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Big Changes to Retirement Planning with the SECURE Act

With the busy-ness of the holidays, you might not be aware of recent legislation that just passed both chambers of Congress and was signed into law by the President last month. The “Setting Every Community Up for Retirement Enhancement (SECURE)” Act was part of the annual US spending bill to keep the country funded for the next fiscal year to September.

The SECURE Act contains provisions that could affect retirement and tax planning for many people. Here are some details about major provisions;

  1. For non-spouse beneficiaries of IRA’s whose owners pass away after January 1, 2020, the ability to “stretch” required minimum distributions (RMD’s) within an inherited IRA, over the life of the beneficiary recipient, will no longer be an option. (In other words, no more Stretch IRA’s.) Instead, the beneficiary will be required to completely empty the inherited IRA within 10 years after the original owner’s death. There appear to be no specific distribution requirements within the 10-year window, only that by the end of that window, all assets in the account must be distributed. Therefore, a beneficiary can take one lump-sum now/soon/years later, or periodic distributions, etc.

    Note however, that the new rule does NOT apply to beneficiaries currently taking inherited RMD’s before 01/01/2020: those currently taking required distributions are grandfathered under the prior inherited RMD law. This change could have income tax implications. Discussing strategic distributions of inherited IRA’s under this new law could be a beneficial idea. Finally, there are qualified exceptions to this new provision; the new law does not apply (but the old rules still do apply) to beneficiaries who are:

    1. Spouses of the original owners
    2. Disabled
    3. Chronically ill
    4. Less than 10 years younger than the decedent
    5. Minor children of the decedent, but ONLY until the minor reaches age of majority, (then the 10-year window starts).
  2. For those who turn 70 ½ AFTER January 1, 2020, their first RMD’s are postponed until age 72. Thereafter, the same rules apply regarding distributions the first time (can defer until April 1 of the following year, then 12/31 for the second year and thereafter), as well as the annual RMD divisor calculation based upon age. Therefore, under this new rule, the first RMD calculation will be based upon the prior-year-end aggregate IRS value(s) and the divisor at age 72.
  3. The SECURE Act allows an individual to withdraw up to $5000 penalty-free from their IRA within one year after either the birth of their child or date of adoption of a child. This applies to either/both parent(s) and is allowed “per child”. For Traditional IRA’s, applicable taxes would still apply to the distribution. This provision was established as a “financial assistance” idea in the Act to help new parents with added expenses of childbirth.
  4. The Act eliminates the rule that prevents IRA owners from contributing to a Traditional IRA after age 70 ½. Now anyone with earned income of any age can make a tax-deductible contribution to a Traditional IRA (good for those over 70 ½ who still work P/T).
  5. The Act allows for annuity options within qualified Employer-Sponsored Retirement Plans (such as 401k plans). There is also a “portability” provision for annuities within a 401k plan if that plan discontinues the annuity feature.The Act also contains changes regarding who provides fiduciary oversight of annuities within employer-sponsored retirement plans.
  6. There are also many new provisions and incentives for small employer retirement plans, including larger tax credits for establishing plans (including SEP’s/SIMPLEs), including 401k plan auto-enrollment, higher auto-enrollment employee contribution limits and allowances for part-time workers to also enroll.
  7. 529 plans – the Act will allow 529 college savings account owners to take qualified distributions for “qualified education loan repayments” up to $10K lifetime cap for the beneficiary of the 529 account. This limit is per person, so it’s possible an account owner (parent) may use the same account to help more than one of their children pay back student loans, (up to $10,000 per student). Apprenticeship programs are now also qualified expenses.
  8. Kiddie Tax is back! The SECURE Act (Section 501) reverses the two-year-old rule (from December 2017) that made unearned income of a child taxable at Trust rates, rather than parents’ marginal rates. To further complicate things, taxpayers have the option of using either rule for tax year 2019 and 2018. For those who have children with significant unearned income, consulting with your tax advisor regarding the “kiddie tax” would be wise tax-planning.

If you have questions regarding how this new legislation may affect your financial plan or future objectives, give our office a call – we’d be glad to help.

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Negative Interest Rates are Not Positive

If you’ve followed the financial news over the past year, you may have run across a curious term – negative interest rates. It denotes the situation where one lends money to another entity, does not earn interest and eventually may receive back less than what they loaned.At first blush, negative interest rates seem strange – why would you lend money, not charge interest, and /or be agreeable to accept less than your original loan amount? Yet this phenomenon is prevalent in global government debt markets today. Due to an inability to otherwise juice economic growth, countries like Japan and many in Europe have indeed driven down the cost of their sovereign debt to such a degree. In fact, so much so that in August 2019, Deutsche Bank estimated there was over $15 trillion of global government bonds with negative rates in circulation. Due to a worsening economy, Germany is on the cusp of issuing negative rate bonds too. The purpose of this policy is apparently to force cash into the respective economy and spur spending and investment by consumers and businesses.While zero or negative rates may sound great for borrowers, there are plenty of downsides that proponents of the strategy (such as our President) should consider. First of course, is the point of view of those on the other side of the transaction; namely savers and lenders. Those who deposit their money with lending institutions (such as banks and finance companies) should and do expect some kind of return for their monetary commitment. You have likely winced at the paltry interest paid over the past decade on your bank savings accounts and certificates of deposit. As we’ve seen in the investment world, negligible earnings from savings/CD’s are causing some consumers to turn instead to more risky investments than they otherwise would be comfortable with, such as the stock market. Even large investors such as pensions and insurance companies, who invest heavily in government bonds and other income securities, also expect (and need!) a return on their money. The potential demand for negative-rate US Treasuries may be far less than proponents might hope for.Negative rates turn the normal functioning of capital flows and economic finance upside down. They also hurt lenders – rather than earn the spread between what interest they pay depositors and what they earn by lending, banks are forced to pay central banks to hold their cash or push it out into the economic system. Bank profit margins are also squeezed, forcing banks into more risky lending and to seek profits through more services fees; something consumers have complained about for some time.Negative rates also have the potential of triggering inflationary pressures by pushing up values of financial assets and real estate, sometimes beyond what is reasonable in a normal environment. Critics point to recent equity prices and values of real estate in high-end parts of the country as potential examples of this consequence.Lowering rates too far to zero or negative also remove a potent tool from central banks, such as the Federal Reserve, to stimulate their economies by lowering rates. Once rates go negative, pushing them further down may be ineffective in motivating spending to invigorate the economy. In sum, the advent of negative rate bonds is truly uncharted territory. While the consequences over time are not known, the best defense for consumers and investors may be to suffer with lower savings yields for now, remain diversified, and manage risk even more diligently than before.

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Lack of Wage Growth Means Keeping a Closer Eye on Your Money

It’s been well documented in the financial media that average “real” (meaning inflation-adjusted) wage growth has been anemic over the past couple decades (if not longer) except for higher-tier wage earners. This stagnation in real purchasing power over the years is starting to become a significant problem for many Americans and it can be argued that the lack of real wage growth for the average worker has been partly the fuel that’s lead to the partisanship and social divisions we see in our society today.

It’s also a significant contributor to the worrisome debt issues we see today, particularly in the credit card and education loan sectors, not to mention the struggles many households have in meeting medical expenses. Medical costs and college tuition expenses have both outpaced CPI inflation (and theoretically cost-of-living increases in wages) for over a decade. Since both are fairly important expenditures for nearly all households, it may not take much analysis to realize why households seem to be unable to save for the future and are falling further behind in debt and building their net worth.All of this continues to point to the need for every family/individual to strive for “financial efficiency” with their money matters. By efficiency, we mean more mindful approaches to how a family’s money is earned, saved, sheltered from taxes and grown for future objectives. While it may not be necessary to count every penny, adjusting money habits like; avoiding impulse purchases, delayed gratification, disciplined (automated) saving and avoiding consumer debt, may be even more crucial than ever before.As financial planners, we of course advocate for each household to have even a simple financial plan that addresses near-term and longer-term goals and objectives. But it may also benefit each family to have a more detailed ‘internal-household’ financial system (a.k.a. that dreaded “budget”!) where spending areas such as grocery-shopping, family entertainment, household maintenance, etc. have their own budgetary boundaries that help the larger-scope financial plan to stay on-track. It may not be that pleasant for everyone to micro-manage their money in this way, but we’ve seen where households that do, even with modest incomes, can achieve stunning results in their savings and toward reaching their goals, all seemingly without much sacrifice along the way. In short, it’s much about stretching every dollar earned a bit further over time. Even small steps in this direction can be beneficial to everyone.

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Year Ending Thoughts to an Unsettled Investment Environment

While both investors and their advisors had wished for a quiet market during the December holidays and the end of the year, this month was decidedly anything but. If you were lucky enough to be preoccupied with celebrating the holidays instead of watching CNBC over the past few weeks, (as you should have been), you might be surprised to learn about the wild, daily fluctuations in the stock market indices.  On certain days, indices such as the Nasdaq, the S&P 500 and the Dow Jones Industrial Average (Dow) rose and fell as much as 2-3% over the course of trading hours.  Reportedly, even seasoned traders on Wall Street were scratching their head trying to fathom the underlying reasons for such volatility.

There’s no forecasting what 2019 has in store for investors, but here are some bits of market wisdom to keep you centered and calm in case this type of volatility continues into the New Year:

1) Every past decline looks like a missed opportunity.  Every future decline will look scary and risky.
2) There are investments that never get “wild”.  They are called FDIC-insured savings accounts.  But reaching your future goals may be difficult, if not impossible, utilizing these ‘safe’ investments.  Volatility is the price we pay for the better returns we want over saving account interest.
3) The biggest factor in volatile markets is often ‘changes in emotion’ and ‘changes in the collective market perception’ of what’s good news and what’s bad news.  Over the course of our long collective experience, we’ve observed markets rise and fall dramatically based on the same news, just a contrasting perception of what the news may or may not mean.
4) Based on market history and economic cycles, we can expect some type of market decline and perhaps a recession every 5-6 years.  History and experience has also demonstrated that no one can predict either declines or recoveries with any accuracy.  Many claim they did, but far after the event occurred (in hindsight). The Market Gods delight in making market forecasters look bad every year.
5) If investing were about math, mathematicians would be rich.  If based on history, economic theory or psychology, then PhD’s in those disciplines would be rich.  In reality, even the brightest minds often do worse than the common investor who just asset-allocates, diversifies and invests consistently with discipline and stick to their plan.
6) Leverage, overconfidence, impatience and ego are the greatest dangers to your investments.  Humility, discipline, margins of safety and consistency are some of the greatest ingredients to success.
7) Your lifetime results as an investor will likely be mostly due to what you do (or don’t do) when markets are volatile and your account loses value during a period of time.  “Holding on” is difficult, but maintaining your calm when many others are losing theirs is often the difference between future success and failure.

If your December year-end statements give you pause and anxiety, give us a call so we can meet to review your investments and keep you on-course.

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Success in Personal Finance Usually Comes Down to the Basics and Common Sense

There’s an old Yogi Berra –ism (though correctly attributed to computer scientist Jan van de Snepscheut) about theory and practice: “In theory, there’s no difference between theory and practice. In practice, there is.” While Yogi may have attributed the concept to baseball and Van de Snepscheut to computer algorithms, it also applies to personal finance.Most financial planners will (or should) admit that recommendations they provide to clients are not exactly rocket science and often are rooted in some basic financial common sense, along with a hefty dollop of analysis, tax rules, asset allocation strategies concerning compounding savings and rates of return versus interest amortization, inflation and spending. In short, success in personal finance and planning is often pretty simple to understand to anyone who takes the trouble to carry out the various tasks required to create a workable plan.It is often the execution (or day-day practice) of good financial habits that get people in trouble, (read: being human, with all our collective foibles). We (over)spend when we should save, drive up the credit card balance, forget to pay the life insurance premium, under-insure our car/home, hide our heads in the sand about college costs for our kids, and dismiss the notion of our own eventual demise and fail to get our estate in order. All those things and more.And we forget the lessons of the past. The tech boom and bust of the late 1990’s. The inflation of the 1970’s. How markets recover eventually from a crash. That something for nothing is, and always will be, a fantasy. That companies need sales, revenue and eventual real earnings to survive and support a wildly-high stock valuation. Or how supposedly-secret stock tips or strategies touted by investment newsletters are not really so secret or exclusive (except to you and three million of your closest co-subscribers). And despite common knowledge about Ponzi schemes and ever-vigilant regulators watching out for unethical product-pushing, advisor-charlatans, consumers still get taken to the cleaners at times. PT Barnum is attributed with the snarky comment about a sucker born every minute. When it comes to personal finance, Barnum was a prophet.In our 24 years as a firm, we’ve seen that many clients do, in fact, have a pretty decent handle of what they’re trying to do and why. Circumstances and life-events may have derailed their initial plans or perhaps things didn’t work out the way they hoped. That’s life, of course. In most cases,our work with these folks have been chiefly to crystalize and structure what they innately know about their money – they often just need someone who, with some specialized knowledge and the software programs to demonstrate in charts and graphs, can help them flesh out the numbers and forecasts into something they can grasp and understand. With this direction and a second opinion, people often feel empowered to forge ahead toward their objectives, despite the many obstacles and setbacks that are part of life. For the most part then, people have a good feel for where they are, whether their future looks bright or potentially troublesome.After these many years, we’ve also seen that even those with modest means can build wealth for the long-term. For these people, their advantage is having stout fiscal discipline, adherence to a plan of some sort, a conservative lifestyle and the faith that the sacrifices they’ve made along the way will serve them well in the future. There are many new financial books published each year, but the basics remain the same. The markets, investing trends, financial gurus and politicians, of course, all come and go, but if you save for the future, invest widely and carefully, avoid falling prey to get-rich schemes or ill-conceived financial decisions, most likely you’ll end up with sufficient financial success to fill some, if not all, of your dreams and aspirations for you and your family. It just takes a plan and the willpower to execute it.

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An Estate Plan is for Everyone

Estate planning is an important part of a good overall financial plan. Here is a list of common estate-planning mistakes we see in the office from time to time.A first mistake is thinking that you don’t need an estate plan because you don’t have gobs of money that you’re leaving behind. This unforced error is rooted in the misconception that estate planning is just for the uber-rich who might be subject to inheritance taxes. While the wealthy may indeed have more complex planning, the core reason for estate planning is to develop a plan for the distribution of assets, during severe disability or ultimately death, according to the wishes of the individual, in the most expedient, efficient and least cost possible. As a local attorney once said, “You want to be looking down from heaven and all is transpiring the way you envisioned.” Estate planning involves more than just trusts and a Last Will. Nearly every good estate plan includes documents such as Durable Powers of Attorney, a Living Will and specific provisions for dependents that may be left behind. One of the next biggest mistakes is the failure to title assets properly. You can have an attorney create the most effective, beautiful estate documents in the world, but they might be ultimately useless if the assets involved are not ‘re-titled’ in the name of said trust(s). For example, if the George & Martha Trust is designed to distribute the George and Martha Investment account in a certain way, but the investment account is not retitled in the name of the trust and has an old beneficiary designation that names George’s first child from a prior marriage as the sole primary beneficiary, guess who gets the money?Which segues into the next big mistake; no or old beneficiary designations. Life insurance, IRA accounts and retirement plans are often the largest assets on one’s estate. Life happens and changes occur which often require updating beneficiary designations. These updates are critically important during major life transitions, such as divorce, marriage, new children, changing objectives regarding heirs, or even just creating an estate plan. A large insurance death benefit may be better off within a separate trust than going to the estate and an IRA beneficiary as one’s estate may result in unnecessary taxes paid.Another less common, but important, mistake is naming inappropriate fiduciaries, such as executors, trustees, etc. Naming your eldest sibling to take care of administering your estate is a common default many people use, but is your eldest sibling the right person? He or she may not be all that organized, too busy with their own life or live in another part of the country where taking care of matters after you’re gone would be a huge (and costly) burden for them. For trustees to your trust, some people are just not able to handle the myriad details of trust administration (or may not want to). So when you name executors and trustees, consider these designees carefully and ask them first.These are just a few of the errors that can occur after it’s too late. Have a written plan and exercise great care in the planning.

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Currency is Not Money

If we were to hold up a $100 bill and ask, “What is this?” invariably there would likely be a chorus of voices calling out, “Money”, then mutters of disbelief when our response would be, “No sorry, that’s not correct”.Well if that “Franklin” isn’t money, then what is it? It is ‘currency’, a medium of exchange representing an amount of government-backed value that can be freely exchanged for goods and services in the good old U.S. of A. Well, okay, you say. Then what is money?In the purest sense, the word ‘money’ is actually purchasing power – the ability to take a measure of stored, generally-accepted value, (whether dollars or clam-shell wampum) and exchange it for an equal-valued item or service desired. The reason I call your attention to the difference between currency and money is that this is essential to knowing why we save and invest for the future. It is also critical to understanding why, despite the anxiety that may be part of investing, we shouldn’t just stuff our ‘currency’ in the mattress or all in bank certificates of deposit and believe that our ‘money’ is safe. The currency units (dollars) in the bank may be safe, due to guarantees by the Federal Deposit Insurance Corporation (FDIC), but even then, our currency dollars are leaking purchasing power every day.In the early 1980’s, a depositor might have earned about 15% on his bank CD investment. Sounds wonderful, right? The problem was one of context, because inflation (loss of purchasing power) was just over 10 percent in 1981. So really, the CD-owner’s nominal purchasing power may have only increased by about 5% (pre-tax, of course). Depending upon that particular individual’s tax bracket that 5% increase in purchasing power may have been reduced by another 1.5% due to Federal/State taxes on his interest, bringing his net gain to about 3.5%. Nothing to dismiss, of course, but not quite as juicy as that original 15% either.So when we are making contributions to our IRA’s, our 401(k) accounts and college savings accounts, we are deferring current consumption at today’s purchasing power in order to create greater purchasing power that we want (and need) in the future. And in order to maximize our future purchasing power, we ought to be investing in things that have at least a fighting chance of outpacing the ravages of inflation over time and help our limited savings grow. This is the reason that, (in line with our ability to tolerate the volatility) some portion of our investments ought to be as “owners” (shareholders) of companies, not just as lenders (to companies or banks) through bonds and other forms of “fixed income”.With investing, one size doesn’t fit all, so your neighbor’s tolerance for risk in stocks and stock funds may differ from yours, as does his/her goals and objectives. The point here is to encourage all to understand a core concept of why we invest our money. It’s the added purchasing power we seek to combat the erosion of inflation over time and it’s really not a matter of choice, but of necessity.

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Maintain Some Perspective When Evaluating Historical Investment Returns

In the world of professional investment advisors, the phrase “Past performance is no guarantee of future results” is a staple (or should be) within client conversations, literature and most any other form of communication with the investing public. There’s a good reason the regulators are so adamant in preventing financial advisors from misleading the unwary investing public by touting an investment’s past success – it’s not all that hard at times to cherry-pick data in order to persuade a prospect that their future investment returns could be stellar, based upon what that investment has done in the past.Like everyone else, advisors want to forget the Great Financial Crisis (GFC) of 2008 and the abysmal investment returns that occurred that year. When advisors, fund representatives or even individual investors themselves review historical returns of an investment, what occurred in 2008 usually looms large in several places; in the multi-year period performance figures (usually 3-year, 5-year, 10-year or “since inception” results), in the “Best/Worst” performance results for a 3-month, 6-month or full-year period, or in historical returns “by year”.Often though, performance reports may limit their listing of past performance at 10 years (‘since inception’ is too general and ambiguous to be useful). This is where the passing of 2018 becomes significant. As occurred after 2011 for the 3-year returns and in 2013 for 5-year period returns, after 2018, the 10-year return averages for investments such as mutual funds will see the horridly negative results for 2008 fall out of the equation and may offer a little boost to the 10-year historical results. In addition, investors need to be aware that the general US stock market has been on a bit of winning streak; as measured by the unmanaged S&P 500 index, there have been no down years since 2008. In 2011 the S&P 500 returned 2.11% and in 2015, the return was 1.38% (Source: ycharts.com), but otherwise, in each year from 2008-2017, a potential investment in S&P 500 index delivered double-digit returns (but of course, there’s no guarantee of a repeat!). The point here is that an investor looking at these returns next year might be unaware that they’re seeing results during a historic 10-year bull market and uptrend (assuming we end 2018 on an up-note). The fact that markets do, in fact, go down and sometimes severely may be lost on such individuals unless someone (like an ethical advisor), point this out to them (perhaps using 2008 as an illustrative example). Markets can also be volatile in a year, but end up with mediocre returns at the end (as in 2011 and 2015, but also 2005 and 2007).So when evaluating investment returns as part of your due diligence research, go beyond the published numbers on the “quick fact sheet” and dig a little. Get a little more perspective and be thoughtful about whether the investment is relatively new or whether it (and the portfolio manager behind it) has some “battle scars” to show. This also goes for the relatively new, (but highly touted and popular) Exchange-Traded Funds (ETF’s) which have yet to participate in full blown market decline or bear market.

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Critical Thoughts on Meeting College Costs

In the nearly two decades that we have written about college financial planning and helped client families figure out how to pay/finance college expenses, we’ve come to some sobering conclusions. Since it is September and the college admission and financial aid application season will begin October 1st, we’re hoping these will resonate and help readers make good decisions about college choice and funding.An Internet search will likely show you that total student loan debt is about $1.5 trillion dollars in the US today. That’s 5x the amount of debt in 2005, according to the Federal Reserve. If you were to research “Why all of this debt?”, you’ll get; More students are going to college today, more are taking out loans, college costs have increased faster than inflation, states don’t have the money to subsidize public colleges, etc.But there are little-understood, more subtle reasons for this crisis and it starts with family finances. First, stagnant “wages” for the average family is a huge problem. Most middle and upper income families are finding it difficult to pay their bills and perhaps put a little aside in the 401k for retirement. A chart I keep in my office shows college costs rising at a steady 45 degree angle for the past 20 years, yet average wage growth per capita (adjusted for inflation) is flat. So without savings or extra cash flow, the family has little choice but to borrow (heavily) if they want their student to attend a good college. The next reason is consumer debt and the inability to live within one’s means. An oft-cited statistic reveals that 46% of American households would be unable to pay a $400 extra expense without selling something or going into debt. Add the cost of one or two college degree costs at $25,000/year or so (after financial aid is figured in) and the family budget is at DEFCON 1. Lastly, college students and their parents should copy/paste this next sentence as their smartphone screen wallpaper: Every student borrower must fully understand and calculate their future ability to repay their loans upon graduation, given the career choice and the earning potential of their first job(s) during the repayment process. What does this mean, exactly? It means the student and their parents must research what the student’s earning potential will be after graduation, calculate normal after-tax living expenses, then the “carrying cost” of the aggregate student loan debt in monthly payments, and then determine whether all of that debt is affordable to attend the chosen college. If not, move on to a less expensive school choice. It’s that simple, but that critical. Otherwise, the student is possibly being set up for financial disaster in the future. Current debt counseling at the colleges doesn’t go this far, but students and their families need to. “College financial planning” means exactly that – families need to have a thoughtful, thorough plan to tackle college costs and financing from middle school right through to the last college loan payment. Otherwise they and their student(s) could be flying blind into a financial hailstorm.