Stock Market Volatility Making You Nervous? What to do by age group . . .

With the stock market losing ground more often than not lately, what should you do? If you find yourself a little nervous by this occurrence here are some ideas:

For investors in their 60’s and beyond

• Make sure your asset allocation (bond/stock mix) is suitable for your risk tolerance and age (utilize maxims like invest your age in bonds (a conservative approach) or invest 100 minus your age in stocks);

• Revisit (or create) your financial plan to make sure you are on retirement track;

• Be flexible and adjust your budget/withdrawal rate to reflect weaker market returns; and

• Ensure you keep a cash reserve/“bucket” of two to three years worth of living expenses on the side for down markets.

For investors in their 40’s and 50’s

• This group also needs to make sure their asset allocation (bond/stock mix) is suitable for their risk tolerance and age (utilize maxims like invest your age in bonds (a conservative approach) or invest 100 minus your age in stocks or mimic allocations found in appropriate target date funds); and

• Check the quality of your bonds, remembering that high quality, shorter duration bonds exhibit negative correlations with stocks and thereby provide a better ballast to ones portfolio during turbulent stock market times.

For younger investors

• Stay the course and add to your equity positions in these down markets; and

• Only invest in stocks money that you will not need for the next 5-10 years, money that is needed for shorter time horizons should be in short to intermediate term/duration bonds or cash accounts.

For more information about this topic, click on the link above!

With stock valuations in a late economic cycle, non-correlated bonds are your best bet!

A really interesting article pointing out which bonds tend to serve their purpose most dutifully, while others fall short (as all bonds are not created equal). For sometimes, investors seem to lose sight of the fact that bonds really should provide a ballast to one’s portfolio during turbulent stock market times.

In that light, one should ensure that a least a portion of their bond portfolio preferably exhibits a negative correlation with stock movements. Notably, quite a few bond sectors don’t. For example, high-yield bonds and corporate bonds tend to display a higher correlation with stocks than U.S. Treasuries. Although yields are low on Treasuries, one of their other major functions within a portfolio (besides investment return) is to reduce losses in stock market downturns. As witnessed by their negative correlation with stocks, bonds “zig” when stocks “zag,” thereby providing buoyancy to one’s sinking stock ship.

The linked article also succinctly points out that a purpose of some of your bond portfolio’s function/objective/diversification is best met by bonds of high credit quality with short duration. This point is further supported by the fact that most “new’" bond money is going into ultrashort duration funds, while corporate and high-yield inflows have been drying up in 2018.

Click on the link above to read more about bonds and their correlation with stocks!

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.”

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!

Medicare Open Enrollment October 15th to December 7th - Do you need to make a change?

If you think you need to make a change begin by reviewing your Annual Notice of Change (ANOC), which lists changes to your plans premiums and co-pays. Your ANOC will also provide a comparison of your 2018 benefits versus your 2019 benefits. Options available to Medicare recipients during this open enrollment period include: choosing a new plan, adjusting your drug coverage, or switching to an Advantage Plan. With regard to Medicare Advantage Plans, check to make sure your local hospital is still accepting your Medicare Advantage Plan, as well as, your pharmacy and doctors are still part of the Plan’s preferred network. Also, make sure your prescriptions are still covered under your plan’s coverage. When comparing Medicare versus Medicare Advantage Plans, don’t only judge the plans by their premiums, look to make sure deductibles and co-pays are appropriate, as well as, your network coverage and medications. Click on the link above for more information!

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

Follow us: Investopedia on Facebook

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!

Worried about running out of money in retirement?

Running out of money in retirement is a real fear. What can you do to alleviate this from occurring? Follow these suggestions to improve your chances of avoiding the proverbial “poor house” in retirement:

• Withdraw only 3% to 4% per year from your retirement savings (the latest research suggests withdrawing only 3.13% from your retirement accounts at age 65);

• Have some exposure to stock, so you portfolio can grow during retirement (a general rule of thumb suggests 100 minus your age for your equity allocation); and/or

• Don’t retire too early - the longer one works, the less time your retirement accounts need to support you; plus social security benefits grow by 7% to 8% each year you don’t take social security.

For more tips, click on the link above!

What do I need to earn each year to max out my social security benefit?

Well, since social security is based on your 35 highest inflation adjusted years of earnings, your benefit changes with your income level. Also, since Social Security’s benefits formula changes each year, it is hard to give a specific dollar amount going forward. However, generally speaking though, you will need to earn more than Social Security’s maximum taxable earnings in at least 35 individual years to receive the maximum possible Social Security benefit (which is around $2,788 per month in 2018). Since Social Security’s maximum taxable earnings has risen from $90,000 in 2005 to $128,400 in 2018, you can see how your benefit might vary if your income falls below the threshold in any given year. Also, remember that Social Security only taxes “earned” income; so, if your passive income is what pushes you over the Social Security maximum taxable income level, you will not “max out” your benefit. Click the link above for more details!

If you are in your 30's, have you saved as much as your peers?

The average 401k balance, according to this article, for those in their 30’s is around $42,700. Have you saved this much? Well, if you are in your mid thirties, you really should have at least two times your salary saved for retirement. And, when using that metric, the average 401k balance should probably be around $85,000 by the time you reach 35 years of age. With that thought in mind, you may wish to clink on the link above as this article also highlights the following general checkpoints for retirement saving amounts at various points in your life:

• By age 30: Have the equivalent of your starting salary saved

• By age 35: Have two times your salary saved

• By age 40: Have three times your salary saved

• By age 45: Have four times your salary saved

• By age 50: Have six times your salary saved

• By age 55: Have seven times your salary saved

• By age 60: Have eight times your salary saved

• By age 67: Have 10 times your salary saved

I am a bit of a “belt and suspenders” kind of guy, so I would recommend shooting for 15x’s your salary saved by age 67. For example, if your salary is $100K per year, then $1.5 million allows for approximately $60K a year (4% time $1.5 million) from your retirement accounts when doing a rough back of the envelope calculation. This combined with your social security should replace approximately 80% of your pre-retirement income.

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).

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!

If I am not eligible for Medicare, but my spouse is eligible, can I receive Medicare benefits?

A good article explaining that "yes," you can receive Medicare benefits on a spouse's record.  Notably, to acquire Medicare coverage under a spouse's record, a person need only be 65 years of age or be deemed medically disabled.  Typically, to qualify for Medicare you need to have paid into the Social Security system.  Fortunately, for spouses, just like with Social Security benefits, a spouse can qualify for Medicare benefits under a spouse's record.

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!