Change is all around us and has certainly been kicked into overdrive during the past year or so. There’s so much to stay on top of and in my industry, conferences have been an excellent place to take it all in. The conferences are virtual, of course, but are still a great way to hear from a variety of experts all in one place (so to speak) about the economy, the markets, taxes, and various other topics related to financial planning.

I spent the better part of last week at one of these virtual conferences. There was a lot of investment-related stuff that I won’t bore you with, but I will share other information with you today about expected changes to tax policy.

Late last month the Biden administration proposed the American Families Plan, a major tax overhaul reversing much of the last major overhaul from just a few years ago. There’s sort of a washing machine feeling that comes with these lurches in tax policy but deal with it we must.

I’m going to present this information in bullet format to try and replicate my notes from a couple of the sessions last week. There’s a lot to the tax plan and much is subject to change as it works through Congress. (That old saying, “the President proposes, Congress disposes” comes to mind.) Still, the thrust of the plan is what’s important and, with Democrats in control of the government, most of these proposals will likely be implemented even if the numbers end up a little different.

• It’s assumed that the new tax laws will take affect in 2022 and won’t be retroactive for this year. Hopefully Congress doesn’t wait until late in the year as they did with the Tax Cuts and Jobs Act, and the SECURE Act (both passed in late December 2017 and 2019, respectively). Doing so makes planning difficult.
• There’s a line being drawn in the sand at $400,000 of annual income. Those above are likely to pay substantially higher tax rates than those below. If you know, or at least expect, to be around that income number you should pay close attention to the news around these proposals. You may end up trying to pull income forward into this year and delaying expenses into next, if possible.
• Again, those well below this supposed threshold shouldn’t see their taxes go up. The opposite should be the case, at least on average.
• Higher earners could see a host of other changes, including itemized deductions getting capped at 28% and losing the Qualified Business Interest deduction for those with small businesses.
• Retirement account savings methodology could be flipped on it’s head. We could see deductibility capped on contributions to IRAs and 401k plans for higher earners while lower earners could receive a refundable credit. Essentially, this would take deductibility from higher earners and give it to lower earners to allow them to save more toward retirement (a so-called Robinhood provision. The man in tights, not the brokerage firm). This could make Roth IRAs and Roth 401k plans more appealing to higher earners and traditional IRAs more attractive to lower earners – a reversal of current thinking.
• The so-called SALT provision that caps deductibility of state and local taxes could go away. This isn’t in the Biden plan but is thought to have to be included to get support from coastal democrats.
• Capital gains, real estate exchanges, and the so-called step-up in basis could have a $1 million income threshold. Those with income (which includes the value of asset sales) over the threshold would pay higher rates, be unable to do exchanges, and even lose their basis step-up. All of this would lead to more capital gains taxes being paid by higher earners.
• As a reminder, your tax status is generally looked at one year at a time. You could have a more “normal” income situation followed by a surge of income from a business sale or maybe a taxable inheritance. This could bump you up beyond these thresholds for one year and you get hammered by taxes, only to go back to normal the next year.
• The ramifications of this last bullet are interesting in states like CA where folks often have a lot of home equity. Under the proposed plan it’s possible that death triggers a “sale” for tax purposes above this $1mil income threshold. The step-up in basis would go away and the larger gain becomes taxable for higher earners who inherit family property, for example.
• Also along these lines, the so-called death tax limit could be reduced to $3.5 million but could be as high as $6.5 million. Nobody I heard from thought it would be anywhere close to the current $11+ million level.

These and other proposals are now subject to the vagaries of our duly elected officials in D.C. The main point of this post is that, even with everything else going on in the world right now, major tax changes are being planned yet again. If you’re anywhere near the thresholds currently being talking about, you should pay close attention to how this plays out.

Also, I think this should be obvious, but I’ll say it anyway: none of the above should be taken as specific tax advice. I’m not a CPA and don’t even play one on TV. I am enhancing my services in the tax planning area, however, in part because of this latest round of proposed tax changes. More on that in the coming weeks.

Here are two links to read more about the proposals.

https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/

https://www.wsj.com/articles/whats-in-bidens-american-families-plan-proposal-11619621174

Have questions? Ask me. I can help.

Renowned economist Paul Samuelson once quipped that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” This has stuck with me since hearing it years ago as one of the things that makes investing so darn hard for the masses but so profitable for brokerage firms.

We’re wired to want to feel good about what we’re doing, to feel validated in our decisions, and to get that sense of instant gratification. We invest a dollar, pull the lever, and want the noise and blinking lights to tell us we did the right thing. Casinos know this, of course, and that’s why they’re so profitable. They know how to push our buttons to keep us coming back for more.

Like any game, playing is harmless when the stakes are low and the rules clear. But start adding zeroes and complexity, and the situation quickly gets serious and shouldn’t be treated as a game. Or at least understand it’s a different type of game and play it the right way.

Different industries engage in so-called gamification and brokerage firms have built entire business models around it. Robinhood is the clearest example of this. The firm developed a phone app that gave its customers all the flashing lights and other forms of validation they require, even raining digital confetti at certain milestones. (The firm recently stopped the confetti thing since it was getting them into hotter water with regulators.) But one of many problems with this is that Robinhood customers aren’t playing slots while enjoying free drinks, they’re investing in complicated markets and in complicated ways, including being incentivized to buy more stock with borrowed money without fully understanding how it works.

Using borrowed money to buy assets is something we do all the time. Think of the mortgage on your home. You put down maybe 20% and borrow the rest to purchase a relatively stable asset. You usually get clear terms, like a fixed payment for 30 years and have disclosure documents that show how much interest you’ll pay over the life of the loan. If the value of your home drops, just keep making your mortgage payments and nobody will kick you out, and so forth. That’s a good use of leverage and the mechanics are easily understood.

But then we get to a form of leverage available in brokerage accounts referred to as “buying on margin”. Using margin magnifies gains when times are good but can also lead to catastrophic losses when markets turn. This can be sort of like the initial excitement of pouring gasoline on a campfire that then spreads to melt your tent. Margin gets incredibly complicated and should only be for seasoned investors who know (or at least think they know) what they’re getting into and can afford the risk.

The reason is that margin, at its simplest, is a loan with terms meant for short-term trading, not long-term holding as with your mortgage. This can come back to bite investors when stock prices are volatile. The stocks in your portfolio act as collateral for the loan and can only fall by a certain amount (which is set by government regulators) before you’re “called” and must deposit cash to make up for the decline. If you can’t afford that you’re forced to sell stock, something that usually catches investors unawares. That old saying of “when it rains it pours” is never more apt then when investors are forced to sell stock in a down market to meet their margin requirements. This can leave the uninformed and unprepared in a state of utter bewilderment, wondering where all the money just went.

This has been the unfortunate reality for many Robinhood customers in recent months. The firm made it far too easy to buy stock on margin. Just a few clicks and that was it. Yes, they provided disclosures, but I seriously doubt most customers read them. And why should they have? Investors were receiving lots of validation from Robinhood and social media, and stock prices were mostly going up. In short, it felt great for a while until it didn’t. I repeat this all the time, but it’s just like an adult version of musical chairs. The music stops suddenly and only then do you truly realize the risk you were taking. Maybe investors should be required to play the game before being given access to margin; sort of like having teens wear those goggles that simulate drunk driving. It might be instructive.

I’m attaching a link to an article from The Wall Street Journal that ties all this together. It’s a sad commentary on how far things have gotten with gamifying the investing process. I suggest you send it to anyone in your life who might be getting into day-trading or using margin. If nothing else, perhaps it will jar them into getting better educated on how to play the game the right way.

The Journal has a soft paywall so let me know if you can’t access the story and I’ll email it to you through my subscription.

https://www.wsj.com/articles/robinhood-three-friends-and-the-fortune-that-got-away-11619099755?mod=hp_lead_pos5

Have questions? Ask me. I can help.

Deciding to retire is a big deal. That’s probably obvious but people don’t always fully appreciate just how hard and complicated a decision it can be. Folks often plan on it for years, getting more excited as the “right time” gets closer only to find they can’t take the leap when they get there. There can be fear of loneliness and boredom, worry about relationships, or even fear of missing out on the goings-on at the office. Or simply a fear of the unknown. There are lots of reasons for retirement anxiety and they are not always financial.

Maybe it was easier when you worked for a company long enough to hit mandatory retirement. There wasn’t much personal choice involved. You attained the age and that was that. This kind of retirement is rare these days, so people usually have to make the decision themselves. And with most retirees not having a pension to draw from and with Social Security being relatively small, they have to rely on themselves too. That’s a burden but also an opportunity.

But how do you know you’re ready? Maybe your humble financial planner says you can afford to retire, but is it a good personal choice? Why do you want to back away from work? Are you somehow giving up by retiring? Will it be forever, or do you just need a nice long break? What do you plan to do? There are so many questions and we, as a culture, seem to lack a clear framework for addressing them.

Along these lines, here are portions of a recent article from a psychologist writing for The Wall Street Journal. She lays out eight questions to ask yourself if you’re thinking of retiring. Question #2 is firmly in my wheelhouse, but #8, regarding travel and where to live is something I’ll delve into in a future post.

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I can’t believe it’s already May. This year has been zipping right along and, as some of the pandemic concerns appear to be waning, people are starting to get optimistic about the rest of 2021. Let’s hope that lasts!

With the past year or so being tough in many ways this recent surge of optimism is leading some to take the leap and retire early. Life is waiting out there, they think, and restarting after a year-plus of living on hold may be the perfect catalyst for major change. For these folks, going back to the same old grind just doesn’t seem that appealing.

Retiring early is complicated from a financial planning perspective, but it can be possible with some creativity. Or maybe creativity mixed with a sense of adventure. The definition of retirement is changing. In short, you can define it however you want. Is now the right time for you? Of course I can help with the financial part of that, but the bigger “What does retirement mean to me?” question is something only you can answer.

This week I wanted to share a couple different stories centering on this theme of bucking convention and retiring early. What’s interesting is the age spectrum being reported on lately. The first story covers who you’d think of as more typical early retirees while the second, perhaps surprisingly, looks at much younger folks who are planning to “retire”.

Here are big portions of each article and I’m including links if you’d like to read each in full.

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We’re all aware how strong the Sonoma County housing market is right now. This is happening nationally as well and for a variety of reasons, but the dollar amounts are larger in our area. Zillow lists the typical single family home price at just over $800,000, up about 10% from last year. This is way higher than the national average of about $272,000 and higher (although to a lesser extent) than most popular retirement destinations. This begs a simple question: should you capitalize on home equity and retire in your dream location?

How crazy would you be to consider such a thing? After all, maybe you’re sitting in your dream location right now. Poking around online I found that roughly half of retirees don’t move. They stay in the same home they lived in during their 50’s. Others move later in life for medical reasons, and some are forced to move due to finances. Of the rest, many move somewhere else by choice. Let’s call it one out of every five moving for obvious reasons: lower housing prices and cost of living, maybe a better climate, perhaps to be closer to kids and grandkids. But that was before the pandemic hit. Numerous anecdotes and a variety of surveys from moving-related firms like U-Haul, Hire-A-Helper, and Zillow report a surge in retirees looking to relocate. Considering a move under the current circumstances isn’t crazy at all. In fact, you’re likely in good company.

But where can you move to? What are some options? You may already have locations in mind or maybe you’re looking for a change and don’t know where to begin.

Last week I wrote about questions to ask yourself to see if you’re emotionally ready to retire. One of those questions dealt with where to live. Obviously, it’s a huge and deeply personal question. There are tons of online tools available and lists of best places. These are helpful but with so many it can be tough figuring out where to start. Here are some notes and links from what I found when picking through a few this week.

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Market performance during the first quarter (Q1) of 2021 is probably best summed up as a transitional phase. We began anew after what was, on balance, a horrendous year for public health and much of our economy. Then increased vaccinations, more relief from Congress, and further reopening across the country helped signal a shift toward a more positive future. Stock investors reacted favorably to this while bond investors were cautious.

The stock market remained solid throughout the quarter as it threw aside performance trends from last year. Small company stocks and various market sectors had underperformed for much of 2020 but a rotation between them, which began late last year, continued into Q1. The result was that small company stocks enjoyed a big runup through about mid-March and handily outperformed their large-cap brethren. Not all returns were positive, however. The bond market struggled as investors digested a seeming disconnect between sanguine inflation guidance from the Federal Reserve and the massive amounts of relief and stimulus money coming from Congress.

Here’s a roundup of how major markets performed during the first quarter:

• US Large Cap Stocks: up 6.4%
• US Small Cap Stocks: up 12.9%
• US Core Bonds: down 2.7%
• Developed Foreign Markets: up 3.9%
• Emerging Markets: up 2.4%

Style (e.g. small vs large company) and sector (e.g. energy vs technology) rotation was a main theme during Q1. Some analysts suggested the rotation may have been due to large scale portfolio rebalancing after such a lopsided year as 2020. Whatever the reason, and there were probably many, the performance difference during Q1 was stark when compared to last year. The smallest company stocks that had seen a horrible 2020 were up almost 24% and the largest that had performed so well last year were up a relatively small 6%. Within the various sectors, Energy was the clear outperformer during Q1, up 31%, while Technology, a market darling in 2020, was up only 2%. All told, the S&P 500, the typical measure of the US stock market, closed at an all-time high of 4,000 as the quarter ended.

The transition from a market focused on stay-at-home orders to a more optimistic reopening trend was clear throughout the quarter. This had a negative effect on the bond market, however. Bond investors saw one of their worst quarters since the Global Financial Crisis. The yield on the benchmark 10yr Treasury ended the quarter at about 1.7%, up from early-pandemic lows of half a percent and .9% as 2020 ended. Since bond prices move in the opposite direction of yields, this steep increase in yield led to steep price declines. And the longer the term, the worse the performance. 20+ year Treasuries were down 13%. Intermediate-term Treasurys, the kind more typical to investor portfolios, were down 3-4%.

This transition phase for bonds seemed almost entirely due to the inflation fears of investors here and abroad in countries like Japan. However, those controlling interest rate policy and government spending weren’t (and still aren’t) nearly as concerned. Even though the government seems poised to inject trillions into the economy from the start of the pandemic and over the next several years, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen don’t expect inflation to be a problem. Both speak of the pandemic creating a huge economic hole that we’re still digging our way out of and how stimulus from Congress and work by the Fed are providing backfill. Some excess inflation will even be welcomed, they suggest, as the recovery is allowed time to reach more Americans.

We learned at the end of Q1 that our unemployment rate dropped to 6%, down from almost 15% a year ago. While this should be celebrated, there are still roughly 4 million more unemployed Americans than before Covid. And millions more are either working part-time because their hours have been cut and others are simply detached from the workforce. Additionally, the number of so-called long-term unemployed is stuck at over 4 million people, up substantially from before the pandemic. Powell and Yellen have said they won’t be concerned about inflation until most of these people are back to work. This is expected to take at least a couple years, so money should be cheap and plentiful until then.

Even with all the current challenges and those yet to come, the outlook is brightening (we’ll put our hopeful hats on for a moment). Consumer confidence is higher, housing prices are soaring, the vaccine rollout is moving forward, people seem ready to travel again, and the recently passed $2 trillion American Rescue Plan may be followed by a $2+ trillion infrastructure plan. All this spending will boost the economy for most Americans and should help keep the stock market elevated for a while.

Obviously, there’s lots of risk to this outlook. Nothing is free and no government can spend aggressively for long without creating imbalances (aka bubbles), having to raise taxes, fight inflation, or all three. The stock market will eventually correct because of this and who knows what else, and bond prices will remain in flux as investors sort all this out. But again, the overall situation is showing signs of meaningful improvement. Accordingly, we’ll want to remain focused on fundamentals like diversification and rebalancing as inevitable shifts occur within our portfolios.

Have questions? Ask me. I can help.