No rest for the weary. Isn’t that what people say as they push through a growing onslaught of obstacles? However one uses the adage, I think it’s appropriate as we head into the end of another eventful year.

In any other year we’d have deadlines for saving, gifting, harvesting losses and gains, and a host of other investment-related issues. Those are typical and can be planned for. But this year-end, on top of everything else we’ve been enduring, we also have to contend with what’s shaping up to be another eleventh hour set of major changes to our tax code.

While Congress has missed its own deadlines for the Build Back Better legislation, some senators are making noise about a vote occurring by Christmas. If that happens, and if the House plays along with the Senate’s version, we could be looking at the so-called social stimulus bill being signed into law right as the year closes. Most of the provisions don’t start until next year, but some, such as a dramatic increase to the cap on deductible state and local taxes (known as the SALT cap) could be retroactive for this year.

This matters because many property tax payers in expensive areas like ours would get to deduct more, or even all, of their property taxes whereas the current cap is $10,000. The Build Back Better version passed by the House raised this cap to $80,000, well within range of local median home values. This also matters because a larger tax deduction can create room for planning opportunities like Roth conversions, or even generating extra spending cash in retirement by selling appreciated investments. These would have to be done by year-end and would only work for some folks if the SALT cap was raised substantially. The final dollar amount of the cap will continue to be hotly debated in the days and weeks ahead, but there at least seems to be some consensus that it should be raised.

The problem, of course, is the waiting. Since we’re not likely to know when or even if Congress will send a bill to the president’s desk for signature this year, how does that impact our decisions today? I’m an advocate for making the best decisions now with the information you have available and not becoming a victim of analysis paralysis, but I’m still holding off for a bit to see how this plays out in D.C. After all, if it’s as simple as selling investments prior to market close on the 31^st, I can do that in minutes.

But for anything requiring the processing of paperwork, the longer the wait the lower the chance that anything gets done. Typical processing cutoffs are around the 15^th, or maybe Friday the 17^th this year, well before Build Back Better becomes law. Big firms like Schwab and TD Ameritrade have pushed their cutoffs to earlier in December anyway, so we’re trying to cram in as much as we can at this point. Further waiting is unfortunate because any 2021 planning opportunties created by the legislation are likely to be a victim of the calendar.

On top of this back office stuff and pending legislation, we’re also living through the first meaningful spike of inflation in decades, looming issues with the debt ceiling again, and of course tons of uncertainty having to do with the pandemic. Each of these are big issues on their own, but also weigh down the Build Back Better legislation itself.

Here’s a recent podcast on these topics from Michael Townsend, Schwab’s Washington-based commentator. In a little over 20 minutes he breaks down the news from D.C. that’s important for investors to know.

https://www.schwab.com/resource-center/insights/content/content/washingtonwise-investor-episode-52

Finally, I want to wish you and your family Happy Holidays. It’s been another challenging year and connecting with those most important to you seems that much more important because of it. That said, I’ll be taking the next couple of weeks off from writing this blog. This creates more time to spend with family and opens up additional time for working with clients as we react to whatever Congress does, or doesn’t do, in the waning hours of the year.

Have questions? Ask me. I can help.

Never a dull moment. That’s maybe a good way to sum up how markets reacted last Friday to the latest iteration of the coronavirus pandemic. Understandably, investors around the world sold stocks on the thin, but potentially worrisome, news that the omicron variant emerged overseas. Post-Thanksgiving Fridays are usually pretty quiet, but not this year. I imagine many short-term investors, and the algorithms they often employ, waking up from their day off to the cascade of negative headlines and thinking one thing: sell.

At one point the Dow Jones Industrial Average was down over 1,000 points. Scary, sure, when you hear it quoted on the radio or on TV, but still less than a 3% decline on an index that’s up roughly 17% year-to-date. We’ve seen market reactions like Friday play out many times and each raises an important question for long-term investors. What, if anything, should you do when others are freaking out? The short answer is usually nothing. The slightly longer answer is to be ready to buy.

Buying while others are selling takes real intestinal fortitude, no doubt about it. What helps is the basic understanding that the stock market is made up of thousands of individual companies. Some will go bust but most will continue to be around for a very long time, through thick and thin. Values will rise and fall day-to-day, sometimes in dramatic fashion, but will trend higher as the companies continue to produce and sell their products and services. This sounds pretty basic, and it is, but it helps us remain calm when markets get wobbly. And make no mistake, we’re in an unstable market that is merely a representation of the times we’re living through.

The other thing that helps is reviewing market history. To help us here I’ll again pull from my research partners at Bespoke Investment Group. The following are snippets and charts from two different pieces, one from Friday and one from yesterday morning. These cover recent market responses to bad news and a longer-term look at a key gauge of investor anxiety, the VIX. There’s some detail here but, again, looking at information like this helps put market gyrations into context.

As they often do, Bespoke’s research provides good perspective during unsettling times. I can’t praise their work loudly enough. The bottom line is that long-term investors should try to think about the investing process differently than the short-term folks do. It’s just unfortunate that the latter drives the market and the news day-to-day; they’re the smaller group with a louder megaphone, especially on days like Friday.

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For the past couple of weeks we’ve looked at important year-end questions. Another timely one might be, “Have I taken my RMD yet?”. We’ll get into that but first let’s put things into perspective.

Saving and investing for retirement is all about the tradeoffs that come with delayed gratification. Money accumulated for the future needs to be saved today, years or even decades before spending it. Then you have to put your hard-earned money at risk to reap the rewards of time in the markets and compound interest. Neither are much fun in the present, but we balance this with the knowledge, and perhaps faith, that we’ll come out ahead later by doing so.

The government helps with this, too. Decades ago the IRS started allowing taxpayers to fund Individual Retirement Accounts (IRAs). At the time the novel idea was to let savers contribute money that could then be deducted from their taxable income. This was a great motivator to get people saving.

But, as they say, there’s no free lunch. The tax break was the carrot, and the stick was that the government would eventually come to collect. And they wouldn’t wait forever. Savers had to start withdrawing and paying tax on a Required Minimum Distribution (RMD) from the account by age 70 ½, whether they needed the money or not. The starting age was recently bumped to 72, but the concept is the same.

Then the stick was sharpened by another tradeoff. Not only would the government collect tax on the original contributions, but on every dollar of growth as well. The government would forgo tax on, say, the $1,500 saved in 1975 (the max amount in the first year for contributions) and wait to tax perhaps $55,000 of value in the future. Talk about delayed gratification!

RMDs aren’t that relevant for many retirees because they’re already withdrawing more than the required minimum for living expenses. But a good many others don’t necessarily need the money to live on, or at least not right now, and get annoyed by feeling forced to withdraw money just to pay tax on it.

Let’s discuss some of the RMD particulars at a high level.

As I mentioned a moment ago, the starting age for RMDs is now 72. This means the account owner must take a distribution from their IRA (not a Roth IRA, just a “Traditional” or “Rollover IRA”) by the end of the calendar year in which they attain that age. Then the process is repeated each following year.

Fortunately, your brokerage firm calculates your RMD, so you don’t need to worry about the math. That said, the mechanics aren’t especially complicated. The value of your account at the end of the prior year is divided by a life expectancy factor found on a table published by the IRS. The result is your RMD for the current year.

The government doesn’t care if you take your RMD all at once, on the first or last day of the year, or once a week for that matter. All the tax folks care about is that you’ve at least withdrawn your RMD by December 31^st.

There’s a special pass for the first year’s distribution that allows you to take it by April 1^st of the year following, but then that year you’d need to take two, one for the prior year and one for the current and pay tax on both. You’d only want to do this if 1) you forgot during the calendar year and have to play catch up, or 2) you’re expecting lower taxable income during the year you turn 73. Otherwise, keep it simple and focus on year-end as your deadline.

And there’s no way to get out of paying tax on the distributions. That is unless you’re willing to give the money away. There’s a rule allowing folks who are at least 70.5 (that’s still at the prior age – don’t ask me why) to give their RMD, up to $100,000 per year, to charity. It can be one big gift that year or lots of little ones, the government doesn’t really care. What they focus on is that the money goes directly to charity. It can’t even get within a mile of your checking account.

There are some other things to remember, such as you can combine all of your IRAs and take the total RMD from just one account, but you can’t combine with your spouse. And the rules are a little different if your spouse is more than ten years younger. Also, your brokerage firm can withhold taxes from your RMD, but it’s not required. If you do withhold, which is probably the simplest thing to do, it could take the place of making estimated tax payments.

And you’ll want to make sure not to forget about taking your RMD. The penalty is 50% plus you’ll have to add the one you missed to the then current year’s RMD and pay tax on both in the same year.

Beyond that, we haven’t discussed IRAs that you might have inherited. Spouses get to treat IRAs they’ve inherited as their own, but others have a different set of rules to conform to. Oh, the never-ending joys of the tax code!

Have questions? Ask me. I can help.

Bonds have been going through a rough patch lately. No, they haven’t tanked in exciting fashion like stocks can do sometimes. They’ve just been boring and uninspiring. They’ve been like dead legs as you head out for a run on an otherwise beautiful day; an unworthy detractor. And they’ve underperformed.

This underperformance is heightened by how well the stock market has done since the pandemic lows in March 2020. Since then the major bond market indexes have gained about 8% while stocks, depending on the index, have doubled. And pre-pandemic, from early-March 2020, bonds have only returned shy of 3% to the stock market’s 50% or more, again depending on the index.

The following chart shows this clearly. Here we see four big ETFs that each track a separate market index. SPY tracks the S&P 500, the primary US stock index. IWM tracks the Russell 2000, the main index for small-cap stocks. VEA tracks the MSCI EAFE, an index of developed foreign markets including Europe. And BND, the orange line, is Vanguard’s Total Bond Market fund, a good proxy for bonds issued by the US government, government agencies, and high-quality corporations.

It’s apples and oranges, but extended underperformance like this coupled with low interest rates leads many to ask reasonable questions like: Why should I own bonds at all? Shouldn’t I sell them and buy stocks instead?

This is a tricky question, but the following chart of market activity during the last month provides a great example of why bonds are valuable to many investors. It’s all about downside protection.

Heading into this autumn, BND had been down about 2% year-to-date. Again, this stood in stark contrast to the stock market being up 20% or more during the same timeframe. And underperformance from bonds was dragging down moderate portfolios that might hold 30%, 40%, or even 50% in bonds. It’s hard to see one side of a portfolio performing so well while the other is acting like dead weight. So some head scratching was to be expected.

But of course that was when the stock market had been rising steadily. Add in the news of omicron causing overnight market anxiety, and bonds were suddenly showing investors what the asset class is best at: not being stocks.

What I mean is that when investors, individual and institutional alike, sell stocks they typically buy bonds, often short- or medium-term, to park money while waiting for the stock market to settle down. This raises bond prices during periods of stock market volatility and leads to the kind of behavior seen in the chart above. While this dynamic isn’t a guarantee day-to-day, and there can be periods when the relationship falls apart, it’s typical over time.

You own bonds in a moderate or conservative portfolio because the asset class smooths out stock market volatility and provides regular income. The give up is that bonds can’t rise as much as stocks overtime. So you have to choose how much protection you want versus how much volatility you’re willing to stomach in the name of growth potential. Part of the art and science of portfolio management is determining what proportions of stocks and bonds is ideal for the individual investor. There are rules of thumb, but no single right answer.

Do you have to own bonds? No. If you’re focused on growing your portfolio and see risk and volatility and your friends, you could maybe do with having less in bonds, or even cut them out entirely. And I’ve written before about how some investors could do other things to dampen their exposure to market volatility by enhancing their capacity to take risk. They could pay down debt instead of owning bonds. They could, under the right circumstances, buy a rental property for regular income instead of owning bonds. There are other options too.

But for most investors it’s just easier to buy high-quality bonds as part of a diversified portfolio. The right bonds in the right proportions will help reduce your portfolio’s reaction to stock market gyrations and will, ideally, keep you from doing anything rash when markets get crazy. Bonds do their job over time, just don’t expect them to be very exciting along the way.

Have questions? Ask me. I can help.

Inflation is on the minds of many this Thanksgiving week. We’re seeing higher prices on just about everything planned for the table, at the pump on the way to the store, and all points in between. There’s also the growing issue of shrinkflation, or having to pay the same price for less. This was happening pre-Covid, of course, but has only gotten worse since.

Unfortunately, nobody knows where prices go from here or when it will get better. As we’ve discussed previously, our chief inflation fighter, the Federal Reserve, expects that the recent spike in prices will be short-lived. It’s due to complex supply chain issues and unexpected pandemic-driven changes to consumer behavior (hoarding, shifting priorities, etc), even inflation expectations themselves, all forces that should ease during 2022. But other inflation drivers like rising wages amid labor shortages and the so-called Great Resignation, seem likely to linger. Only time will tell if the Fed is right.

That said, I don’t think inflation is of grave concern yet. The economy continues to grow and that’s expected to continue well into next year, perhaps beyond with all the stimulus money in the system and what’s yet to come. But it would be silly not to worry.

It’s also prudent to ask about the potential impact of not-so-transitory inflation on the stock market. We know that stocks are one of the best tools we have to fend off inflation from hurting our personal finances over the long-term, but they can be rocky when investors get nervous. Investors have so far only shown mild interest toward inflation, and sentiment can turn on a dime. So what does history tell us about how the market reacts to extended bouts of inflation?

Here’s some information on this subject from my research partners at Bespoke Investment Group…

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Before we begin this morning, I want to take a moment to congratulate my assistant, Brayden, who passed the CFP Board exam yesterday. We’ve been working together for over three years, and I’m proud of him for accomplishing this goal. Congratulations Brayden!

Today let’s look at maximizing retirement savings. Saving all you can toward retirement might sound like a no-brainer, but the mechanics can catch folks off guard. Next week we’ll discuss RMDs and gifting strategies.

Before we get to this week’s installment, here are some questions to ponder about your financial life so far in 2021. Any “yes” answers are topics to drill down on because there could be planning, investing, or tax issues to consider.

• Have you had any big income changes this year? Maybe you switched jobs, downshifted to part-time, or even retired? Have you started or closed a business?
• Any large expenses on the horizon?
• Have you sold investments or other assets for what you consider to be a large gain or loss?
• Have you inherited money or other assets?
• What’s your financial outlook for next year? Does it include any of the above?

Another question might be, “Have I saved all I can this year toward my retirement?” While trying to do so might seem obvious, actually getting it done can be challenging, and not just financially. The challenges are structural. 401(k) plans weren’t created to be what they are today. The new plan type was latched onto by large employers in the late-1970’s and 80’s who wanted to offload much of the risk associated with running a traditional pension plan. Or at least that’s my take on the history. 401(k) plans have evolved since to become the dominant retirement account type in the country, so we’ll focus on them in today’s post.

Government regulations try to set the stage for employee success by requiring a certain amount of transparency and plan quality, but the reality is far from ideal. The result is that employees have to shoulder much of the burden in terms of figuring out how much they can afford to contribute to the plan, how to invest the money once it’s there, how to manage the account over time, and myriad other rules and regs along the way. This is part of why there’s such a disparity between the long-term performance of more highly educated workers compared with their blue-collared brethren.

Okay, on that note, let’s look at a common structural issue for 401(k) savers – underfunding. I’ve found that it’s not often a lack of affordability at issue, it’s a lack of time. People are busy, they’re stressed, and it can be difficult to get into the nitty gritty of one’s 401(k) plan, especially if it’s one of the many subpar plans out there.

It’s pretty typical for workers to save all year only to find they hadn’t been contributing as much as they thought, or that they could have easily saved more. This is problematic for lots of reasons but approaching year-end the biggest issue is taxes.

As you’re aware, dollars saved into a 401(k) are considered pre-tax, so they come right off the top of an employee’s W-2 income and aren’t taxed by the Feds or the state. These savings won’t be taxed as they grow either and, if you play your cards right, won’t start being taxed until age 72 (or older – some proposals in D.C. would see the minimum age to start mandatory taxable distributions go to 75). These years, or even decades, of tax deferral are huge when it comes to accumulating money for retirement.

Some fuzzy math as I’m writing shows that if you maxed out your 401(k) contributions each year, the additional amount invested from tax deferral could add over $130,000 to your bottom line over 20 years! So, in a real sense, time lost from not maximizing this benefit is time and money you’ll never get back.

The government sets limits on how much you can save into your 401(k) each year. This cap gets adjusted for inflation and is currently $19,500 while those 50 and older can save $26,000 through Dec 31^st. Or you might be part of a SIMPLE 401(k), a less common type, with maximums of $13,500 and $16,500, respectively. Again, this is a cap on what the individual employee can save each year. It doesn’t count money the employer adds as matching contributions. This is also true if you’re self-employed except that you function as the employee and employer, matching your own contributions. I can’t tell you how many people misunderstand this employee/employer dynamic and save less because they were worried about overfunding. Most plans have a mechanism to ensure you don’t overfund your account anyway, so that’s less of a concern. Don’t overthink it, it’s hard enough already!

So, as we get closer to year-end, have you saved all you can into your 401(k)? Maybe you’re trying to hit the annual maximum and are coming up short, even with remaining pay periods. Or you realize you’re sitting on extra cash in your bank account and can afford to contribute more for the rest of the year. A lot of people contribute only a few percent of their pay while they save cash at the bank. Emergency funds are great, but don’t let inertia keep you from retiring better.

I suggest logging into your plan to confirm what you’ve saved so far this year and then try to fill in any gaps.

Good quality plans might only take a pay period to make these changes, so it’s possible to still get several paychecks into your plan if you’re coming up short. Usually you can do this sort of thing yourself. But if your plan is one of the many with a horrible website, you may need to pick up the phone. Something good to remember is that most plans allow you to contribute up to 50% or even 100% of your paycheck to your 401(k). That’s often the only way to get extra money into your plan at year-end since unfortunately they won’t let you simply mail in a check.

However you do it, try to fill up your 401(k) as much as possible this year. It will save on you taxes, add money to your bottom line over time, and get you one (or many) steps closer to being ready for retirement.

Have questions? Ask me. I can help.