Unfortunately, Roth recharacterizations are gone . . .

Why does this matter? Well, you can still convert traditional IRA assets into a Roth IRA (that’s good news); however, if your conversion proves unfavorable, you can no longer undue that conversion post October 15, 2018. Prior to the tax reform package of 2017, if your Roth conversion proved financially unfavorable, you could recharacterize (read as undue) your conversion to avoid the adverse consequences of your actions.

What has this tax law change cost us? Here are some examples:

• Since converted assets must be included in your taxable income, tax planning your conversion has become more difficult because end of year unexpected income or deductions can alter/change what once appeared to be a tax savvy move earlier in the year;

• Also, if your converted assets suddenly lose value after your conversion, you still owe taxes on the converted value, not the new lower value (in essence, you will owe taxes on money that you no longer possess); and

• Finally, if your tax conversion levied more taxes than you could afford, you may even have to liquidate some tax-deferred assets to cover your new tax bill causing you to incur even more taxes and, possibly, penalties.

If your considering converting some or all of your traditional IRA assets to a Roth IRA, you need to be more careful now than ever! Consult with your tax professional and your financial advisor to help ensure your not wishing for a “recharacterization.”

Market sell-offs leaving you worried? Maybe they should not . . .

If market down-turns are leaving you worried, then consider the following:

• If you are invested appropriately for your age and risk tolerance, then market down-turns should not be of large concern;

• If you are still in the accumulation phase of saving for retirement (10 or more years out from retirement), then market down-turns should not be of large concern; and/or

• If you like buying things on sale, then sufficient market down-turns can provide a buying opportunity.

So, the next time a market down-turn seems to leave you with a little angst, make sure you are invested appropriately for your age and risk tolerance and maybe you won’t have to reach for the antacids. A little planning can go a long way.

For more information about how to handle market sell-offs, click on the link above!

Got the RMD (Required Minimum Distribution) blues? Rebalance!

Some older investors love to hate their RMDs. Why, you may ask?

Well, some may not need the money, while others are not sure what to do with the proceeds of their distribution (e.g., how to reinvest or how to minimize the tax consequences of their distribution).

Enter: rebalancing.

Not necessarily a solution to the above mentioned RMD problems, but possibly a silver lining to the cloud of unwanted distributions. For you see, although rebalancing may be something we all find nerve racking (and counter-intuitive because we are selling our winners to buy more of our losers), it, nevertheless, improves a portfolio’s returns while also reducing a portfolio’s risk. So, the next time you are dreading your RMD, use it as an annual reminder to rebalance your retirement accounts. Something you needed to do anyways!

**Remember, you don’t need to wait for an RMD opportunity to rebalance your portfolio. All investors can rebalance inside of their tax-deferred accounts without incurring tax consequences whenever they want!

Want a higher rate of return on your bank account? Look on-line!

The Federal Reserve has been raising interest rates throughout 2018, but banks have been loathe to pass that extra interest along to their customers. Most “bricks and mortar” banks are offering less than 1% on their savings accounts. So where do you go and what do you do to earn a higher interest rate for your savings. Enter on-line banks (and more importantly, FDIC insured on-line banks). Some on-line banks are currently offering savings accounts yielding 2% or more. On a one hundred thousand dollar ($100,000) deposit, a yield in excess of 2% can mean $1,000 or more on your cash reserves each year. Yes, $1,000 does not seem exciting enough to overcome the at rest inertia of staying with your current bank, but in 10 years that $1,000 a year is now an extra $10,000. And $10,000 is worthy of thirty (30) minutes of your time to set up your new on-line bank account. A great place to find these higher-yielding on-line back accounts: www.bankrate.com. For even more information about this topic, click on the link above!

Is $1 million enough to retire with?

Simply put, probably not. Why is that? $1 million is a lot of money and pretty hard to accrue. It should be enough to retire on.

Well, the answer in part depends on your budget and when you plan on retiring. For example, if you are retiring today and your budget shortfall outside of your social security and pension income mandates an amount between $30K and $40K a year from your $1M portfolio, then you are probably OK with a $1M nest egg.

However, if you were to retire say 20 or 25 years from now, the Rule of 72 tells us that our $1M nest egg would need to be around $2 million (because at a 3% inflation rate, the purchasing power of our money is cut in half every 24 years). And, additionally, our retirement years will hopefully last another 20 to 25 years, thereby, further requiring even more money if we are to live 50 years from today (nearly 4x’s the $1M needed today).

Moreover, with healthcare costs rising faster than the rate of inflation, healthcare should be a serious concern of every retiree. Fidelity estimates that a couple retiring today would need to budget about $280,000 for lifetime healthcare costs. One can easily see that in 20 to 25 years from now the Rule of 72 again tells us that healthcare costs could be well over a half million dollars.

Is all lost? No. It is never too late to start preparing for one’s retirement. Even saving a modest $6,500 per year at a 7% rate of return for the next 25 years can yield nearly $440,000 per the linked article’s calculation. It may not be a million, but its better than a goose egg! Click on the link above for more information.

For a quick post about how much you need to save by age group to reach $1M, click here.

These metrics can help you decide how tax-efficient your fund is?

Generally, index funds and total-market index funds are tax-efficient due to their inherent low turnover. Moreover, some ETFs can also be tax efficient because they can exchange securities in kind (which avoids tax liability) instead of selling. But, what other metrics can be tracked to help us determine a funds tax efficiency? Here are some interesting ones you should be following:

• after tax returns vs. “tax efficiency;”

• the tax cost ratio (a measure of a funds annual return reduced by taxes paid on distributions); and/or

• the potential capital gains exposure of a fund (a metric that measures all the gains yet to be distributed by the fund)

By paying attention to not only a funds turnover ratio, but also the funds after tax returns, the tax cost ratio, and its potential capital gains exposure, you will help better ensure its true tax-efficiency. Clink on the link above to learn more!

With interest rates rising, how do I invest my money?

Just a couple of weeks ago I was writing about the 10 year Treasury Note breaking 3% and holding. As of today (October 9, 2018), the 10 year is now holding around 3.2%. In a rising rate environment, how does one invest? Some pundits posit that a rising rate environment is bad for stocks (as rising rates can slow the economy and reduce corporate profits); however, not all rising rate environments are the same. Notably, stocks have moved higher in 12 of the 15 periods since 1950 when the 10 year Treasury was rising (i.e., the market has moved higher 80% of the time). This makes some sense because the Fed usually raises rates as the economy is doing better. If the economy is doing better, then corporate profits are usually up and stock prices are up. So, again, where do I invest?

Answer:

Traditionally, the following stock sectors have performed better during rising rate environments:

• Industrials;

• Tech (please note its already high P/E valuation);

• Consumer Discretionary; and

• Energy

And, here are some stock sectors you may wish to avoid:

• Real Estate; and

• Utilities

Regarding bonds, rising rates hurt current bond holders; however, by keeping your bond portfolio duration short or utilizing shorter term bonds (2 years or less), one can reinvest their matured bond money into new, higher-yielding bonds when their money comes due.

For more information, click on the link above!

82% of asset classes post negative inflation-adjusted real returns in 2018

14 of 17 major asset classes have posted negative inflation-adjusted real returns thus far in 2018, as reported by Morgan Stanley and Bloomberg. That’s pretty scary! Pretty much, only U.S. stocks have fared well, while most other asset classes have lost ground. Nevertheless, the mantra of diversification still holds true as one asset class may “zig,” while the other may “zag;” thereby providing a level of risk reduction to your portfolio. Click on the link above and see below to ascertain how your asset classes fared!

Worst Real Returns Since Financial Crisis: A Look at 17 Asset Classes

Winners

S&P 500 Index (SPX)

Russell 2000 Index (RUT)

U.S. high yield corporate debt

Losers

2-Year U.S. Treasury Note

10-Year U.S. Treasury Note

U.S. investment grade corporate debt

Global high yield corporate debt

Inflation-protected bonds

U.S. Aggregate Bond Index

Emerging market U.S. dollar government debt

Emerging market local debt

REITs

MSCI Europe Index

MSCI Japan Index

MSCI China Index

MSCI Emerging Markets Index

Commodities

Sources: Morgan Stanley, Bloomberg; Annualized, unhedged inflation-adjusted real returns in U.S. dollar terms computed YTD as of Sept. 24.

Read more: Investors Face Worst Returns In 10 Years | Investopedia https://www.investopedia.com/news/investors-face-worst-returns-10-years/#ixzz5SsnkRvqG

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How do the Fed's recent interest rate hikes affect those in their 20's, 40's and beyond . . .

The Federal Reserve’s change in the federal funds rate affects everyone, from borrowers to savers. So, let’s take a look at how your age group might be commonly affected:

• “20 somethings” - undergraduate federal direct loans have risen to 5.05% in 2018 versus 4.45% last year; moreover, credit card interest rates have also risen from 15.78% to 17.32% in 2018 (borrowing continues to become more expensive);

• “40 somethings” - mortgage rates have climbed from 3.9% in late 2015 to 4.6% in 2018, any variable rate debts that you owe will have adjusted upwards as well;

• “60 somethings” - online bank savings accounts are now offering rates around 2% while some bond funds are losing value; as to stocks, if corporate profits continue to rise, stock prices should hold and/or continue to rise slightly (noting this is the longest bull market in history).

To see more examples of how your finances are affected by the Fed’s rate changes, click on the link above!

Rising bond yields leaving you concerned about your fixed income portfolio?

Although the 10 year has finally hit 3% here in September of 2018, stretching out on the yield curve provides little benefit as the 30 year is yielding only about 3.2%. Since the risk premium for the 30 year is not there, keep your bond duration low and pick up the higher yields when your bonds mature (think laddering your bonds). Notably, Vanguard still believes that global fixed income returns will be in the 2% to 3% range for the next decade.

How much do I need to save every year to reach $1 Million?

Not much, if you let time (and the compounding of your hard earned dollars) work for you. At a 7% annual return, it takes 30 years for an annual $10K investment to reach $1 million. Albeit, $1 million is not worth what it used to be, it is still a good goal to set (and, hopefully, surpass). For without goals in mind, the event of retirement remains too abstract for some and leads to paralysis. Unfortunately, this article points out this very fact by noting that 1 out of 3 people only have $5,000 saved for retirement. The best time to start saving was 20 years ago, the second best time is TODAY!

401k benefits (what are they?) . . .

A good article about 401k benefits. Most notably, a 401k plan offers the following benefits:

• tax savings (the account is funded through pre-tax payroll deductions);

• employer match incentives (free money that immediately boosts your return);

• portability (can transfer the account to another employer or a rollover IRA); and

• loan and hardship withdrawals (permits acces to money).

These aren’t all of the benefits of a 401k, but funding an account with pre-tax payroll deductions and enjoying tax free growth until withdrawal is good enough on its own!

How much $$ can I save in my retirement accounts?

A good article detailing 2018 contribution limits for different retirement account options for all parties saving for their future. Thankfully, our retirement account options permit a pretty penny to be saved if one’s income allows. For example:

IRA (below age 50) - $5,500

IRA (age 50+) - $6,500

401k (below age 50) - $18,500 + employer match

401k (age 50+) - $24,500 + employer match

Solo 401k (below age 50) - up to $55,000

Solo 401k (age 50+) - up to $61,000

HSA (below age 55) - $3,450 (single); $6,850 (family); add $1K for those 55+

As such, if funds are available, a person below the age of 50 can save $24,000 rather easily (IRA $5,500 plus 401k $18,500). However, that $24K can increase once you add in employer matches, as well as, HSA contributions, if permitted.

Possible penalty free withdrawal options from an IRA before 59 and 1/2 years of age . . .

A great article detailing how, in limited situations or circumstances, one can potentially withdrawal money from an IRA without incurring a 10% penalty. As imagined, these situations are rather limited:

• disability (i.e., where an individual cannot participate in gainful activity or employment);

• one’s medical expenses exceed 10% of their AGI;

• to cover health insurance for themselves, their spouse, and their dependents;

• to cover qualified higher education expenses;

• a first time home purchase;

• withdrawals that meet I.R.C. section 72t exceptions (see earlier post for a further explanation of this option); and

• beneficiaries of an inherited IRA (these beneficiaries are required to take withdrawals).

Saving for College? Do I use a 529, a Coverdell, an UGMA/UTMA account, or a Roth IRA?

A great article explaining the different options that folks have when investing for college. With a 529 college savings plan, you might enjoy a state tax deduction and the potential of contributing up to $150K as a married couple in a single year when utilizing the 5 year election method; however, plan fees and limited investment options can diminish a 529’s luster. That being said, it is still probably one’s best option when planning for college. Click the link above to discover your best options for your particular situation.

Do you only need three funds for investing?

Taylor Larimore thinks so. If you don’t know Taylor, he is a long-time Boglehead (i.e., a disciple of John “Jack” Bogle - the founder of the Vanguard Group). Taylor’s three fund choices:

• a total market US stock index fund;

• a total market stock International index fund; and

• a total market US bond index fund.

That’s it. Pretty simple and the costs for such index funds are very low - a key determinant in improving an investor’s performance. Investing can be made simple!

Can I take money out of my IRA or 401k without a 10% penalty?

Yes, you can. However, that does not mean that you should. A lesser known provision of the Internal Revenue Code, specifically section 72t, allows for substantially equal periodic payments to be withdrawn from your tax-deferred account without a 10% penalty being charged. The rules surrounding this withdrawal method are complex and a tax professional, CPA, and/or an ERISA lawyer’s advice should be sought before implementing. Relatively minor mistakes can subject the entire withdrawal amount to the 10% tax penalty if you are not careful. Don’t forget that such a withdrawal comes at a great cost even if you avoid the 10% penalty; namely, your financial security in retirement because these funds are no longer compounding in value as you make your way to your golden years. Other less onerous possibilities may exist if you still need to access to your tax-deferred funds early. Talk to you financial advisor about possible “hardship” withdrawals or a 401k loan if your plan permits. Better yet, access your “rainy day” fund (i.e., a bank account with at least 6-12 months of living expenses set aside for life’s unexpected events) that all households should have for just such an emergency!

Fidelity first to ZERO index funds pays off . . .

Wow!  Fidelity's ZERO (no-fee) index funds bring in $1B in first first month.  That's a lot of money.  Should you switch?  Maybe.  But, probably not.  If you are already using low-cost passively managed index funds, the move to Fidelity might only save you $4 per $10,000 invested - not exactly a King's ransom.  For example, many passively managed index funds already have an expense ratio of .03% to .05%; as such, a $10,000 investment already only costs about $3 to $5 per year.  Now if it turns out that Fidelity's "tracking error" of its bogey benchmark is less effective than other funds, then Fidelity's ZERO funds could actually end up costing you more in lost returns (albeit, not a huge sum most likely).  Additionally, Fidelity seems to admit that these ZERO funds are a loss leader for them.  Accordingly, they will need to recoup these fees by cross-selling additional products to these new customers.  Finally, if you are considering switching a taxable account to Fidelity's ZERO funds, such an event can trigger a capital gains tax event and a corresponding tax bill from Uncle Sam (something most of us don't want).  Nevertheless, Fidelity's ZERO funds are really good news for the average investor because reducing costs is one of the best things an investor can do to boost their returns! 

Taxable Accounts and when to use them . . .

A good article about when to use taxable accounts.  Generally, it is best to use an employer sponsored tax-deferred account (e.g., an IRA or a 401k plan) when saving for retirement.  Such accounts typically allow for pre-tax contributions, tax free growth of your money, and sometimes even include employer matching contributions.  However, some folks may not have access to an employer sponsored plan and are limited to the $5,500 or $6,500 (for those 50 and over) one can contribute per year to an IRA.  Although, saving approximately $6,000 per year is not a bad start, saving even more improves your likelihood of retiring earlier and living life a little more comfortably.  Hence, the first instance of utilizing a taxable account is to save more for retirement.  Such taxable accounts should take advantage of tax managed assets, i.e., securities that don't provide regular capital gains and dividend income but focus on stock price appreciation, index funds, or tax free bonds.  Other instances ripe for utilizing a taxable account include:

• You wish to retire before age 59 1/2; such taxable accounts would not be subject to the early withdrawal 10% penalty;

• You are saving for a long term goal (a long term goal other than college - you can use a 529 for college goals); or

• You may wish to actively trade or speculate with a small portion of your money.

A penny saved is a penny earned, even in taxalbe accounts!

Two really important retirement charts; however, I believe the second chart is more compelling. Which do you think is more important?

This article provide two really good charts.  The first chart covers what investing $5K, $10K, or $15K annually over five year increments will accrue an investor when returning 8%.  Off course, the earlier you start, the better the results.  But, the real benefit of this chart is revealed when one estimates the annual income produced from this nest egg when using a 4% withdrawal rate.  Tellingly, the second chart shows that 20 years of saving $15,000 at 8% yields $29,000 in annual income in retirement, but start a mere 10 years earlier and that $15,000 at 8% for 30 years yields $72,000 in annual income (almost 2 and 1/2 times greater).  I believe the second chart helps to put in more concrete terms what a retiree can expect from their nest egg in retirement; notwithstanding, that a back of the envelope 4% withdrawal calculation will not work for every retiree's unique and particular circumstances.