Enhancing Your Security

It’s scary out there in cyber land. Crooks are lurking around every corner and its easier for them to strike as we demand more convenience from our devices. Or, at least that’s how it sounded while I attended another continuing education seminar on cyber security a couple of weeks ago. The content was geared toward advisory firms, but the details are applicable to anyone with a computer or smartphone.

Some of the high points dealt with changing recommendations about password formats and the importance of using password managers.

While experts used to recommend passwords ranging from about 8-10 characters, they now suggest that “length is strength”. Length is better than complexity, though I don’t fully understand the technical reasons why. It seems the longer the password the longer it takes a hacker to crack it, and they might move on to someone else’s password instead. A simple way to accomplish this is to use sentences as passwords, such as “ilikeitwhenthegiantswin”, or something that’s easy for you to remember but long enough to be difficult to crack.

You can make using longer passwords even easier by employing a password manager, such as Dashlane or LastPass. These subscription services use encryption to store your passwords and then work with your web browser to autofill your credentials once you’ve logged into the password manager’s website. So, at least in theory, you could create all sorts of crazy passwords and not need to remember them. Free versions are available, but it’s worthwhile to pay perhaps $10 or less monthly for more functionality. There are numerous practical benefits to this. But an important one is that by not physically typing your logins all the time you’ll be making it more difficult for hackers to monitor your keystrokes (which, apparently, is laughably easy for them to do).

It’s a little paranoid perhaps, but I don’t have any presumption of privacy while online, so taking extra steps like this provides piece of mind. Longer passwords and, ideally, the addition of a password manager is low hanging fruit when it comes to shoring up your personal cyber security. I’ll be addressing more methods in the coming weeks.

In the meantime, here are some helpful tips from the FBI’s cyber site. Some may seem obvious. But hackers often use the obvious ways in, such as duping you into clicking a bad link in an email, so don’t take the simplicity of these suggestions for granted. As technology races along, we all need to do a little (or a lot) more to protect ourselves.

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It's Busy Out There

We live in busy and interesting times, that’s for sure. Take the last week or so as an example. All at once we had the impeachment trial in the Senate, Brexit looming (it happened last Friday, by the way), and the coronavirus outbreak in China. We also had some strong but contradictory economic numbers percolating too.

But it was China that tended to dominate the market’s attention, especially last Friday when the Dow Jones Industrial Average slid 600 points, or a little over 2%. The S&P 500 fared a bit better but both indexes ended the volatile week down 2% or so. The main emerging markets index (of which China is a large portion) was down over 5% for the week.

Due to the outbreak the Chinese government had extended holiday closures of local stock markets through last week. Here at home risk associated with the virus had largely been priced into our markets since we weren’t on holiday. But investors in China hadn’t yet had an opportunity to “trade” the situation. As soon as they did yesterday, they sold, sending stocks in China down about 8%, an impressive single-day decline for any country. This let Chinese stocks catch up with commodities like oil, for example, which have been in freefall on fears that the outbreak will cause Chinese demand to slow.

The week of market turmoil also caused the yield curve here at home to invert… again. Although the inversion was slight, it’s still technically a recession indicator. The inversion has since reversed as of this writing as fears about coronavirus dissipate and investors sell bonds to buy more stocks. Still, the bond market has taken notice and currently expects one or two interest rate reductions from the Fed this year.

Fortunately for markets the outbreak came at a time when some of our economic indicators have been turning positive. The Institute for Supply Management tracks manufacturing activity across the country. The index had been contracting for several months but showed a surprise uptick in January, rising from 47.2 to 50.9. Readings below 50 indicate a recession for the sector, so this is a positive change after being weak for a while.

We also learned last week that consumer confidence has continued to rise well above its long-term average. Interestingly, at the same time consumers are reporting optimism, they’re also feeling less confident about their prospects. Your guess is as good as mine in terms of explaining this dichotomy, but it seems like a negative if one feels satisfied today yet doesn’t think it will last. That has to start showing up in our consumer-driven economy at some point, right?

While our economy seems to be trucking right along and defying gravity a bit, and markets have snapped back from last week’s losses, more short-term volatility should be expected as issues like coronavirus and Brexit play out in coming weeks. As we’ve seen in recent years, volatility bursts back onto the scene at unexpected times and in unanticipated ways. It’s important to remember that sometimes the best thing to do about market turmoil is absolutely nothing.  

Have questions? Ask me. I can help.

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Too Much Too Soon

As we discussed last week, the purpose of the recently passed Secure Act was to make it easier for workers to save for retirement. Pretty much everybody acknowledges there’s a retirement savings shortfall in our country, so every little bit helps. The downside, however, is that laws making tax deferred savings easier must be paid for, and this was largely accomplished on the backs on those set to inherit retirement accounts.

Remember that IRAs, 401(k)s, and other types of retirement accounts weren’t originally intended to pass on wealth to heirs. They were meant to fund retirement and perhaps help with a surviving spouse. As we’ve seen over time, too-good-to-be-true-for-long tax loopholes eventually get closed. This is what happened several years ago with the Social Security “file and suspend” loophole that created a cottage industry of books, seminars, and so forth that for years helped folks “maximize” their benefits.

I’m a firm believer in understanding the rules of the game and playing the game hard, but I also try to acknowledge when something has to give. The victim this time around was the concept of “stretching” inherited retirement accounts.

Beneficiaries used to have two main options for retirement accounts they inherited. If the deceased owner was taking required minimum distributions (RMDs), heirs could start taking them on their own the year following the account owner’s death. Or, they could choose to clean out the account within five years. With some good investment management and proper planning, it was possible to try to stretch some of the money for decades, or even into the next generation. This also allowed more control over the timing and amount of taxes. No longer. Those inheriting retirement accounts will now have just one choice, to draw down the balance within ten years.

While these changes impact a broad array of beneficiary scenarios, here’s one that’s likely to start coming up:

Too much income too soon…

Jane’s mother passed away and left her a 401(k) worth $300,000 and a Roth IRA worth $150,000. While she’s mourning the loss of her mother, Jane is 60 and wondering how the extra money and extra taxes will impact her retirement plans.

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Updating Beneficiaries

You never know what’s going to happen to you. You’ve heard this a thousand times and I don’t have to tell you about the impermanence of life. But while we can’t control the future and the timing of our own demise, we can (mostly) control where our money goes after we do.

We accomplish this by naming beneficiaries on as many of our accounts as possible. They can be added at the bank, on our life insurance policies, and our retirement accounts at work and elsewhere. Not doing so automatically sends an account through the probate process after your death. There’s limited ability to control things in probate, so folks generally try to avoid it.

Naming beneficiaries is so simple that people often overlook it or forget to keep them updated. And passage of the Secure Act at the end of 2019 puts added emphasis on double checking your beneficiaries. Among other things, the Act now requires that non-spouse beneficiaries withdraw all the inherited money within ten years, with a boatload of taxes to go along with it. We discussed some of the implications with this a few weeks back, so I won’t bore you with the details again here.

Instead, let’s think more broadly about reviewing your beneficiaries. It’s a bit morbid perhaps, but for a successful review you need to wrap your mind around two potential scenarios; one, you’ve been “hit by the bus” while crossing the street and it’s lights out immediately, or two; you’re suffering from some sort of mental incapacity that precludes you from doing anything on your own.

In either case you’ve got what you’ve got in terms of named beneficiaries. Still have your ex-wife listed as beneficiary on your retirement accounts? Or, maybe you haven’t listed anyone at all even though you’re remarried and have children from both marriages? Maybe you simply wish you had done something different with beneficiaries. The bottom line is that you have to address this before death or incapacity, not after.

It’s important to remember that each account you own stands alone. You might have a will or maybe you spent thousands working with an estate planning attorney to craft the perfect trust document. But if you never actually updated beneficiaries on your IRA, for example, that account doesn’t automatically fall under the trust. Again, it’s on its own and would go through probate or, if you have stale beneficiary designations, directly to whomever is named, even if you’d currently (from the grave, I guess?) disagree.  

While it might sound a little strange, there’s benefit to these accounts being separate. It gives you the opportunity to get creative. For example, most of us with a spouse and kids simply follow the “spouse gets everything, the kids get what’s left” school of thought. The Secure Act adds complexity here, but not for regular brokerage or bank accounts. Maybe one of your kids needs the money more than another. You could name the kid with lower income as beneficiary of your IRA while the other is named on your brokerage account (for its preferential tax treatment and no ten-year rule). Maybe one of your kids gets the Roth IRA (which would be tax free over ten years) and the other gets your pension (taxed as ordinary income). There are lots of ways to customize this.

But then as we all know, things change. Maybe over time your kids swapped their financial status, or maybe they’re both doing great and you’d like to add a charity or two as beneficiaries. This is why it’s important to check how you have things set up from time to time. You might find that choices you made five or more years ago no longer apply.

Again, and at the risk of being overly redundant, nobody but you can update your beneficiaries. We can help you think about the process and assist with the paperwork, but we can’t do it for you. We used to aim to review this every few years or so, but we’ll now be doing so annually with our ongoing clients. It’s simply too important not to. 

Have questions? Ask me. I can help.

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Moving Markets

It’s never easy to see stock market indexes like the Dow opening down 400 points or more, especially on a Monday. Not a good way to begin the week, that’s for sure. This is especially true after a prolonged period where stocks mostly just went up. But as with any market swing it’s best to step back and assess the situation instead of simply reacting. Other investors do that enough for us anyway, so we don’t want to join them and make things worse.

So far this week (and toward the end of last week as well) stocks are primarily reacting to the outbreak of coronavirus in China. This brings back memories of the deadly SARS virus in 1993. That outbreak spread around the globe for about six months and claimed almost 800 lives, according to the CDC. The Chinese were criticized at the time for being slow to respond and opaque about the process. China’s government seems to be much more proactive this time around, shuttering roads, rails, airports, and even extending its New Year holiday season to keep people off the streets.

This situation is obviously very concerning and potentially dangerous. We don’t know how long or how widespread this outbreak will be. Hopefully it won’t be as bad as some are suggesting. But from my limited perspective, it’s interesting to watch how markets respond to situations like this. The Chinese economy is the world’s second largest, so any significant disruption in its system is going to create ripple effects throughout the world, which is part of the reason we see markets dropping in the short term.

Along these lines, I wanted to share the following excerpts of commentary I received from my research partners at Bespoke Investment Group yesterday morning. The first snippet is about the market reaction and the second is about the virus itself. The bottom line at this point, I think, is that stocks had been up for awhile without a meaningful decline and needed an excuse to fall a bit. The outbreak, and other issues, certainly provided it.

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SECURE Act Becomes Law

As you may have heard, right before the end of 2019 the government gave us the SECURE (Setting Every Community Up for Retirement Enhancement) Act. There’s a lot to it, but I’ll try to stick to the high points that are likely the most relevant to you.

No more stretching…

Let’s look at what will probably have a negative impact for many families. If you are planning to leave a retirement account to your kids or grandkids, they will generally no longer be able to take the proceeds over their life expectancies. This was known as “stretching” and allowed non-spouse beneficiaries to slowly withdraw (and pay taxes on) inherited retirement account balances that they didn’t necessarily need right away.

Going forward they’ll have to draw down the balance within ten years, paying taxes at a faster rate than would normally be the case. I recently read that this could generate almost $16 billion in tax revenue for the Treasury over the next ten years. This, at least in part, is how Congress paid for other changes in the new law.

Here are some important details:

1) This doesn’t apply to leaving retirement accounts to your spouse. The surviving spouse simply treats it as their own. This hasn’t changed.

2) The ten-year window doesn’t apply if you have already inherited a retirement account, just newly inherited accounts going forward.

3) If your estate planning documents leave your retirement account to a trust for the benefit of heirs, you should re-evaluate that decision. The reasons have to do with taxes and potentially different stretch provisions available to some types of trusts.

4) If your traditional (non-Roth) retirement account balances are likely to create distributions for your heirs that could cause them to pay higher taxes than you currently do, Roth conversions to prepay their taxes could help.

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