How Does The CARES Act Impact Retirees?

How Does The CARES Act Impact Retirees?

Recently the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. There are a few important items that may impact retirees.

Required Minimum Distributions

For 2020, Required Minimum Distributions (RMDs) have been waived for all retirement accounts, including IRA, 401(k), 403(b), and 457 plans. This includes beneficiary IRAs as well. If you were in the category where you were required to take two RMDs in one year due to delaying your first RMD, you happen to be in luck – no RMD is required. 

No 10% Penalty For Early Retirees

For early retirees that qualify for “coronavirus-related distributions” (an intentionally broad definition), if you took out money prior to age 59 ½ or 55 depending on the type of retirement account, you were potentially subject to a 10% penalty. For 2020 you may now take up to $100k out of your pre-tax retirement accounts without penalty. You are still subject to reporting your distributions as income, though you are allowed to stretch the recognition of this income over three years. 

Stimulus Payments for Tax Filers

For those that earn under $75,000 in adjusted gross income for singles and $150,000 for married filers, they will receive direct payments from the government in the amount of $1,200 (single) or $2,400 (married). This will be sent via direct deposit for those that have set up ACH, and a check will be sent to those that do not have that established. There is a phaseout for those earning above $75k/$150k, ending at $99k for single filers and $198k married.

Clint Walkner

Investment Concepts: Keeping a Healthy Balance

Investment Concepts: Keeping a Healthy Balance

The aims of a diversified portfolio and how it works can be difficult for many investors to understand and in particular a concept that often trips up investors is the concept of “rebalancing”. Rebalancing generally means selling stocks while they are going up and buying them when they are going down.

The first goal of rebalancing is to ensure that investors are not taking more risk than they should or are comfortable with.

For instance, a $10,000 simple portfolio invested in half US stocks and half bonds illustrates this most clearly. If the investment started in January 1987 and was left untouched until the end of 2019, it would’ve ended up as approximately 79% stocks and 21% bonds: meaning that it would have been more risky than an investor originally intended. By rebalancing, that portfolio would stay in line with the targets and give the investor the protection they thought they were getting for down markets. As of writing on March 19, a 50/50 (using VT for the total stock market and BND for the bond portion) portfolio on January 1 would be down only 14.6% versus 21.3% for an unrebalanced balanced portfolio (and 26.2% for an all stock market portfolio) year-to-date.  

Rebalancing then provides insurance on the downside: if disciplined, investors will lose less money when the market goes down. However, there is a less remarked upon side to rebalancing: it means the portfolio potentially will recover more quickly.  

To turn back to the two most recent market downturns (that of 08-09 and 00-02), a 50/50 diversified portfolio returns to flat much more quickly than one without rebalancing. For a non-rebalanced 50/50 portfolio first invested in 1987, the portfolio would have a “drawdown” (or decline off of its peak) of 33.96% in February 2009. The portfolio would recover to its original levels in January 2011. If the same portfolio were rebalanced quarterly, it’s drawdown would be 26.45% and it would return to it’s previous levels by April of 2010. The recovery time for a similar portfolio that was first invested in January 1987 and rebalanced quarterly during the bear market of 2000-2002 would’ve been 12 months less (November 2003 versus November 2004 for an unrebalanced portfolio). 

The case for rebalancing can be made in a variety of ways on paper, but putting the rebalancing in practice can be tricky, taking into account the tax ramifications (this is particularly tricky for US expat clients as they have to take into account tax rules both in the United States and abroad) and the varying time horizons for the variety of cash needs required. However, those who haven’t prepared their portfolio in the face of a downturn by rebalancing, can, hopefully, improve their recovery time by turning to a financial advisor who takes into account their individual challenges but still maintains the discipline needed.

Keith Poniewaz

 

Disclosure note: These securities mentioned were meant to be illustrative in nature only and were not meant to be advice or an inducement for someone to purchase it. You should consider your own personal situation and expertise of a trusted advisor before you implement any investment strategy. The rates of return quoted here are thought to be reliable, but there is no guarantee that they are correct. Again, it’s the premise we are trying to show rather than the actual numbers. 

Should I Stop My Monthly Investments?

Should I Stop My Monthly Investments?

In light of the recent market and economic developments, we have received this question from a few of our clients and wanted to share our thoughts. First off, it is completely understandable that people ask this question. It is a good question to ask and is rooted in people’s desires to make the correct decisions with their long term assets. For that, we commend our clients who are thinking in a proactive way.  

We passionately believe in the ideology that every client and, furthermore, every client situation is unique and requires individual planning. We still believe in those principals but offer our thoughts, as it is on the minds of many of our clients.

Acting During Extreme Market Events

We are reticent to recommend that clients make large, dynamic changes to their investment funding levels or allocations during times of higher volatility. Systematic investing into IRA accounts or company sponsored accounts such as 401k’s and 403b’s provide the opportunities for buying at different points into the markets. When we make consistent contributions over long periods of time, we have some of our contributions buying in at all different points of the market, therefore, balancing out buying shares at low and high points. This creates an efficient average purchase price without having to “time the market”. If we turn off our contributions in the down markets, we negatively affect the average and eliminate our opportunity to purchase shares at a discounted price. 

Don’t Undo Your Dedication

Over longer periods of times, such as five to ten year increments, there will be instances of market inefficiencies. There will be times when the market is “overpriced” or “underpriced”, meaning the cost of the shares of investments are essentially over or under prices based on the intrinsic value of the underlying investments. We even out these inefficiencies by staying dedicated to a consistent investment schedule. Furthermore, we really don’t know whether a market was undervalued or overvalued until we are able to look back at it with a perfect past perspective. 

Inefficiency is Opportunity

We feel that the market may be presenting one of these moments where the shares have fallen in value beyond where they should be due to the projected impact of the pandemic and oil price shocks. This, in our opinion, is the wrong time to turn off or reduce long-term investments. We hear it all the time, “I don’t want to chase good money after bad”, but while the holdings in your portfolio have decreased in value, the ability to buy “on sale” exists. We have said many times in the past that Americans will buy most anything if it is on sale…except the stock market. It is at times like these when conviction and dedication is rewarded. You will never be able to time the market perfectly, so investing on a consistent basis is our preferred way to build wealth over long periods of time. 

Nate Condon

The Fed Raised/Lowered Rates…  What Does That Mean?

The Fed Raised/Lowered Rates… What Does That Mean?

The financial media will predictably and cyclically tease hot button economic topics throughout the year to attract readers to their publications. These topics range from the strength of the housing market to the country’s unemployment rate to a contracting or expanding economy. A recent favorite has been “The Fed is considering raising/lowering rates!” This statement sounds clear enough on its face, but what does it actually mean for the economy overall and *more importantly* to YOU? Let’s go a little deeper into what this statement really means and how it might affect different aspects of the financial landscape and your life.

First off, who is “the Fed”? The “Fed,” in this case, is the Federal Reserve a.k.a. the central banking system of the United States. Fans of the musical Hamilton might be familiar with the creation of the First Bank of the United States, which laid much of the groundwork for the establishment of the Federal Reserve in 1913. It’s made up of 12 reserve banks across the country to provide regional representation, and the most visible and powerful member of the Fed is the Fed Chair. Currently, the Fed Chair is Jerome Powell, who was appointed by President Trump in 2018. While the Fed has many duties and responsibilities, Congress has assigned the Fed two specific mandates as it relates to the US economy: Attempt to maintain a stable inflation rate (of approximately 2%) and monitor and maintain the labor market (and attempt to achieve or maintain low unemployment). The Fed is given a fair amount of authority to manage these two mandates, including the power to raise and lower interest rates. 

But when the Federal Open Market Committee meets and ultimately decides to raise or lower rates, what does that actually mean? The Fed has the ability to raise or lower the Federal Funds rate, which is the rate that banks charge each other on overnight loans. The changing of this rate then has an impact on other rates in our economy such as the Prime Rate. This, however, is where things get a little more opaque. The Fed isn’t directly affecting credit card, auto loan, or home mortgage rates. In fact, home mortgage rates more closely mimic the movements of the 10 year Treasury than they do to the Fed Funds rate. But it is true that a good number of financial instruments that consumers use every day are influenced by the Fed’s handling of the Fed Funds rate. If the Fed is consistently increasing or decreasing the Fed Funds rate over the course of 12 months, then it’s a pretty good bet that you will see certificate of deposit rates, auto loan rates, and home equity loan rates follow suit. So, the relationship between these everyday financial instruments do have somewhat of a correlation to the Fed Funds rates, just not a direct or immediate relationship. 

What impact does all of this have on U.S. consumers and corporations? More than you might realize. Corporations make a host of decisions based on the anticipated direction of interest rates from whether to expand their operations or increase or decrease the prices of their products. Interest rate movement will also influence whether consumers will take that extra vacation this year, make an addition to their home, or spend more for their children’s education. The cost of borrowing to fund these expenses– whether they are business expenses or personal ones– becomes more expensive when interest rates go up. On the flip side, the lowering of interest rates means that it becomes less expensive in the long run to borrow and people will either spend more on the projects at hand, or initiate projects that might’ve previously been too expensive.

Our job at Walkner Condon Financial Advisors is to explain the impact of potential rate increases or decreases to our clients and help them anticipate how these moves may affect the success of their financial plan. 

Nate Condon

The Secure Act is Now Law

The Secure Act is Now Law

As we have discussed in several past blog posts (see here and here and originally here), the SECURE (Setting Every Community Up for Retirement Enhancement) Act promises to make some important changes in how individuals can handle their retirement account and how those accounts might be passed on to heirs or charities. On December 20, 2019 the plan was signed into law, and as it made its way between both houses to the desk of the President, there were some subtle changes to the elements we identified. Consequently, we’ll be reviewing what is contained in the version that now functions as law, as well as identifying some ways the planning landscape has changed as a result. We’ll also be recording a podcast on the topic with an Estate Planning and Tax attorney.  

RMD RULES

As we discussed in our previous blog in the topic, the bill contains changes to the Required Minimum Distribution of retirement accounts such as IRAs or 401(k)s: 

Required Minimum Distributions (RMDs) would be delayed from age 70.5 until age 72 in Individual Retirement Accounts and 401(k)s.  Meaning those who’ve contributed to these plans would be able to defer taking money out for an additional 1.5 years.  

The important clarification to this that came with passage of the law is that if you turn 70.5 in 2019, you will be required to begin taking your RMDs. However, if your 70th birthday was after July 1st, you will be able to delay your withdrawals until the year you turn 72.  Additionally, the new actuarial tables for RMDs show longer life expectancy and, consequently, lower annual RMDs.

Age Limits

Should you still be working at age 75 and want to contribute to your Traditional IRA, you may do so, as there is no longer a limit at what age you can contribute to an IRA.

“Stretch” IRAs

As we discussed in our previous post

In order to pay for the decreased revenues, the treatment of IRAs and 401(k)s inherited by individuals other than a spouse would be changed. Rather than being allowed to “stretch” withdrawals from an IRA across the inheritor’s full lifespan, under the current terms of the legislation, such withdrawals would be limited to a 10 year time frame.

The one addition to this in the final bill is that any IRAs which are to be moved/decanted into a trust will be limited to a 5 year period rather than a 10-year one.  

There were a couple of additional rules that were put into place– namely, that a penalty free (though not tax-free) withdrawal can be made from an IRA account within a year of a birth or adoption. Additionally, it will be easier to roll custodial 403(b) accounts into IRA accounts.

Finally, there are several additional changes to 401(k)s and other employer sponsored retirement plans contained in the SECURE Act that will be discussed in future blogs.

 

Keith Poniewaz

Our Opinion on the UW System 403(b) TSA Options

Our Opinion on the UW System 403(b) TSA Options

Our Opinion on the UW System 403(b) TSA Options

One of the decisions that UW System employees have is what provider(s) to choose in their 403(b) plan. Much like 401(k) plans, 403(b) plans offer the ability for employees to save for retirement by investing some of their compensation into the plan. The main difference between a more typical 401(k) and a 403(b) is that there is only one investment provider in a 401(k) plan, where in the 403(b) arena there are multiple investment providers that are offered. It is up to the employee to do the due diligence on these providers and self select their investment company or companies that they want to use. Financial advisors may also offer their preferred solutions inside the plan, but there may also be conflicts of interest that arise in these situations. If you choose to use an advisor, we strongly recommend that you use a fee-only financial advisor that will act in your best interests as a fiduciary.

Here we offer our opinion on current 403(b) providers inside of the UW System. Keep in mind that although we are providing our take on some of these options, every situation is different and this is not meant to replace individualized investment advice.

TIAA

The good:

TIAA has low-cost funds, offering the ability to utilize index funds. This technically is built on an annuity chassis, though the regular trappings of annuities (high fees and income rider complexity) are not present here. There is a good mix of index funds and actively managed funds. After putting resources into the website, the navigation is much improved.

Index funds offered by the company are fairly low cost as well. Their S&P 500 fund’s expense ratio is 0.05%. Their lifecycle funds are a bit more expensive since they generally use their actively managed funds. For example, their 2040 fund is 0.44%. Despite this higher expense the ratings from Morningstar, a fund ranking service, is still equal to or greater than the Fidelity 2040 index-based option below.

For financial advisors, TIAA is great to work with. They have the ability to grant limited power of attorney to allow advisors to trade accounts. The data feeds also work well in most portfolio management software, allowing us to track performance easily. As a result of these benefits, TIAA is our #1 choice for us in working with our clients.

The bad:

The TIAA “Traditional” account offers a high interest rate, but the small print is often underdisclosed in our opinion – in many accounts there is a mandate that only 10% of the account may be transferred out annually. This ten-year rule can pose significant hurdles when distributing assets.

Because of the annuity chassis that TIAA uses, it has a confusing bifurcation of investment options. Some of the older investment options have “CREF” at the beginning of the fund name. The CREF Equity Index is an index fund that focuses on large company stocks but carries a 0.22% expense ratio, which is on the high side. Most of the CREF funds, as a result, should be avoided, and frankly, TIAA should either significantly drop these expenses to match their other funds or merge them into existing funds.

While TIAA has the reputation for being a progressive, educator friendly company, its socially responsible (or “ESG”) fund offerings are very limited. Service center wait times can sometimes be a challenge.

Fidelity

The good:

Fidelity has a massive list of investment options. They offer index funds, sector funds, actively managed funds, and target-date funds. Cost on these vary, but generally, Fidelity is a good citizen here. The Fidelity 500 Index (their version of the S&P 500) has a minuscule 0.015% expense ratio. Diversified “target date” retirement funds that are prepackaged diversified solutions are also very reasonable for expenses, as the 2040 fund is at 0.12%.

For those investors that desire investment choice and to do it yourself, Fidelity offers a wide range of funds at a reasonable cost. For this reason, we would rank Fidelity as the #1 choice for investors that would like to self-direct their options.

Some advisors may have access to Fidelity, depending on where they custody their assets. This could give them the ability to trade client accounts.

The bad:

If you’re looking to really overwhelm yourself with investment options, here is a great place to do it. For all of those people out there clamoring for the ability to invest in a chemicals oriented portfolio, you have come to the right place.

Fidelity finally rolled out a sustainable equity and bond index for ESG investors, but the track record is short. We would like to see greater choice for investors that desire to be more socially conscious.

T. Rowe Price

The good:

A robust (but not totally overwhelming) list of investment options. T. Rowe Price is known for being an actively managed mutual fund company, meaning that their bread and butter is hiring managers that seek to outperform their benchmarks. Despite the difficulties of consistently outperforming index funds due to higher costs, T. Rowe Price has been solid. According to their website, “Over 75% of our mutual funds with a 10-year track record have outperformed their 10-year Lipper average as of 9/30/19”.

Their target-date series has a long track record with excellent success. Their 2040 fund is ranked five stars for every time period and its inception was 2002.

For investors who are all in on active management, this is a good choice.

The bad:

Their index funds are expensive. For example, their S&P 500 fund is 0.21%, which is our opinion is absurdly high. If you are like many investors and seek to blend actively managed funds with index funds, there are better choices out there.

The target-date funds are also expensive. For example, the 2040 fund is 0.70% annually.

There is little to no choice for socially conscious investors.

The website for the UW System participants leaves something to be desired. (No links to any investment options to do research??)

Ameriprise

The good:

These are based on annuity contracts that are signed with the participant. These contracts have fixed accounts attached to them, which pay a guaranteed interest rate. Older contracts may have higher guaranteed amounts, so investors will want to make themselves aware of what the rate is before transferring to another investment provider or rolling the funds out.

Ameriprise will have financial representatives attached to most contracts. They will have knowledge of their investment choices and may be able to assist in the selection of asset allocation. Investment choices include multiple fund managers across a variety of asset classes and are broad.

The bad:

The current contract, Riversource Retirement Group Annuity II, has a 0.95% M&E expense on the contract. This means that there is an annual fee on the contract to cover “mortality and expense”, which covers commissions for the advisor and a fee for Ameriprise.

Additional expenses also apply to the funds selected. Here’s the rub – finding the expenses is really difficult. In the current prospectus (if you’re looking for an easy website area to find it, think again) they list the expenses on the funds from 0.41% – 2.76%. In an older prospectus, we were able to more conveniently locate an expense table on page 7. There are very few index funds in the lineup, and in looking at the old prospectus and comparing it to the new one, we believe an S&P 500 index fund is 0.41%. That is significantly higher than the mutual fund companies and TIAA.

The “financial advisor” on these plans have significant incentives to recommend their products rather than other companies inside the plan. Furthermore, they are not true fiduciaries because they receive commissions.

Lincoln

The good:

Like Ameriprise, Lincoln is contract-based, meaning that each participant signs up in a variable annuity and is subject to those provisions. For old contracts, the fixed account rate may be fairly high relative to other fixed and bond options.

You also get assigned a Lincoln representative to assist you in selecting funds, which contain multiple fund managers and a variety of choices.

The bad:

Good luck finding information on the plan. There is no UW 403(b) specific page, nor is it apparent what the current contract is.  In doing some digging we found a list of investment providers and it appears that the Lincoln Multi-Fund Select is the current contract. In viewing what we think is the current prospectus, the fund fees range from 0.49%-1.77%. Assuming that the S&P 500 fund is likely the 0.49% expense ratio, this places the Lincoln offering as the most expensive.

We will say the same caveat on the representative of the plan that they have incentives to select their own contract and you are not getting fiduciary advice.

Our note:

Part of our role as financial advisors that are fiduciaries is to help our clients navigate through the options and select what is right for them. We have an experienced team of advisors that is here to help you. Click here to schedule a no-cost, no-obligation meeting to see if we are a mutual fit for your financial situation.

Disclosure:

The expense ratios are subject to change and we are relying on the information on outside sites, which may or may not have completely correct information. You should consult a financial professional and perform your own due diligence on these providers before you make any changes to your own investments. We are not affiliated with the UW System or any of the 403(b) providers.