Planning to Not Retire

Written by Brandon Grundy, CFP®.

Strange as it may seem, there's a fair amount of folks out there who are planning to not retire. Yes, unfortunately for many this is a non-decision caused by the affordability issue. For others the decision to keep on working is driven by a variety of factors. But planning to not retire doesn't give one a pass on retirement planning. It's still just as important, even though the timeline might be different.

When I work with retirement-aged folks who don't plan on retiring (even when they can afford to), their reasoning is often that they are healthy, enjoy their work, and simply feel no reason to stop. Bucket list trips and personal to-do's? That's what vacations and weekends are for, right? When would they consider retiring? When they can no longer work, stop when they drop, pedal to the metal, etc, etc. Sometimes, it's enough for them to know that they can retire, which maybe makes it easier to get ready for work in the morning. If the boss gets on their nerves one too many times, they can Johnny Paycheck their way out of there and know they'll be fine financially.

If this sounds like you, here are some points to consider:

401(k) and Other Workplace Plans
You can keep contributing to your workplace retirement plan past "retirement age", as plans often allow employees to do this. This means continued tax-deferred saving and, assuming your employer offers it, matching dollars.

Additionally, should you continue working past age 70.5, you should be able to avoid taking Required Minimum Distributions (RMD) each year from your plan and having to pay tax on them. This is typically about 3.6% of your balance the year you're 70.5 and goes up each year after that, so keeping those dollars in your plan can save you money.

This would only be for regular employees, however, not those who own a chunk, or all, of the business. Also, putting RMDs on hold is only allowed for the workplace plan and not other old plan accounts (from former jobs, for example) or IRAs. One idea would be to roll eligible accounts into your current plan to delay RMDs entirely. But first ensure your current employer plan has good quality investment options and is reasonably priced. Workplace plans are notorious for being expensive and, depending on the dollars involved, extra costs could outweigh potential tax savings.


Prognostications Roundup

Written by Brandon Grundy, CFP®.

With the new year in full swing it's the season when market analysts of all shapes and sizes reveal their educated guesses about what the markets and economy are likely to do in the year ahead. While many of these prognostications aren't worth the time it takes to read them, some come from very good analysts and are worthy of our attention.

There are several common themes for 2018 as I review reports from three groups I pay close attention to, Bespoke Investment Group, Vanguard's Investment Strategy Group, and Dr. David Kelly at JPMorgan. While none of these analysts would say they're predicting the future, they would likely all say how important it is to be aware of these key themes and how markets might react to them. So, let's look at my summary of their recent work.

Economic Growth, Unemployment, and Wages
Final GDP numbers for 2017 won't come in for a while yet, but assumptions are that the final number will around 3%. If so, this level of growth would be higher than the past few years but still stubbornly below the longer-term average of 3.25%. The expectation is for a growth boost in 2018 fueled by business investment and tax policy, followed perhaps by a tapering off into 2019.

This tapering, should it occur, is expected to be blamed on an increasingly tight labor market. As 2017 ended our main unemployment rate stood at 4.1%, a level most economists would agree is considered "full employment". Strangely, this metric is expected to fall further as businesses expand hiring, perhaps aided by new tax breaks, and hire the few remaining workers out there. But then they hit a brick wall unless a bunch of folks who are currently out of the labor market decide to jump back in. One of the potential outcomes of this would be a long-awaited boost to wages and ultimately a spike in inflation.


Quarterly Update

Written by Brandon Grundy, CFP®.

Happy New Year! Well, I don't know about you but I'm excited to start 2018. Last year was a great year but was also challenging in many ways, dominated of course by the North Bay fires and other natural disasters. Reviewing the Time Magazine 2017 retrospective issue over the Holidays showed just how intense much of 2017 was.

But last year was also a solid yet quiet one for stocks. I recall having conversations with clients a year or so ago about the potential disconnects between the social, economic, and market outlooks at the time. That certainly proved to be the case in 2017. If nothing else, the stock market's run last year showed just how dispassionate Mr. Market is, even while being subject to fits of melodrama.

As had been the case all year, more aggressive portfolios saw continued strong returns during the fourth quarter. The S&P 500 was up almost 7% during the last three months of the year and the Dow 30 was up nearly 11%. Emerging market stocks, which turned out the best performance of 2017, was up 7.5% during the quarter.

The bond market continued its comparatively modest performance during the quarter and year-to-date, with the U.S. Aggregate index generating 0.4% and 3.5%, respectively. Corporate bonds fared better than Treasurys, and high yield (aka "junk") bonds performed better, but bonds as a category woefully underperformed the stock market. This is what bonds due when stocks are up. They chug along maintaining their value and paying their interest payments, a virtue when stocks are down but challenging in years like 2017.

Here's a roundup of how the major indexes performed during the quarter and year-to-date:

  • S&P 500: 6.6% and 21.8%
  • Dow 30: 11% and 28%
  • Small Caps: 3.3% and 14.7%
  • Foreign Stocks: 4.3% and 25.6%
  • Emerging Mkts: 7.5% and 37.8%
  • U.S. Bonds: 0.4% and 3.5%

Here's how some other rates and indicators stood at year-end:

  • Prime Rate: 4.5% (began the year at 3.75%)
  • 10yr Treasury: 2.4% (began the year at 2.45%)
  • 30yr Mortgage: 4.16% (began the year at 4.39%)
  • Oil (WTI): $60 per barrel, up from $54 a year ago
  • Gold: $1,291, up from $1,146 a year ago
  • The Dollar: down on the year versus other major currencies, which helped drive U.S. and global stock market performance.

Have questions? Ask me. I can help.


The Holiday Wrap Up

Written by Brandon Grundy, CFP®.

The Holiday season is upon us and I don't know about you, but it seems to have shown up rapidly this year. Where does all the time go? As in prior years, this will be my last post for the next two weeks. I'll still be hard at work through year-end, but I'm trying to carve out a little extra time with family.

If we don't talk beforehand, I wish you Happy Holidays and success in the New Year!

With gratitude,

Congress is set to vote on its tax overhaul legislation this week, with the House today and the Senate soon after. Even though nothing is etched in stone yet, let's review several of the interesting and lesser-known provisions from the final draft released on Friday.

FIFO – Fortunately for individual investors, mandating first-in-first-out, or FIFO, treatment when realizing capital gains didn't make it into the final draft. As I noted last week, this would have disproportionately impacted "retail" investors for a puny amount of tax revenue relative to the total cost of the bill. By my fuzzy math, the gain to the Treasury from mandating FIFO would have been about 0.28% of the projected $1 trillion deficit addition created by the tax cuts. But to many investors it would have felt much larger.


A Move to FIFO

Written by Brandon Grundy, CFP®.

Major tax reform might just be a couple of weeks away, but it sure is coming down to the wire. The lateness leaves precious little time for planning. A common question has been what, if anything, should we be doing now given how Congress's planned tweaks to the tax code might impact investors. The short answer is nothing... well, almost nothing, until the legislation is signed and we have more details.

Last week I wrote about the potential change to how the government calculates CPI and how this could impact tax rates, and even Social Security benefit payments, long-term. But this week let's review one provision that could have more near-term impacts for investors.

We all know that Congress has to close a variety of loopholes to pay for some of the planned tax cuts. This makes good intuitive sense. But too often closing some of these loopholes has what should be obvious unintended consequences that impact typical investors, not just the hedge fund guys or other "corporate" folks. This leads me to assume that most members of Congress don't understand what's in the legislation they're voting on. Unfortunately, this is a common (and scary) practice to get large and complicated legislation through the process and into back offices where the important details are hammered out by fewer, and presumably more expert, members. This process is happening now, and we're all waiting for more details.

One of the key details for investors is the potential change to how we realize gains and losses in our investment portfolios. This is another one of those seemingly small things that adds up to big money over time. According to the Joint Committee on Taxation and CNBC, this change could generate roughly $2.7 billion in additional tax revenue from investors over the next ten years. Granted, many of those impacted will be wealthy fund managers and the like, but many others will be swept up by the change as well.