, how will I find work?

First, take a deep breath. The pandemic will end, the economy will recover, and life will return to normal. In the meantime, there are many steps you can take right away to put yourself in a better financial position in the short term.

1 - Negotiate your severance package

If your employer provided you with a severance package, don’t be afraid to negotiate for a better offer, especially if you’ve been a loyal employee for many years and have a solid work record. Here are a few items to discuss with your employer if you decide to negotiate their original offer:

· Ask for more money – Request an increase to the payout amount, a planned bonus you were expecting, or unused paid time off or sick leave.

· Keep equipment – If your company gave you equipment to use while employed, ask if you can keep it or buy it at a discount. Items like cell phones, computers and printers will be helpful as you hunt for your next job.

· Use company office space – Ask to use your employer’s office space and equipment as you seek new employment. This could be extremely helpful if you lack a printer at home to produce copies of your resume.

· Request outplacement services – Your company may be willing to pay for outplacement services. This resource could reduce the time it takes you to find a new job.

· Extend insurance benefits – Find out if your company can extend your benefits for a few months. This will provide some peace of mind as you seek new employment. It may also save you money since you won’t have to start paying expensive insurance premiums right away.

· Seek a recommendation – Ask if your employer would be willing to write a favorable recommendation for you, which could help you get your next job.

Throughout the process, strive to remain professional. This will allow you to preserve your reputation in case you cross paths with colleagues in the future. You may also want to use your employer as a reference when you start job hunting, so staying on good terms is a smart move.

2 - Stop discretionary spending

Take a look at your budget and separate essential from non-essential spending. Then work through your non-essential list to see where you can make cuts. Some areas to look at include:

· Dining - Were you eating out three nights a week at $20 a meal? Hit the grocery store instead and start cooking at home.

· Phone service - Are you spending $100 or more on cell phone service? Move down to a cheaper plan with less data. Or call around to find out who offers a better deal.

· Entertainment – Do you hold season tickets to your local theater, opera house or sports team? Are you a member of a country club? Consider suspending your payments for the time being.

You may also want to reduce your spending on magazine subscriptions, cable TV service, landscaping fees, travel and other expenses that aren’t critical.

3 - Apply for unemployment

As soon as you’re let go, you can apply for unemployment. With new government assistance programs, you may even be eligible to receive an extra $600 on top of your regular weekly benefits through the end of July. In addition, the California’s normal weekly income-based payout will be extended from 26 weeks to 39 weeks of pay.

If you’ve never applied for unemployment benefits before, it can be a confusing process. You can get started here: https://www.edd.ca.gov/Unemployment/UI_Online.htm.

4 – Gauge your current financial situation

One of the most important steps is to get a handle on where you stand financially. Add up all your income sources and expenses from now until the end of the year. Then schedule a video conference or phone call with your financial advisor to review this, along with your current investments and financial holdings. This exercise can help you identify ways to stay afloat until you find your next job.
To help you get started, here’s a list of items to consider as you assess your budgetary needs:

Income

Calculate all your direct sources of potential income that you can count on this year.

· Vacation / sick time paid out

· Severance package

· Bonuses and stock options

· Tax refunds

· Unemployment

· Spouse’s income

· CARES Act government bonus of $1,200 per person, plus $500 per dependent (under 17)

o Check out this Forbes article to learn more about CARES Act stimulus checks: https://www.forbes.com/sites/zackfriedman/2020/04/13/stimulus-check-everything-need-know/#4fce8385254f

Emergency funds

Tally all your savings and investments to identify income sources you could tap if your unemployment becomes long term.

· Checking and savings accounts

· Money in taxable brokerage accounts

· Roth IRAs-amounts contributed (the basis)can be drawn out before age 59 ½ penalty-free

· 401(k) – in certain situations, you can withdraw $100,000 for hardship and pay it back in 2021-2022

Debts

As you compile these, be sure to note what rate you’re currently paying and how many years remain on your loans.

· Mortgage and car loans

· School loans

· Credit cards

o Credit card debt should be handled like your “hair is on fire”.

o Consider 0% balance transfer options if unable to pay off cards in the near term.

5 - Assess your insurance options

Being without health insurance during a pandemic is a scary notion. Make it a priority to transfer your coverage as soon as possible, so you’re covered should you or a loved one become sick. Be sure to assess all your options before signing up with an insurance provider. For Californians, two of the most popular options to consider are:

· COBRA health coverage – This allows you to continue on your current health care plan, and you can apply up to 60 days after the day of termination. Premiums will likely be higher than those you paid through your company plan, so take that into account as you create your budget.

· Covered California marketplace – In California, Covered California lets you shop for private, brand-name health insurance. For families of four making less than $94,000 per year, you may be able to get significant government help to pay for it. Coverage options include medical, vision, dental and prescriptions. Learn more here: https://www.coveredca.com/.

6 - Shrink your spending and monthly cashflow needs

When you track your spending, it’s easier to see where you can make cuts. Use credit card and checking statements, a spreadsheet or online services like mint.com to get organized. Then take action to lower your spending, based on your individual needs. Here are some examples

· Reduce or end car payments - If you have monthly car loan payments, you may be able to save money by selling your current car and replacing it with a used, but reliable model that costs less. To determine if this move makes sense for you, assess the vehicle type and number of loan payments you have left.

· Shop smarter - Save money on groceries by shopping at low-cost stores like Walmart or buying in bulk at Costco. Err on the side of healthier items, staying away from costly meat and alcohol products. Extend your savings by loading up your pantry, cooking from scratch, planning meals, and shopping from a list versus splurge buying.

· Avoid major purchases - Now is probably not the best time to buy a new home or car. Back burner these purchases until you’re in a stronger financial position.

· Rebid service providers - When money is tight, call your service providers—cell phone, cable, car insurance, internet channels—to see what they can do to help. They may be able to give you a promotional discount or offer an alternate plan that will reduce your monthly bill.

· Review tax payments - Work with your CPA to assess quarterly estimated payments to see if there are ways to reduce or eliminate them.

7 - Earn money without affecting your unemployment

You can make a few extra dollars without sacrificing your unemployment benefits by selling unused items, applying for credit card bonuses, and going on a “treasure hunt” at home. (You never know what you’ll find in those couch cushions!)

Some of my clients have added up to $4,000 to their savings in a single year with the following ideas. See below for an estimate of possible earnings.

· Sell unused items at garage sales or on eBay / Craigslist .............................................. $1,000

· Search for your unclaimed property on unclaimed.org, Credit Karma .......................$450

o Unclaimed property may come in the form of dormant bank accounts, old stock certificates, uncollected insurance checks, etc.

· Get cash back bonuses on your credit cards.................................................................……. $720

o Citi Double Cash Card – 2% back

o Capital One® Spark® Business Card – 2% cash back on purchases

· Apply for credit card bonuses and spend required amount in early months ...........$450

o Capital One Quicksilver® Card - $150 bonus with $0 annual fee

o American Express Blue Cash Everyday® card - $150 bonus with no annual fee

o Chase Ink Business Card - $500 – no annual fee

o Bank of America Cash Rewards card - $200 – no annual fee

· Search your house for cash and coins (couch, coat pockets, drawers)........................$100

· Sell gold or silver jewelry you no longer wear or need to Cash for Gold USA..........…$200

· Put cash savings in a high-yielding money market account............................................ $1,200

o Target one that yields at least 1.5% (Example: 1.5% x $80,000 = $1,200 per year)

o Shop best money market accounts here: https://www.bankrate.com/banking/money-market/rates/

8 – Apply for a home equity line of credit

When you’re short on funds, securing a home equity line of credit gives you access to money to cover expenses. It acts like a credit card with a much lower interest rate, and you withdraw money as you need it. The downside is that it uses your home as collateral, so if you default, the lender can foreclose on your home. Learn more here: https://www.debt.org/real-estate/mortgages/home-equity-line-of-credit/

9 - Avoid dipping into retirement savings

While losing your job is a “qualifying financial hardship” that would allow you to withdraw your 401(k) funds without penalty, it’s not recommended. If you dip into your retirement savings early, you might not have enough money to live on in your golden years. That’s because you’ll lose out on the compounded interest and earnings you could have had if you’d left the money in your account.

Strengthen your financial position now

None of us know how long the current economic decline will last. So don’t wait! Place yourself in a stronger financial position now, so you’ll be able to survive the downturn if recovery takes longer than expected.

To do that, follow the steps outlined above, taking the time to assess how much you truly need to survive. You may think you can’t live without Netflix, your unlimited cell phone service or weekly meals from your favorite restaurant, but you may have to if you want to safeguard your savings until you’re once again gainfully employed.

In the meantime, feel free to reach out to me if you have any questions or would like to schedule a financial review. I’m here for you!

Capital One, Savor and Spark are the trademarks of Capital One Financial Corporation.

References:

1 – Lambert, Lance. (May 7, 2020.) Fortune.com. “Real unemployment rate soars past 24.9%—and the U.S. has now lost 33.5 million jobs.” Retrieved from https://fortune.com/2020/05/07/unemployment-33-million-coronavirus/.

2 – Kelly, Jack. (May 8, 2020.) Forbes.com. “U.S. Unemployment Is At Its Highest Rate Since The Great Depression At 14.7%—With 20.5 Million More Jobs Lost In April.” Retrieved from https://www.forbes.com/sites/jackkelly/2020/05/08/us-unemployment-is-at-its-highest-rate-since-the-great-depression-at-147-with-205-million-more-jobs-lost-in-april/#2eb8fee6656d.

3 – Soergel, Andrew. (March 23, 2020.) U.S. News and World Report. “Fed Official Warns of 30% Unemployment.” Retrieved from https://www.usnews.com/news/economy/articles/2020-03-23/fed-official-unemployment-could-hit-30-as-coronavirus-slams-economy.

Love the Bonds You're With

Enough about stocks already! I’m sure we’re all sick of hearing about when or if they’ll recover. The headlines are flooded with useless predictions and analysis. Every. Single. Hour. The reality is this: Yes, they will eventually recover. Now, let’s move along.

It’s times like these when the bonds in your life should take center stage, especially if you’re retired or within a few years of retiring.

(Note: The word “bonds” will be used throughout this piece, but please note that for the sake of this discussion, it is interchangeable with the term “bond mutual funds,” which are funds that own thousands of bonds.)

Definition of a Bond

As a reminder, what is a bond? A bond is a loan. When you invest in a bond, you’re simply lending money to another entity. For example, a 2.2% interest – 10-year, U.S. Treasury bond is a loan that you make to the U.S. government that returns 2.2% annual interest until the loan matures after 10 years. At the end of that timeframe, you get your original investment back.

Because there’s an implicit IOU involved with bonds, they offer more certainty of return than stocks.

With stocks, you’re part owner of a company. Therefore, you might get profits and, then again, you might not!

Bond Performance in Bear Markets

Bonds, when done right, are the key to peace of mind and cash flow assurance during volatile times. Why? Despite the fact that they, too, have their own risks like interest rate or default risk, they should be the primary investment category in your portfolio that most likely gives you positive, stable return during bear markets.

For example, compare the Vanguard Total Bond Market Index Fund (VBTLX) to the Vanguard S&P 500 Index fund (VFINX) below.

Since January, you might note that the bond fund is up 4% over the past few months compared to stocks, which are down 12%. You might also notice that the bond fund has only offered an average of 4% return over the past 10 years compared to the stock fund return at 11%.

These two funds demonstrate how we expect bonds to behave relative to stocks. Under normal, mostly positive, stock market return years, bonds don’t offer as much return as stocks. When a bear market comes along like the one we’re in now, bonds provide a shelter from the storm.

Not All Bonds Are the Same

During rocky times, the true colors of our bond holdings come out. What I mean by that is not all bonds are going to perform defensively. Investment-grade bonds play solid defense while high-yield bonds, aka “junk” bonds, fail to do so.

How can you tell which is which? By understanding the characteristics of each. To do that, you need to be aware of the two most important bond traits: Credit Quality and Duration.

Credit Quality is just like it sounds: How good is the credit of the entity you’re lending to? Are you lending to your 22-year-old, unemployed nephew or your gainfully employed, 55 year old uncle? When it comes to the bonds you’re counting on to use during bear markets, you’ve got to stick to lending to your financially stable uncle, even if he’s not willing to pay you as much interest.

As a real-world example of this, if you had looked up bonds to invest in a month ago, you would have found high-quality U.S. Treasury bonds at 2% and low-quality Western Digital corporate bonds paying 4%. As tempting as it would be to go with Western Digital at a higher interest rate for bear market protection, the sensible investor would stick to the Treasury bonds and other investment-grade bonds, which are bonds rated at high to intermediate quality.

Back in the 1980s, high-yielding bonds like Western Digital were actually called junk bonds. To this day, within the industry, funds holding low-rated corporates are considered junk. They may have gotten this name because they’re not very useful: not great at playing offense (they average about 3-5% less return than U.S. stocks) and not very good at playing defense (they sink like a box of rocks during bear markets).

So how is Credit Quality determined? It’s measured with ratings of third-party agencies like Standard & Poor’s and Moody’s. While these agencies are far from infallible, they do a pretty good job of supplying investment-grade bond fund managers with the information they need to stay clear of junk.

Duration, the other bond trait you need to know, is a measure of a bond’s sensitivity to interest rate changes. It’s measured in years. A shorter duration is less sensitive to interest rate risk than a long duration. The Treasury bond paying 2% over 30 years, for instance, might not be a bond you want to keep if bond interest rates rise substantially in the near term.

In general, you should stick with short to intermediate term duration bonds, normally with terms less than 10 years, that will be less impacted by interest rate changes.

What Matters About Bonds Now

If you’re retired or nearing retirement, it’s important to assess where you currently stand with your financial holdings.

Start by calculating how much money you’re currently holding in bonds, bond funds, money markets, CDs and cash. Verify that your bonds are investment-grade.

Then take that total and divide it by the amount of cash you expect to need each year from your investments. This simple math will give you an idea of how many years you have covered with your defensive money.

No one knows when the stock market will recover, but if you have enough defensive money, your bonds and cash will give you the confidence to stay the course. If your defensive holdings will cover you for at least five years, you can sit back, take a sip of your “quarantini” or other beverage of choice, and know that your bonds are supporting you during these rocky times.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

How to Handle the Current Stock Market Slump

As Charles Munger, senior partner of investment guru Warren Buffett, once said, “Sometimes the investing ‘tide’ will be with us and sometimes it will be against us, but the best thing to do is to just continue to focus on swimming forward.”

In times like these, when the stock market has suffered steep drops without an end in sight, it is easy to think it might be time to give up on stock market investing. Investors are facing a test unlike anything seen in over a decade. Investors are worried. Billions of dollars have left stocks. The “herd mentality” tempts us all. Should we stay? Should we go?

In order to stay centered on an investment strategy, keep the following things in mind.

Bear Markets Are Part of the Investing Experience

Just like choppy waters are part of the ocean swimming experience, volatility is an essential part of investing. Because there is risk when investing in businesses, there is return. If this investing stuff was easy, investing return would be very low. It is by taking on stock market risk that we eventually get to experience the reward of capital markets.

From 1984 to 2018, the S&P 500 Index experienced a median intra-year decline of -9.9%.1 Yet stocks still posted positive returns in 29 of those 35 years with a median annualized total return of 13% and an average annualized return of 11%.1

Bear markets are always scary, but only devastating if you sell in the midst of them. There have been 12 bear markets since 1901, lasting an average of 22 months with an average decline of 42%.2 Swimming through turbulent waters can be unnerving, too. And yet the only way to get to your destination is to keep on swimming.

The Best Stock Market Returns Often Come After the Worst

Despite 2008 being the center of the Great Recession where at one point markets were down over 40%, 2008 also had seven of the 20 best return days for the Dow Jones Industrial since 1945. 1

Missing even the 10 best days in the market reduces returns by almost 50% in the last 20 years.1

I would love to have a crystal ball to tell you when the best and worst days will come. No one has that crystal ball, which is why the sensible investors avoid market timing and stay the course with their asset allocations.

Your Portfolio Is Based on Thousands of Businesses, Not Predictions

Stocks go up over time because earnings improve. Ultimately, the driver of return is the underlying businesses. Granted in times like COVID-19, many businesses will experience dips in their product and service sales. Some of those businesses will not recover. On the other hand, other businesses will rise to the occasion. New businesses will be born. Staying diversified offers you the chance to gain return over time, despite many businesses struggling.

Don’t Fall Into the Trap That This Time Will Be Different

Each generation has faced their share of challenges. While experiencing the challenges, we become overwhelmed by the severity of the moment. History has dealt serious blows whether it was the Global Depression, cold wars, hot wars, presidential assassinations, or pandemics. When viewed through the lens of history, we know that even the worst turbulence has not stopped the inevitable climb of the stock market. Why is this? Humans are remarkably resilient. In our free market system, human potential for solving problems will eventually rise to the occasion once again.

Your Future Self Is Counting on You to Stay the Course

Most financial plans, whether saving for college, retirement, or a house, are based on achieving a rate of return that can only be realized by staying the course. Your plan is no different.

Take a page from Warren Buffett. When asked by CNBC in 2009 how it felt to have “lost” 40% of his lifetime accumulation of capital, he said it felt about the same as it had in the previous three times. 3

The bottom line is that market corrections do not equal a financial loss unless you sell.

What Can You Do Now?

Now that we are in a crash, what are the sensible steps to take:

• Be less interested in your statements. Checking them once a quarter is more than enough for long-term investors.

• Resort to stock market history. Refresh your memory on other near-death investment moments that turned out okay. Two interesting reads in this category are Stress Test (Geithner, 2015) and Boom and Bust: Financial Cycles and Human Prosperity (Pollock, 2010).

• Stay true to your allocation. Though it takes some degree of intestinal fortitude, check your percentage of stocks relative to bonds, and if under your target, add more to your stock funds.

• Invest more. Once you have high-interest debts like credit cards paid off and an emergency fund in order, add money to your investments consistently over time, perhaps even taking advantage of market dips.

• Control what you can. There are many actions you can take, including a thorough review of your spending priorities, tax planning such as adding to IRAs, or Roth IRA conversions at lower asset values. Another wise move might involve harvesting tax losses in taxable accounts.

The tide will eventually turn. Though tides are easier to predict than stock market movement, you should continue to swim as competently and as calmly as you can.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.



References

1. Invesco. (Oct. 17,
2019). Compelling Wealth Management Conversations 2018. Retrieved from: https://www.invesco.com/us-rest/contentdetail.

2. JP Morgan. (Dec. 31, 2019). JP Morgan Asset Management
“Guide to the Markets,” p. 14.

3. CNBC. (Mar. 9, 2009). TV interview with Warren Buffet.

How the New SECURE Act Will Impact Your Retirement

In the midst of impeachment, among the hustle and bustle of the holidays, our elected officials passed a new law that has far-reaching effects on retirement accounts as we know them.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which passed the House back in July, intends to improve retirement readiness for millions of Americans who are currently facing a dire retirement future.

Last year, the wealth management giant Vanguard revealed that the median 401(k) balance for those aged 65 and older was just $58,035.1 With average social security income of about $18,000 and a 401(k) of $58,000, a retiree would have to survive on just $20,000 per year, hardly enough to cover food, utilities, and housing.

This article outlines what is in the new Act and offers strategies to consider with this new provision.

Provisions of the New Act

When it comes to understanding the SECURE Act, here are the key takeaways to know:

· Delayed IRA distributions. The Act pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72. This likely postpones taxes for many retirees from age 70 - 72 and also improves an IRA’s ability to last until the end of one’s life.

· The death of the “Stretch IRA” for newly inherited IRAs or 401(k)s. Prior to this act, an inherited IRA could be stretched by distributing funds over the lifetime of the inheritor. This was beneficial because the inheritor could withdraw small amounts of money over many years and likely stay in lower tax brackets by doing so. The new law requires total distribution within 10 years with very few exceptions. Thus, an inheritor in prime earning years might end up paying nearly half of the inheritance to taxes as opposed to 25%. This provision will pay for the SECURE Act, raising an estimated $15.7 billion in additional tax revenue.2

· Traditional IRA contributions allowed beyond age 70. In the past, regardless of employment status, the chance for saving more money in a traditional IRA ended at age 70. Under the new Act, persons with earned income can contribute to IRAs beyond age 70. Ultimately, this offers a tax advantage to employees who continue to work into their 70s, whether it be full employment or a side gig.

· The proliferation of annuities in 401(k) accounts. The Act encourages 401(k) providers to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations. Also, the 401(k) provider is not required to choose the lowest cost annuity plan.

· Encouragement for employers to offer 401(k)s and to auto-enroll employees in them. The SECURE Act will make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer by providing a tax credit ranging from $500 - $5,000 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.

· Help for parents having children. Permits penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.

Biggest Negative – The Stretch IRA Elimination

The most significant drawback of the Act is the new limitations on inherited IRAs. Critics of the Act are frustrated by the fact that inheritors of IRAs will be more heavily taxed by forcing withdrawal within 10 years. Estate planners in particular indicate that thousands have converted IRAs to Roths or handled IRAs in a manner to improve results for their heirs. This meticulous planning now goes out the window.

There are exceptions to the elimination of the stretch IRA, however. The new limitations don’t apply to an heir who is a spouse, disabled, chronically ill, or a minor. In addition, persons who are within 10 years of the age of the deceased or who have already inherited IRAs get to continue with the old rules as well.

Biggest Benefit – Delay of Required Minimum Distributions to Age 72

For all of those who are not 70½ by the end of 2019, there is an enhanced opportunity to manage taxable income up through age 72. In the past, you were forced at age 70½ to take annual distributions that were entirely taxable from your IRAs without any flexibility. It is helpful now that you can consider taking partial distributions in the form of Roth conversions. By doing so, you may be able to reduce the impact of IRA distributions once they are mandated at age 72. The Roth conversion strategy has been deployed in the past most often between the age a person retires and age 70 with the general intention of evening out their taxable income over their retirement years. Having two additional years to work the Roth conversion strategy will prove beneficial for those sophisticated enough to perform this careful tax analysis.

New Planning Opportunities

In light of the new rules, it behooves you to consider making changes that could give you an advantage. This includes:

· IRA beneficiaries should be reviewed. If you were planning to leave your IRA to a grandchild to enable them to stretch the IRA over his or her lifetime, you might consider leaving it with your spouse instead who can still distribute the IRA over his or her own lifetime. If you were planning on leaving your entire IRA to one beneficiary, you might consider adding beneficiaries such that the inheritance can still be split over many years and heirs.

· Weigh the pros and cons of a Roth conversion. Retirees younger than age 72 should work with their CPAs and/or tax software to determine whether taking an annual Roth conversion makes sense in minimizing their taxable income once age 72 arrives and IRA distributions are mandated. This might be even more beneficial now in light of the Tax Cuts and Jobs Act of 2017 that instated reduced tax rates between years 2018 - 2025, which will likely lead to all tax brackets moving back up in 2025 by about 2%.

· IRA heirs should maximize the stretch that still remains. If you do have the good fortune of inheriting an IRA in 2020 or beyond, be thankful that there still is some stretch. The new Act requires the inherited IRA to be distributed within 10 years, but that doesn’t mean it has to be spread evenly over 10 years. A high-earning heir who is planning on retiring in a few years might postpone the IRA distributions until after retirement.

· Small business owners should revisit advantages of setting up 401(k) plans. The tax credits added for opening a 401(k) plan might be significant enough to entice more employers into starting plans. If you have not yet set up 401(k)s, SEP IRAs or Simple IRAs for your employees, now might be the time to do so in order to offset the costs.

· Do nothing. Ultimately, the delay of IRA-required distributions on your own retirement accounts offers additional flexibility. The fact that your beneficiaries might now face steeper taxes when they inherit your IRA might be the least of your worries, especially when you consider that most IRA holders will live well into their 80s and likely reduce their IRA account balances by the time they pass away.

Whether or not the new SECURE Act will make a dent in the frailty of the financial lives of current and future retirees is up for much debate. The major benefit from the required minimum distribution being pushed out from age 70½ to 72 should give some tax benefit to retirees. If IRA inheritors have to pay a higher tax bill, they will still have inherited money that they probably weren’t counting on. Unfortunately, there doesn’t seem to be anything too significant in this bill that will really tip the scales of incentivizing Americans to save more or invest more sensibly. Thus, what could have been a real opportunity to boost retirement success will remain an opportunity for future lawmakers.

Sources:

1. Kurt, Daniel. (Dec. 23, 2019). “What is the SECURE Act and How Can It Affect Your Retirement?” Investopedia.com. Retrieved from https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743.

2. Saunders, Laura. (Dec. 21, 2019). “Inheriting IRAs Just Got Complicated, Thanks to New Retirement Overhaul.” The Wall Street Journal.