What Investors Think, And How Advisors Plan For Retirement Income….
What Investors Think, And How Advisors Plan For Retirement Income….
After 20 months of relative calm, this volatility needs to be taken in stride.
Are you upset by what is happening on Wall Street? It may help to see this pullback within a big-picture context. Corrections have become so rare as of late that when one occurs, emotion threatens to influence investment decisions.
So far, February has been a rough month for equities. At the close on February 8, the Dow Jones Industrial Average was officially in correction territory after a slide occurred, which included two 1,000-point descents within four days. Additionally, nearly every U.S. equity index had lost 7% or more in the past five trading sessions.1,2
This drop is troubling, yes – but not as unsettling as it may first seem. The market has been up for so long that it is easy to dismiss the reality of its occasional downs. Last year’s quiet trading climate could legitimately be characterized as “abnormal.”
Prior to this current retreat, the S&P 500 had not fallen 5% from a peak since June 2016. It went more than 400 trading days without such a slump, setting a record. In this same calm stretch, the index also went through its longest period without a dip of 3% or more.3
During a typical year, there are five trading days when equities descend at least 2%, plus one correction of about 14%. On average, equities take roughly a 30% fall every five years.4
This year, the kind of volatility normally seen in the market has returned. It may feel like a shock after so much smooth sailing, but it is the norm – and while the Dow’s recent daily losses are numerically unprecedented, they are also proportionate with the level of the index.
A few things are worth remembering at this juncture. One, Wall Street has had more good years than bad ones, as any casual glance at its history will reveal. This year may turn out well. Two, something similar happened in the mid-1990s – a long, easygoing bull run was suddenly disrupted by major volatility. That bull market kept going, though – it lasted four more years, and the S&P 500 doubled along the way. Three, this market needed to cool off; in the minds of many analysts, valuations had become too expensive. Four, the economy is in excellent shape. Five, earnings are living up to expectations. Last week, Thomson Reuters noted that 78% of the S&P firms that had reported this earnings season had topped profit forecasts.1,3
Wall Street may be turbulent, but you can stay calm. You could even look at this as a buying opportunity. Assuming this is a correction and nothing more, the market may regain its footing more quickly than we think. Typically, the average correction lasts less than 90 days. Consider any moves carefully – and talk with a financial professional if you have concerns or anxieties about this volatile episode for the markets.5
1 – cnbc.com/2018/02/08/us-stock-futures-dow-data-earnings-fed-speeches-market-sell-off-and-politics-on-the-agenda.html [2/8/18]
2 – markets.wsj.com/us [2/8/18]
3 – money.cnn.com/2018/01/22/investing/stock-market-today-extreme-calm-pullback/index.html [1/22/18]
4 – marketwatch.com/story/panicked-about-a-stock-market-crash-what-you-need-to-remember-can-fit-on-a-single-notecard-2018-02-08 [2/8/18]
5 – cnbc.com/2018/02/07/the-quicker-the-sell-off-the-faster-we-recover-says-market-watcher.html [2/7/18]
Never touch your principal in retirement? Think again.
By Money On Tap
More than a century ago, an American financial archetype emerged – the household that lived on the interest earned by its investments, never touching its principal.
Times have changed. While the Vanderbilts, Carnegies, and Rockefellers could do that back in the Gilded Age, you will likely face a tough challenge trying to do the same in retirement. The reason? Low interest rates.
The federal funds rate has not topped 3% since the winter of 2008. In fact, the nation’s benchmark interest rate has been under 2% since October 2008. In today’s interest rate environment, you will need a substantial investment portfolio to live solely on income and dividends in retirement. In some parts of the country, a million-dollar portfolio might not generate enough income and dividends to help you maintain your lifestyle.1
Try another approach – the approach used by institutional investors. Wall Street money management firms and university endowment funds frequently rely on the total return investment strategy. In a retirement income context, this means that you strategically sell some assets to complement the dividends and interest income you receive.
Portfolio rebalancing is central to the total return strategy. The recurring ups and downs of the financial markets gradually unbalance a portfolio over time. A long bull market, for example, will usually leave a portfolio with a larger stock allocation than initially desired. To get back to the portfolio’s target allocations, you need to sell shares of stock (or, stocks aside, amounts of other kinds of investments). The proceeds of sale equal retirement income for you.
Before you pursue this strategy, you need to determine two things. One, do you have a portfolio built so that you can potentially derive income from diverse asset classes? Two, assuming you have that diversification, how much dividend and interest income is your portfolio likely to generate this year? The amount may fall short of the income you need. Rebalancing might be able to help you make up the slack.
Besides being fundamental to a total return approach for retirement income, rebalancing may also help you accomplish other objectives.
Rebalancing keeps your portfolio diversified, so that your retirement income does not depend too heavily on the performance of one asset class. It can stave off a potentially risky response to the ongoing desire for yield (some investors, frustrated by poor returns, direct money into high-risk investments they barely understand). It may also allow you to sustain your lifestyle and spending; relying only on dividends and interest may cause you to pare your spending back and notably reduce your quality of life.
Think total return. Explore the total return approach to retirement income planning, today.
1 – thebalance.com/fed-funds-rate-history-highs-lows-3306135 [12/13/17]
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What should you keep in mind as you donate?
Are you making charitable donations this holiday season? If so, you should know about some of the financial “fine print” involved, as the right moves could potentially bring more of a benefit to the charity and to you.
To deduct charitable donations, you must itemize them on I.R.S. Schedule A. So, you need to document each donation you make. Ideally, the charity uses a form it has on hand to provide you with proof of your contribution. If the charity does not have such a form handy (and some charities do not), then a receipt, a credit or debit card statement, a bank statement, or a cancelled check will have to suffice. The I.R.S. needs to know three things: the name of the charity, the gifted amount, and the date of your gift.1
From a tax planning standpoint, itemized deductions are only worthwhile when they exceed the standard income tax deduction. The 2017 standard deduction for a single filer is $6,350. If you file as a head of household, your standard deduction is $9,350. Joint filers and surviving spouses have a 2017 standard deduction of $12,700. (All these amounts rise in 2018.)2
Make sure your gift goes to a qualified charity with 501(c)(3) non-profit status. Also, visit CharityNavigator.org, CharityWatch.org, or GiveWell.org to evaluate a charity and learn how effectively it utilizes donations. If you are considering a large donation, ask the charity involved how it will use your gift.
If you donated money this year to a crowdsourcing campaign organized by a 501(c)(3) charity, the donation should be tax deductible. If you donated to a crowdsourcing campaign that was created by an individual or a group lacking 501(c)(3) status, the donation is not deductible.3
How can you make your gifts have more impact? You may find a way to do this immediately, thanks to your employer. Some companies match charitable contributions made by their employees. This opportunity is too often overlooked.
Thoughtful estate planning may also help your gifts go further. A charitable remainder trust or a contract between you and a charity could allow you to give away an asset to a 501(c)(3) organization while retaining a lifetime interest. You could also support a charity with a gift of life insurance. Or, you could simply leave cash or appreciated property to a non-profit organization as a final contribution in your will.1
Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move.
You may wish to explore a gift of highly appreciated securities. If you are in a higher income tax bracket, selling securities you have owned for more than a year can lead to capital gains taxes. Instead, you or a financial professional can write a letter of instruction to a bank or brokerage authorizing a transfer of shares to a charity. This transfer can accomplish three things: you can avoid paying the capital gains tax you would normally pay upon selling the shares, you can take a current-year tax deduction for their full fair market value, and the charity gets the full value of the shares, not their after-tax net value.4
You could make a charitable IRA gift. If you are wealthy and view the annual Required Minimum Distribution (RMD) from your traditional IRA as a bother, think about a qualified charitable distribution (QCD) from your IRA. Traditional IRA owners age 70½ and older can arrange direct transfers of up to $100,000 from an IRA to a qualified charity. (Married couples have a yearly limit of $200,000.) The gift can satisfy some or all of your RMD; the amount gifted is excluded from your adjusted gross income for the year. (You can also make a qualified charity a sole beneficiary of an IRA, should you wish.)4,5
Do you have an unneeded life insurance policy? If you make an irrevocable gift of that policy to a qualified charity, you can get a current-year income tax deduction. If you keep paying the policy premiums, each payment becomes a deductible charitable donation. (Deduction limits can apply.) If you pay premiums for at least three years after the gift, that could reduce the size of your taxable estate. The death benefit will be out of your taxable estate in any case.6
Should you donate a vehicle to charity? This can be worthwhile, but you probably will not get fair market value for the donation; if that bothers you, you could always try to sell the vehicle at fair market value yourself and gift the cash. As organizations that coordinate these gifts are notorious for taking big cuts, you may want to think twice about this idea.7
You may also want to make cash gifts to individuals before the end of the year. In 2017, any taxpayer may gift up to $14,000 in cash to as many individuals as desired. If you have two grandkids, you can give them each up to $14,000 this year. (You can also make individual gifts through 529 education savings plans.) At this moment, every taxpayer can gift up to $5.49 million during his or her lifetime without triggering the federal estate and gift tax exemption.8
Be sure to give wisely, with input from a tax or financial professional, as 2017 ends
1 – tinyurl.com/y8dkleed [8/23/17]
2 – forbes.com/sites/kellyphillipserb/2017/10/19/irs-announces-2018-tax-brackets-standard-deduction-amounts-and-more/ [10/19/17]
3 – legalzoom.com/articles/cash-and-kickstarter-the-tax-implications-of-crowd-funding [3/17]
4 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals [8/17/17]
5 – pe.com/2017/11/04/its-not-that-hard-to-give-cash-or-stock-to-charity/ [11/4/17]
6 – kiplinger.com/article/taxes/T021-C032-S014-gifting-a-life-insurance-policy-to-a-charity.html [11/17]
7 – foxbusiness.com/features/2017/10/18/edmunds-what-to-know-about-donating-your-car-to-charity.html [10/18/17]
8 – law.com/thelegalintelligencer/sites/thelegalintelligencer/2017/11/02/with-2018-fast-approaching-its-time-for-some-year-end-tax-planning-tips [11/2/17]
From Ponzi schemes to whether to contribute to a Roth or Traditional IRA– we tackle some of your toughest questions!
Things you can do for your future as the year unfolds.
Seth Krussman IAR
Brayshaw Financial Group LLC
What financial, business, or life priorities do you need to address for 2018? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to lowering your taxes. You have plenty of options. Here are a few that might prove convenient:
Can you contribute more to your retirement plans this year? In 2018, the contribution limit for a Roth or traditional IRA remains at $5,500 ($6,500 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $135,000 and joint filers with MAGI above $199,000 cannot make 2018 Roth contributions.1
For tax year 2018, you can contribute up to $18,500 to any kind of 401(k), 403(b), or 457 plan, with a $6,000 catch-up contribution allowed if you are age 50 or older. If you are self-employed, you may want to look into whether you can establish and fund a Solo 401(k) before the end of 2018; as employer contributions may also be made to Solo 401(k)s, you may direct up to $55,000 into one of those plans.1,2
Your retirement plan contribution could help your tax picture. If you won’t turn 70½ this year and you participate in a traditional qualified retirement plan or have a traditional IRA, you can cut your 2018 taxable income through a contribution. Should you be in the 35% federal tax bracket, you can save $1,925 in taxes as a byproduct of a $5,500 regular IRA contribution.3
What are the income limits on deducting traditional IRA contributions? If you participate in a workplace retirement plan, the 2018 MAGI phase-out ranges are $63,000-$73,000 for singles and heads of households, $101,000-$121,000 for joint filers when the spouse making IRA contributions is covered by a workplace retirement plan, and $189,000-$199,000 for an IRA contributor not covered by a workplace retirement plan, but married to someone who is.2
Roth IRAs and Roth 401(k)s, 403(b)s, and 457 plans are funded with after-tax dollars, so you may not take an immediate federal tax deduction for your contributions to these plans. The upside is that if you follow I.R.S. rules, the account assets may eventually be withdrawn tax free.4
Your tax year 2018 contribution to a Roth or traditional IRA may be made as late as the 2019 federal tax deadline – and, for that matter, you can make a 2017 IRA contribution as late as April 17, 2018, which is the deadline for filing your 2017 federal return. There is no merit in waiting until April of the successive year, however, since delaying a contribution only delays tax-advantaged compounding of those dollars.4
Should you go Roth in 2018? You might be considering that if you only have a traditional IRA. This is no snap decision; the tax impact of the conversion must be weighed versus the potential future benefits. If you are a high earner, you should know that income phase-out limits may affect your chance to make Roth IRA contributions. For 2018, phase-outs kick in at $189,000 for joint filers and $120,000 for single filers and heads of household. Should your income prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2018 and then go Roth.1
Incidentally, a footnote: distributions from Roth IRAs, traditional IRAs, and qualified retirement plans, such as 401(k)s, are not subject to the 3.8% Medicare surtax affecting single/joint filers with AGIs over $200,000/$250,000. If your AGI surpasses these MAGI thresholds, then dividends, royalties, the taxable part of non-qualified annuity income, taxable interest, passive income (such as partnership and rental income), and net capital gains from the sale of real estate and investments are subject to that surtax.5
Consult a tax or financial professional before you make any IRA moves to see how those changes may affect your overall financial picture. If you have a large traditional IRA, the projected tax resulting from a Roth conversion may make you think twice.
What else should you consider in 2018? There are other things you may want to do or review.
Make a charitable gift. You can claim the deduction on your 2018 return, provided you itemize your deductions with Schedule A. The paper trail is important here.6
If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record or a written communication from the charity with the date and amount. Incidentally, the I.R.S. does not equate a pledge with a donation. Contributions to individuals are never tax deductible.6
What if you gift appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value, and avoid capital gains tax that would have resulted from simply selling the investment and donating the proceeds. The non-profit organization gets the full amount of the gift, and you can claim a deduction of up to 30% of your adjusted gross income.7
Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, the I.R.S. says you need to keep “a contemporaneous written acknowledgement” from the charity “indicating the amount of cash and a description of any property contributed.” You must also file Form 8283 when your total deduction for non-cash contributions or property exceeds $500 in a year.6
If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.
See if you can take a home office deduction. If your income is high and you find yourself in one of the upper tax brackets, look into this. You may be able to legitimately write off expenses linked to the portion of your home exclusively used to conduct your business. (The percentage of costs you may deduct depends on the percentage of your residence you devote to your business activities.) If you qualify for this tax break, part of your rent, insurance, utilities, and repairs may be deductible.8
Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2018. You can make fully tax-deductible HSA contributions of up to $3,450 (singles) or $6,900 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older. HSA assets grow tax deferred, and withdrawals from these accounts are tax free if used to pay for qualified health care expenses.1
Practice tax-loss harvesting. By selling underperforming stocks in your portfolio, you could record at least $3,000 in capital losses. In fact, you may use this tactic to offset all of your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2019 (and future tax years) to offset ordinary income or capital gains again.3
Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts, and your most tax-efficient securities should be held in taxable accounts.
Review your withholding status. Should it be adjusted due to any of the following factors?
* You tend to pay a great deal of income tax each year.
* You tend to get a big federal tax refund each year.
* You recently married or divorced.
* A family member recently passed away.
* You have a new job, and you are earning much more than you previously did.
* You started a business venture or became self-employed.
Are you marrying in 2018? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2018, you will need a new Social Security card. Additionally, the two of you, no doubt, have individual retirement saving and investment strategies. Will they need to be revised or adjusted once you are married?
Are you coming home from active duty? If so, go ahead and check the status of your credit and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still there, and revoke any power of attorney you may have granted to another person.
Consider the tax impact of any upcoming transactions. Are you planning to sell (or buy) real estate next year? How about a business? Do you think you might exercise a stock option in the coming months? Might any large commissions or bonuses come your way in 2018? Do you anticipate selling an investment that is held outside of a tax-deferred account? Any of these actions might significantly impact your 2018 taxes.
If you are retired and older than 70½, remember your year-end RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs and 401(k), 403(b), and profit-sharing plans by December 31 of each year. The I.R.S. penalty for failing to take an RMD equals 50% of the RMD amount that is not withdrawn.9
If you turned 70½ in 2017, you can postpone your initial RMD from an account until April 1, 2018. The downside of this is that you will have to take two RMDs in 2018, with both RMDs being taxable events – you will have to make your 2017 tax year RMD by April 1, 2018 and your 2018 tax year RMD by December 31, 2018.9
Plan your RMD wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your adjusted gross income, plus any non-taxable interest income you earn, plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.10
Lastly, should you make 13 mortgage payments in 2018? If your house is underwater, this makes no sense, and you could argue that those dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January 2019 mortgage payment in December 2018. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more.
Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in 2018.
1 – cbsnews.com/news/I.R.S.-allows-higher-retirement-savings-account-limits-in-2018/ [10/24/17]
2 – forbes.com/sites/ashleaebeling/2017/10/19/I.R.S.-announces-2018-retirement-plan-contribution-limits-for-401ks-and-more/ [10/19/17]
3 – turbotax.intuit.com/tax-tips/tax-planning-and-checklists/4-last-minute-ways-to-reduce-your-taxes/L3eJ81kRC [11/9/17]
4 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [10/25/17]
5 – bbt.com/wealth/retirement-and-planning/retirement/medicare-surtaxes.page [11/9/17]
6 – irs.gov/taxtopics/tc506 [9/21/17]
7 – tinyurl.com/yc6ecpq8 [10/12/17]
8 – irs.gov/businesses/small-businesses-self-employed/home-office-deduction [10/26/17]
9 – fool.com/retirement/2017/04/29/whats-my-required-minimum-distribution-for-2017.aspx [4/29/17]
10 – smartasset.com/retirement/is-social-security-income-taxable [7/19/17]
Post Trump election talk! How might things look during a Trump presidency? Plus the BONUS TRACK on “Tactical gifting”.
Become a strategic giver! Discover tax incentive benefits in structured giving from our guest Kyle Christopherson with Renaissance Philanthropic Solutions Group.
Generosity could never have fallen so low! Don’t get taken and find out why you still want to be generous with caution!
Whether it’s swimming with sharks or jumping out of airplanes we all have ideas around our tolerance and expectations.
Gather around boys and girls. It’s time to talk about Black Holes and how they will eat up your retirement. Now, no crying, and just listen while uncle Ben, John and Seth teach you how not to get sucked into singularities without proper guidance.