Shortlink

How Inflation Risk Can Affect You

Inflation is a steady rise in the price of goods and services over time and actually signals both good and bad economic conditions. On one hand, as prices rise, someone living on a fixed income cannot purchase the same amount of goods, so they tend to reduce spending or buy cheaper alternatives. On the other hand, when inflation rises, the Federal Reserve tends to reduce interest rates, making it cheaper to borrow money — so spending picks up.1

This cycle of inflation tends to go round and round. Many factors can cause inflation — including a growing economy — but there are monetary policies that help drop the inflation rate in time. Likewise, each of us needs to be able to manage how inflation affects our household finances throughout these cycles, and those management strategies differ based on your situation.

For example, someone working full time may be able to adjust spending based on fluctuating prices. However, many retirees live on a fixed income and have fixed expenses, so when prices increase that can squeeze the household budget. If you’d like to learn about ways to position assets so that you can increase income when needed without threatening your financial security, please give us a call.

Inflation can actually be positive for stock investments, as a company’s revenues and earnings tend to move in tandem with higher prices. Interestingly, the stock market has held remarkably well even in the low inflationary environment the U.S. has experienced throughout the past two decades. The fact that inflation is rising now isn’t necessarily a negative for investors; the traditional theory is that stock prices should increase alongside prices of consumer goods.2

At present, the Fed expects the economy to continue growing despite the ongoing coronavirus. In fact, the agency projects inflation-adjusted GDP growth of 7% for this year and 3.3% in 2022. If this projection holds, interest rates are likely to stay in their current low range until at least 2023.3

Investors worried about rising prices impacting their portfolio may want to consider one or more inflation-mitigation strategies. For example, allocate more assets to sectors that tend to increase along with inflation, such as the energy, materials, technology and financial sectors.4 Other asset classes that tend to move with accelerating inflation include commodities, real estate, and industrial and precious metals.5 Fixed income investors may want to take a look at Treasury Inflation-Protected Securities (TIPS), a type of U.S. Treasury security whose principal amount is adjusted to reflect the inflation rate.6

Content prepared by Kara Stefan Communications.

1 David Floyd. Investopedia. May 17, 2021. “9 Common Effects of Inflation.” https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp. Accessed Aug. 26, 2021.

2 US Bank. Aug. 6, 2021. “Effects of inflation on investments.” https://www.usbank.com/financialiq/invest-your-money/investment-strategies/effects-of-inflation-on-investments.html. Accessed Aug. 26, 2021.

3 Taylor Tepper. Forbes. Aug. 25, 2021. “Who Should Worry About Inflation—And Who Shouldn’t.” https://www.forbes.com/advisor/investing/inflation-worries-2021/. Accessed Aug. 26, 2021.

4 Scot Landborg. Kiplinger. Aug. 20, 2021. “8 Ways to Insulate Yourself from Inflation.” https://www.kiplinger.com/personal-finance/603306/8-ways-to-insulate-yourself-from-inflation. Accessed Aug. 26, 2021.

5 US Bank. Aug. 6, 2021. “Effects of inflation on investments.” https://www.usbank.com/financialiq/invest-your-money/investment-strategies/effects-of-inflation-on-investments.html. Accessed Aug. 26, 2021.

6 Collin Martin. Charles Schwab. June 24, 2021. “Treasury Inflation-Protected Securities: FAQs about TIPS.” https://www.schwab.com/resource-center/insights/content/treasury-inflation-protected-securities-faqs-about-tips. Accessed Aug. 26, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

9/21 – 1822957C

Shortlink

Sustainably Investing in Our Future

While extreme weather events typically affect only certain parts of the country, there is increasing concern that climate change will affect the overall economy – including our investment portfolios.

For this reason, the federal government is making composition changes to the Thrift Savings Plan (TSP), the retirement plan for federal employees. The TSP currently holds more than $762 billion in assets, making it the world’s largest defined contribution plan. Starting in 2022, the plan will offer participants the opportunity to customize their individual portfolios by choosing from more than 5,000 funds, which may include environmental, social, and corporate governance (ESG) options.1

Other developed countries are ahead of the U.S. when it comes to promoting ESG options among federal pension funds. A recent report from Europe found that participants who invest their federal pension money in environmentally conscious companies are at least 20 times more effective at removing carbon compounds from the environment than those who take other actions, such as reducing their airline flights and using alternative energy. In the past, the choice to invest in green companies generally meant a trade-off for lower returns. Now, repositioning assets to support ESG companies is taking precedence to greatly reduce the world’s carbon footprint at a faster pace.

In the U.S., some economists believe that the combination of long unsolved problems — such as the pending insolvency of Social Security — coupled with climate change and the recent economic damage created by the pandemic, is going to generate long-term income issues for retirees.

Olivia Mitchell, a Wharton School professor who specializes in retirement income research, had this advice for retirees. “People are just going to have to work longer if they possibly can. And if they can’t, they’d better start looking to move where they’re not subject to drought, fires, floods, hurricanes and all the other things that climate change brings with it,” Mitchell said. She also emphasized that those nearing retirement age should consider downsizing their homes, buying an electric car or growing a vegetable garden “because we’re going to need to be more self-reliant in this new world.”2

When it comes to retirement planning, self-reliance may not always be your best option. That’s our business, so please contact us to help you devise a multi-faceted income plan for the future.

Farmers also are looking for ways to create more sustainable crop generation for the future. The traditional blueprint is to clear trees for vast spaces of land to raise livestock and plant rows of single crops, which are called monocultures. At present, about half of all habitable land is used for growing food, and the globe is running out of room to meet this demand. A new trend in farming is called agroforestry, which is the blending of trees, crops and livestock to create more sustainable yields. In fact, certain trees feed nitrogen into the soil, which eliminates the need for excessive fertilization. In some areas, the mix has produced up to 40% more than same-crop monocultures. Today, less than 2% of U.S. farmers practice agroforestry. There is enormous potential to deploy this farming technique to better protect farmland from the ravages of climate change while at the same time generating higher crop yields.3

According to Morgan Stanley, one overlooked investment sector is the electrical industry. It has recently been overshadowed by high-profile investment themes such as electric vehicles, grid modernization and distributed power. However, these innovations are all electrical equipment, a long-standing, lower-risk investment sector with explosive growth potential for the future industrial economy. Market analysts at Morgan Stanley project that the “electrification” theme could produce 6% compound annual growth throughout the next two decades.4

These investment opportunities are key to boosting both the future of the United States and our individual financial viability. Fortunately, the largely bipartisan infrastructure bill currently under consideration in Congress can further support these goals. As the largest federal allocation to infrastructure projects since the Great Recession, the investment gives a nod to the saying “you have to spend money to make money.” While it is expected to contribute to growing government debt, analysis by the Penn Wharton Budget Model refers to the investment as “productive assets” that will not only produce jobs and yield a higher income tax base but also generate improved transportation to help private firms get goods to market at a lower cost.5

Content prepared by Kara Stefan Communications.

1 Knowledge@Wharton. August 16, 2021. “Should the Federal Government ‘Green’ Its Pension Plan?” http://www3.weforum.org/docs/WEF_Davos_Lab_Youth_Recovery_Plan_2021.pdf. Accessed Aug. 20, 2021.

2 Ibid.

3 Johnathan Lambert. Science News. July 14, 2021. “Mixing trees and crops can help both farmers and the climate.” https://www.sciencenews.org/article/trees-crops-agroforestry-climate-biodiversity. Accessed Aug. 20, 2021.

4 Morgan Stanley. July 29, 2021. “Plugging into the Electrification Supercycle.” https://www.morganstanley.com/ideas/electrification-grid-energy-transition-opportunities. Accessed Aug. 20, 2021.

5 Knowledge@Wharton. August 16, 2021. “How the $1 Trillion Infrastructure Bill Would Impact the Economy.” https://knowledge.wharton.upenn.edu/article/how-will-the-1-trillion-infrastructure-bill-impact-the-economy/. Accessed Aug. 20, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

9/21 – 1822273C

Shortlink

Status Update: Young Adults in America

Over the past 20 years, America’s young adults have experienced significant unemployment, massive student debt, extreme weather events, a global pandemic, a contentious political environment and dramatic socio-economic turmoil. Not that these things didn’t happen in previous generations, but today’s young adult is far more involved and aware due to the 24-hour news cycle and their constant companion — the smartphone.

Even with the advantages of today’s technology, there is a sense that the issues facing subsequent generations tend to be getting worse. It is no longer a given that children will be better off in income, education and opportunities than their parents.1

If you feel your financial portfolio would benefit from a review to help make meaningful contributions to your children’s lives or better position your legacy, please give us a call.

If there is a silver lining to the COVID-19 crisis, it’s that the country must address significant structural changes to improve the lives of all Americans in every facet of the country. Regardless of where we stand on the political spectrum, issues like extreme weather, our ability to respond to pandemic-level health crises, our education system, infrastructure in rural and metropolitan areas, and responsibly harnessing technology and energy to sustain our way of living affects us all. We are all stakeholders and drivers in creating a strong society for the future.

Ultimately, our young people are best positioned to lead the transformation into a stronger America. But let’s consider for a moment some of the challenges they will face as adults.

Longer Life Expectancy

One thing hasn’t changed — each new generation is expected to live longer than the last. The current data suggests that half of the children born in the United States in the year 2000 could live to be 105 years old. On the surface, living longer may sound like a positive, but bear in mind that living longer doesn’t necessarily mean enjoying health or independence in old age. Research shows that people who live longer and have a fulfilling retirement tend to have strong personal relationships and social support systems, eat a healthy diet, maintain better physical health, and remain intellectually active.2 In other words, it’s not just about better, life-prolonging drugs.

Working From Home

Moving forward, the reality is that more generations will be working from home. However, if you think back to some of the apartments you may have had in your early adult years, that might not be much of a perk, especially if you have to share an apartment with roommates also working from home. One challenge that remains to be seen is how workers will be compensated for setting up their own home office. After all, if the work-from-home (WFH) staffing model reduces overhead expenses, surely employers will provide a stipend for home office expenses — ranging from computers and office furniture to broadband and utility bills. Or will they?

Who Pays for College?

Now that college has become so expensive, some young adults are opting not to go. This could lead to a less qualified workforce and a smaller talent pool. In response to the recent labor shortage, some companies are offering to pay for college. Target, Walmart, Chipotle and Starbucks have all introduced programs to help employees pay for college.3

Expensive Lifestyle

One of the perks of today’s generation of young adults is that many were raised under some pretty affluent circumstances. Baby Boomers broke ground in a lot of areas, from women breaking the glass ceiling to improving higher education rates to massive participation in a growing investment market. Unfortunately, lifestyles have become so upscale that it may now be too expensive to have it all. The average middle-class family can’t afford for both spouses not to work, and some young couples are even opting not to have children at all. Between 1950 and 2021, the birth rate in the U.S. declined by 50%. And while 38.3% of women had completed four years of college or more by 2020 (up from 5.2% in 1950), much of the hesitance in starting a family remains financial. Today, economists estimate that it costs an average of almost $250,000 to raise a child to the age of 18.4

Meanwhile, declining fertility rates threaten a “demographic cliff” for the future economy. Legislators and the education industry may have to contend with a lower tax base, school closings and declining college enrollment.5

Content prepared by Kara Stefan Communications.

1 Klaus Schwab. World Economic Forum. August 2021. “Davos Lab: Youth Recovery Plan.” http://www3.weforum.org/docs/WEF_Davos_Lab_Youth_Recovery_Plan_2021.pdf. Accessed Aug. 15, 2021.

2 Sofiat Akinola. World Economic Forum. Aug. 12, 2021. “Here’s what young people think is key to a long and fulfilled life.” https://www.weforum.org/agenda/2021/08/heres-what-young-people-think-is-key-to-a-long-and-fulfilled-life/. Accessed Aug. 15, 2021.

3 Melissa Repko. CNBC. Aug. 5, 2021. “Target to pay 100% of college tuition and textbooks in bid to attract workers.” https://www.cnbc.com/2021/08/04/target-rolls-out-debt-free-college-degrees-to-woo-retail-workers.html. Accessed Aug. 15, 2021.

4 Ann M. Oberhauser. World Economic Forum. July 9, 20201. “Women in the U.S. are having fewer babies. What’s driving this trend?” https://www.weforum.org/agenda/2021/07/declining-fertility-rates-research/. Accessed Aug. 15, 2021.

5 Ibid.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

9/21 – 1822262

Shortlink

Market Thoughts: Looking Ahead and Abroad

The mid-year U.S. economic recovery numbers look strong. On Wall Street, analysts predict that our economy will expand by trillions of dollars and create 2 million good-paying jobs throughout the next 10 years. However, despite nearly 1 million jobs reported in July alone, the White House cautioned that the resurgence in COVID-19 cases among unvaccinated Americans could set us up for an economic relapse in the remainder of the year.1

While the U.S. lags in vaccination numbers, other countries are starting to pick up the pace. This could mean that our foreign competitors excel for the rest of the year while the U.S. plateaus. Overall, experts say the world economy is nearly restored to its pre-pandemic size, showing remarkable resistance in the wake of the first global pandemic in memory. Unfortunately, the International Monetary Fund (IMF) reports that the recovery is lopsided due to the rate of vaccinations. At the end of July, 40% of the population in advanced economies had been fully vaccinated whereas only 11% of emerging market (EM) economies could say the same.2

We can view this lopsided recovery in two ways. One is to be cautiously optimistic and invest in well-established performing securities that have weathered difficult events in the past. The other is to look at weak areas of the market as investment opportunities. When you believe a company, industry, or geographic region is well-poised to eventually recover, buying shares now at a bargain price could prove rewarding for those with a long-term outlook. However, your investment style is as unique as your financial circumstances, so it’s best to consult with an investment advisor to help you determine appropriate strategies for your situation. Contact us for advice today.

The market analysts at T. Rowe Price appear bullish on China, which currently has more than 5,200 public companies listed on the country’s exchanges — more than in the U.S. Despite the economic fallout from the pandemic, nearly 900 Chinese companies launched initial public offerings (IPOs) between the end of 2018 and June of this year.3

According to Merrill Lynch, consumer spending in developing countries will be a tremendous market influence once we’re on the other side of this pandemic. The United Nations reports that the developing world now constitutes about 41% of global personal consumption expenditures. This is the reason the wealth manager believes growth investors should allocate some portion of assets to EM equities.4

The United Kingdom had to initiate multiple lockdown restrictions starting last spring but was able to reopen its economy by the end of July thanks to higher vaccination rates. And yet, as of early August, there were six countries in the European Union that had actually exceeded the U.K.’s vaccinated population levels: Malta, Belgium, Spain, Portugal, Denmark, and Ireland. In recent months, the vaccine rate in France nearly doubled after their president imposed rules that banned citizens without proof of vaccination or a negative test from visiting restaurants, movie theaters, museums or travel on long-distance train routes. Denmark, Italy, Greece, and Germany have all adopted similar penalty-based vaccination plans.5

Interestingly, the U.S. has now entered an economic phase for which consumers are likely to be the greatest influence on our growth prospects in the near term. That’s a rather unique phenomenon — and an opportunity to yield control over our own destiny.

Content prepared by Kara Stefan Communications.

1 Christina Wilkie. CNBC. Aug. 6, 2021. “Biden skips victory lap after strong July jobs report warns of economic peril from rising Covid cases.” https://www.cnbc.com/2021/08/06/biden-warns-of-economic-peril-from-covid-despite-july-job-gains.html. Accessed Aug. 6, 2021.

2 Tom Fairless, Stella Yifan Xie and Aaisha Dadi Patel. The Wall Street Journal. July 30, 2021. “World Economy Caps Extraordinary Return From Covid-19 Collapse.” https://www.wsj.com/articles/world-economy-caps-extraordinary-return-from-covid-19-collapse-11627643509. Accessed Aug. 6, 2021.

3 T. Rowe Price. June 2021. “Positioning for a New Economic Landscape.” https://www.troweprice.com/content/dam/iinvestor/resources/insights/pdfs/positioning-for-new-economic-landscape.pdf. Accessed Aug. 6, 2021.

4 Merrill Lynch. July 2021. “Whispering Winds.” https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Viewpoint_July_2021_Merrill.pdf. Accessed Aug. 6, 2021.

5 Jon Henley. The Guardian. Aug. 6, 2021. “Six EU states overtake UK Covid vaccination rates as Britain’s rollout slows.” https://www.theguardian.com/world/2021/aug/06/six-eu-states-overtake-uk-covid-vaccination-britain-rollout-slows. Accessed Aug. 6, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions

8/21 – #1771282C

Shortlink

RMDs in 2021

Last year, the Setting Every Community Up for Security Enhancement (SECURE) Act increased the age for required minimum distributions (RMDs) from 70½ to 72. The purpose of

RMDs is to spread out the tax burden associated with the years of tax-deferred earnings investors accrued in qualified retirement plans.1

If you expect RMDs to be an unnecessary burden income during retirement, you might consider paying the taxes while you’re still earning income to reduce those taxes in retirement (particularly if you expect your tax rate to be higher in retirement). Another option is to convert some of your traditional IRA assets to a Roth IRA, which isn’t subject to RMDs when withdrawn in retirement (as long you’ve held the account for at least five years).2

If you do end up having to pay taxes on RMD income that you don’t immediately need in retirement, you may consider reinvesting those assets in a taxable account, naming your beneficiaries as heirs. Or, you can gift up to $100,000 a year to a qualified charity. Since qualified charitable distributions (QCDs) generally are not subject to ordinary federal income taxes, you can make charitable contributions without increasing your taxable income.3

RMD rules are complex and vary based on your birth date, the type of plan involved, and changing rules based on legislation. Additionally, it’s important to develop a distribution plan that coincides with your timeline for drawing from all of your retirement income sources, including pensions and Social Security. Please feel free to contact us to help develop your income distribution plan based on your personal circumstances. The earlier you do this the better — preferably several years before your planned retirement date.

RMDs generally apply to:4

  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contribution plans

However, note that the date you must start taking RMDs differs by plan. According to the IRS, if you were born after June 30, 1949, the start date for IRAs (including SEPs and SIMPLE IRAs) is April 1 of the year following the calendar year in which you reach age 70½. For 401(k), profit-sharing, 403(b) or other defined contribution plan, the start date is April 1 following the calendar year in which you turn age 72 (age 70½ if born before July 1, 1949) or retire (if your plan allows this).5

The CH

CH

SECURE Act generated an interesting quirk for RMDs in 2021 — no one actually has to start taking RMDs for the first time this year. Note that the SECURE Act increased the age for the first RMD from 70½ to 72 for IRA owners who reached age 70½ after 2019. In practice, the required beginning date, or RBD, for this demographic is April 1 of the year following the year they turn 72. However, an IRA owner who obtained age 70½ in 2020 could delay RMDs until age 72, so the earliest RBD would be April 1, 2022. Folks who had reached 70½ before 2020 would have already been taking RMDs, so it’s technically impossible for anyone to have a required beginning date in 2021.6

RMDs for inherited IRAs work a bit differently now. A non-spouse beneficiary who inherits an IRA from someone who passed away in 2020 or later is not required to make annual RMDs but must withdraw the entire account balance within 10 years. Spousal beneficiaries and certain eligible non-spouse beneficiaries may be permitted to take RMDs throughout their life expectancy.7

Finally, be aware that new life expectancy calculations will be published in 2022. They are expected to include a larger life expectancy factor per age, which will produce lower RMD amounts.8

Content prepared by Kara Stefan Communications.

1 Vanguard. Feb. 21, 2021. “RMDs are back for 2021: What you need to know.” https://investornews.vanguard/rmds-are-back-for-2021-what-you-need-to-know/. Accessed July 30, 2021.

2 Ibid.

3 Ibid.

4 IRS. May 3, 2021. “Retirement Topics — Required Minimum Distributions.” https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds. Accessed July 30, 2021.

5 Ibid.

6 Ed Slott. Investment News. March 16, 2021. “Quirks in required minimum distributions this year.” https://www.investmentnews.com/quirks-in-required-minimum-distributions-this-year-203605. Accessed July 30, 2021.

7 Vanguard. Feb. 21, 2021. “RMDs are back for 2021: What you need to know.” https://investornews.vanguard/rmds-are-back-for-2021-what-you-need-to-know/. Accessed July 30, 2021.

8 Ibid.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Shortlink

Young People: Who Said You Have To Be Wealthy To Invest?

Young adults have weathered difficult times the past two decades: mass school shootings, extreme weather conditions, student loan debt, and a global pandemic. But now they’re witnessing an unprecedented job market, where even those with little to no work experience can dictate their own terms.

It’s important that we steer our young adults to good saving and investing habits now, while they have the capacity to earn increased income. This job market may not always be the reality, so it’s good to build a treasure chest when they have the opportunity. Here are some tips to get them started:

Invest when you’re young. You don’t have to wait until you have a lot of money — the power of compounding interest makes time your greatest ally. When you start early, you can accumulate substantially more wealth with less invested capital than if you start investing later. In fact, you can start small — $50 to $100 a month — and increase the amount as you earn more. Investing regularly and automatically allows your money to work even harder than you do. The advantage of starting an investment program before you start making a lot of money is that you learn to live on less. Always strive to live below your means.1

Many graduates just starting out in the work world barely earn enough to make ends meet. There is one way to empower your ability to save a portion of what you do earn: Take control of your vocabulary. Instead of saying, “I can’t spend that much money” for something you want, say “I don’t want to spend that much money.” The second version implies that you are making a choice, and you choose not to overspend.2 We’d be happy to help you open an investment account and determine where to invest your savings every month. It’s never too early to start and no amount is too small to get started.

Diversify. Don’t invest all your money on one big stock tip you read about or receive from a friend. Spread it out over a portfolio of investments, which is less likely to lose money. The market will go up and down, but the way to protect your portfolio is to have some investments performing well while others don’t. The easiest way to do that is through a mutual fund or exchange-traded fund (ETF).3

At some point, you’ll want to establish a strategic asset allocation. There are three basic types of assets: stocks, bonds, and cash instruments (like CDs and money market accounts). Stocks represent the biggest risk — meaning a higher chance of losing money for the potential of higher gains — followed by bonds, then cash. As a general rule, the younger you are, the more you’ll benefit from a higher allocation to stocks, but you may want to allocate a portion to bonds and cash as well.

It’s particularly important to establish an emergency fund for your cash account. That way if any big expense comes up — like a car repair — you won’t have to tap your investments to pay for it. The longer your money stays invested, the better its potential to grow (and the lower your risk of losing it). Asset allocation is similar to diversifying your investments, but it’s more strategic because you maintain that balanced mix of stocks, bonds, and cash.4

Invest tax-deferred. Even if your employer doesn’t offer a retirement savings account, you can open your own. Anyone with earned income under age 50 can contribute up to $6,000 a year to an Individual Retirement Account (IRA), in which you choose which securities to invest. With a “traditional” IRA, you can deduct that amount from your current income taxes, and the account grows tax-deferred until the money is withdrawn. If you open a Roth IRA, you don’t get the tax deduction, but you won’t have to pay taxes on withdrawals (as long as you don’t take out money for at least five years from your first contribution).5

Whether graduating from high school or college or transitioning with some time off, don’t get too wrapped up in the pursuit of money. Pursue your interests, and the money will likely follow. Invest time in learning about the job(s) that interest you while also investing in meaningful friendships and worthwhile hobbies that develop healthy habits and expose you to new opportunities. Start now and your rewards will grow with time. Your career, friends, family, and activities are all seeds you plant now for a secure and happy future.6

Content prepared by Kara Stefan Communications.

1 John Woerth. Vanguard. June 18, 2021. “Investment advice for recent grads.” https://investornews.vanguard/investment-advice-for-recent-grads/. Accessed July 5, 2021.

2 Vanguard. January 12, 2021. “Want to set financial goals that stick this year? Start with one word.” https://investornews.vanguard/want-to-set-financial-goals-that-stick-this-year-start-with-one-word/. Accessed July 5, 2021.

3 John Woerth. Vanguard. June 18, 2021. “Investment advice for recent grads.” https://investornews.vanguard/investment-advice-for-recent-grads/. Accessed July 5, 2021.

4 Vanguard. January 11, 2021. “Choosing an asset allocation.” https://investornews.vanguard/choosing-an-asset-allocation/. Accessed July 5, 2021.

5 Fidelity. 2021. “IRA contribution limits.” https://www.fidelity.com/retirement-ira/contribution-limits-deadlines. Accessed July 5, 2021.

6 Chasity Holt. Fidelity. April 19, 2019. “5 tips for new grads.” https://www.fidelity.com/spire/career-building-tips-college-graduates. Accessed July 5, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference. 8/21-1745738C

Shortlink

What is Investing on Margin?

This year, investors are making record-high margin investments against their accumulated assets. According to FINRA, margin debt had reached $847 billion by the end of April.1 Much of this activity is fueled by low interest rates and rising stock prices, making leverage investing more appealing. However, investing on margin poses significant risks.

You can purchase securities “on margin” by basically taking a loan from your brokerage company, using your investment portfolio as collateral. This method allows you to buy more shares without having to lay out more cash. Remember, though, that you must pay interest on the amount borrowed. If the stock you purchase rises, you will have the money to pay the loan back. But if the stock moves in the other direction, you could lose more than the money you’ve borrowed. One way to pay the loan back is through other available cash; that way you don’t have to realize gains to clear your portfolio of the debt.

The question of whether to invest on margin is something you should discuss with your financial professional. When the market is robust, it can make sense for certain investors. However, it is not a strategy to be used if you’re desperate to cash in on quick gains because you need the money. To learn more about investing on margin, feel free to consult us for a review of your financial situation.

Note that you must apply to borrow on margin much the way you apply for a home equity loan. The broker will evaluate your annual income, net worth – both liquid and invested – and even your credit history. Your finances are carefully scrutinized to determine if you have the resources to manage a margin account.2

Furthermore, qualified portfolios must meet specific margin requirements. For example, the Regulation T margin requirement for new purchases is 50% of the total purchase amount. Imagine, for example, that you would like to purchase $10,000 of Company A stock on margin. You would be required to deposit $5,000 or have at least $5,000 in equity in your account.3

Also, be aware that FINRA Rule 4210 requires that an investor keep at least 25% equity in his margin account at all times. Some brokerages may insist on an even higher percentage.4

Be aware that the risks of investing on margin are substantial, as you could lose more money than you deposited in your reserves. If the stock you bought on margin drops in price, your broker may enforce a “margin call,” which means you would have to deposit more in the margin account or the broker can sell that stock. Not only does the investor have no say in which securities are sold, but the broker isn’t even required to inform him of the sale. Also note that the loan isn’t fixed; your interest rate may increase making the cost of the loan even more expensive.5

Content prepared by Kara Stefan Communications.

1 Carla Mozée. Business Insider. June 4, 2021. “Leverage ‘can rip your arms off,’ former TD Ameritrade boss says in warning to meme-stock retail traders.” https://markets.businessinsider.com/news/stocks/meme-stock-leverage-warning-ex-td-ameritrade-boss-amc-reddit-2021-6-1030495097. Accessed June 24, 2021.

2 Fidelity. 2021. “Margin Loans.” https://www.fidelity.com/trading/margin-loans/overview. Accessed June 24, 2021.

3 Will Kenton. Investopedia. Nov. 4, 2020. “Regulation T (Reg T).” https://www.investopedia.com/terms/r/regulationt.asp. Accessed June 24, 2021.

4 Jason Fernando. Investopedia. Feb. 11, 2021. “House Maintenance Requirement.” https://www.investopedia.com/terms/h/housemaintenancerequirement.asp. Accessed June 24, 2021.

5 Fidelity. 2021. “Important Information about Margin Lending.” https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/Using_Margin.pdf. Accessed June 24, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

Shortlink

College Savings: An Update

Congress is known for passing enormous bills with lots of little-known provisions that are not entirely central to the key objectives of the bill. Alas, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 is one of them. It contains changes to how students and parents apply for student aid via the Free Application for Federal Student Aid (FAFSA). While the changes won’t go into effect until the 2024-2025 academic year, the first year for new income reporting rules will be 2022.

Updates to the FAFSA are meant to simplify the application process by reducing the number of questions asked and altering how certain calculations are made. Specifically, the application process will drop about 60 questions from the current form, and the process will be even simpler for low-income applicants. Another change is that the term used to determine how much families will pay will be renamed “student aid index” (it is currently “expected family contribution”). Although the form is expected to take less time to complete, it is still likely to be complicated. Experts say that one outcome may be that families with multiple children in college at once may qualify for less aid.1

Divorced Parents

The new rules also affect how divorced parents complete the forms. Currently, the parent with the most custody fills out the forms, but this will change to the parent who pays the most in child support. This could add to the challenges divorced spouses face in getting one parent to become more engaged, even if it would lead to the child receiving more student aid. Moreover, the quagmire of individual divorce agreements — or lack thereof — could complicate this process even further.2

If you’re looking for ways to save for college, there are many, and they are typically no easier to understand than other types of investments. However, that’s what we’re here for. We can help you navigate the web of resources and tailor a solution that works best for your family and finances. Feel free to contact us for more information.

Grandparent Savings with a 529 Plan

The new rules also impact who helps pay for college and by how much. A 529 college savings plan allows the account owner to open, fund, and choose the investments and the account beneficiary — yet still maintain control of the assets. The account owner decides when and where to disburse funds and can even change the beneficiary or close the account and keep the money. Contributions to 529 accounts are made with after-tax income, but earnings and withdrawals avoid federal income taxes if used to pay for qualified education expenses.

Presently, when grandparents help fund college expenses with a 529 plan, that income gets reported on the FAFSA form as untaxed student income. This, in turn, can reduce the amount of aid for which the student is eligible. However, the new simplified FAFSA will no longer ask about these funds, so students may qualify for more aid.3

Custodial Accounts

There are two types of accounts that are often used to help provide college funding. The Uniform Transfers to Minors Act (UTMA) and Universal Gifts to Minors Act (UGMA) allow the transfer of financial assets to a minor without establishing a trust. However, be aware that while these accounts are controlled by the custodian, they are held in the name of the minor and relinquished to the child once he or she reaches the age of majority in that state.4

Coverdell Education Savings Account (ESA)

The ESA, which was previously referred to as an education IRA, enables parents to invest for tax-free earnings as long as the money is used for qualified educational purposes. Coverdell funds may even be used to pay for eligible K-12 schools. The annual contribution limit is $2,000, so it may be best to start saving early to accumulate potential earnings to help offset future education expenses.5

Content prepared by Kara Stefan Communications.

1 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.

2 Ibid.

3 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.

4 Kristen Kuchar. Saving For College. June 22, 2020. “What is an UGMA or UTMA account?” https://www.savingforcollege.com/article/what-is-an-ugma-or-utma-account. Accessed June 24, 2021.

5 Julia Kagan. Investopedia. June 22, 2021. “Coverdell Education Savings Account.” https://www.investopedia.com/terms/c/coverdellesa.asp. Accessed June 24, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

8/21-1750095C

Shortlink

Roth vs. Traditional IRA: Retirement and Estate-Planning Advantages

It would be nice if the Roth IRA had been around long as the traditional IRA. Imagine the long-term benefits of tax-free growth throughout a 40-year career. Annual contribution limits for IRAs are relatively low ($6,000; $7,000 for 50-plus), but the Roth is a good complement for investors who also contribute to an employer-based retirement plan. While 401(k) contributions are made from tax-deferred income, Roth contributions are derived from previously taxed income. Both vehicles are permitted to grow without taxes on earnings; however, in retirement, you don’t have to pay any taxes on Roth distributions, whereas all 401(k) distributions are taxed at your then-regular income tax rate.1

That tax bite during retirement can feel pretty punishing when you’re on a fixed income. It’s one reason why the Roth has an edge over the traditional IRA — which also taxes distributions in retirement. One of the key strategies that has emerged in the Roth IRA era is tax diversification in retirement: Try to invest in such a way that not all your income is taxable. This can help avoid taxes on Social Security benefits and keep you from having to pay higher Medicare premiums.2

Everyone has different circumstances, and you should build your financial portfolio to reflect your needs and objectives. Since the total amount you can contribute to an IRA each year — traditional, Roth or a combination — is limited, it’s typically a good idea to pick one that best meets your needs. Another viable strategy for reducing taxes in retirement is later converting a traditional or rollover IRA to a Roth. Investors also should consider the advantages of both versions for estate planning purposes. If you have any questions, or would like help developing a long-term IRA strategy, please contact us.

Distributions from a Roth IRA can increase your income during retirement since qualified withdrawals are not taxed. Moreover, if an investor doesn’t need to use his Roth funds during retirement, those assets and all potential tax-free earnings they generate can be left tax-free to heirs. Whatever amount he passes on can continue growing tax-deferred and eventually be withdrawn tax free. Note that non-spouse beneficiaries of a Roth will need to take full distribution within 10 years of inheriting the money. However, when beneficiaries have the discipline to leave that money in the inherited Roth for the full 10 years, it can continue to grow for an even larger inheritance with no tax consequences.3

By contrast, traditional IRA distributions to heirs are considered taxable income in the year(s) withdrawn.4 So don’t just think about reducing your own taxes with a Roth; consider its tax-free advantage for your heirs.

Be aware that you can contribute only earned income to an IRA. That precludes Social Security and pension income, dividends, etc. You may continue to contribute throughout retirement as long as you’re earning some income — and may only contribute up to amounts earned, subject to the contribution limits. Also bear in mind that there are income limits for making Roth IRA contributions. Single tax filers must earn less than $140,000 (in 2021); the married and file jointly income limit is 208,000.5

In a Roth conversion, you can move money from a 401(k) into a Roth IRA, converting all or a portion of assets throughout time, but there are considerations. For example, you’ll have to pay taxes on the money you move in the year it’s converted. That’s a good reason to only move a portion at a time; try not to tip your reported income into a higher tax bracket each year. If you conduct the conversion once you’re retired, your taxable rate will be lower.

However, Roth funds are subject to a five-year rule. If you convert 401(k) funds to a Roth you’ve already owned for five years or more, you can go ahead and use that money. But, if you must open a new Roth to make the conversion, you must wait five years before you can tap that account, or funds tapped will be subject to a 10% early withdrawal penalty.6

If you are considering a Roth conversion for any retirement account funds, remember that income tax rates are relatively low right now. If there are any changes in the near future, rates are more likely to go up than down. That’s a good reason to start a conversion now if you and your advisor believe that’s a good strategy for your situation, especially if you plan to roll over funds gradually throughout several years.7

Content prepared by Kara Stefan Communications.

1 Dayana Yochim and Andrea Coombes. NerdWallet. April 28, 2021. “Roth IRA vs. Traditional IRA.” https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account. Accessed July 21, 2021.

2 Phil Lubinski. ThinkAdvisor. June 10, 2021. “6 Ways to Help Clients Avoid Medicare’s IRMAA Surcharges in Retirement.” https://www.thinkadvisor.com/2021/06/10/6-ways-to-help-clients-avoid-medicares-irmaa-surcharges-in-retirement/. June 23, 2021.

3 T. Rowe Price. Summer 2021. “The Simple Move That Has Significant Advantages.” https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine.pdf. Accessed June 23, 2021.

4 Dayana Yochim and Andrea Coombes. NerdWallet. March 17, 2021. “Inherited IRA: How It Works & Distribution Rules for Beneficiaries.” https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account. Accessed July 21, 2021.

5 Charles Schwab. 2021. “2020-2021 Roth IRA Contribution Limits.” https://www.schwab.com/ira/roth-ira/contribution-limits. Accessed June 23, 2021.

6 Cathy Pareto. Investopedia. April 9, 2021. “Must-Know Rules for Converting a 401(k) to a Roth IRA.” https://www.investopedia.com/articles/retirement/08/convert-401k-roth.asp. Accessed June 23, 2021.

7 Sarah O’Brien. CNBC. May 20, 2021. “These strategies can reduce the taxes you will pay on retirement accounts.” https://www.cnbc.com/2021/05/20/these-plans-can-reduce-how-much-tax-you-will-pay-on-retirement-account.html. Accessed June 23, 2021.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences, including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions. We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

7/21-1721266C

Shortlink

Reshoring: What’s the Future for Products and Services Made in America?

According to a recent survey of supply chain professionals, the COVID-19 pandemic interrupted 98% of global supply chains. Among the most disruptive supply challenges was the procurement of personal protective equipment, pharmaceuticals and semiconductors. Companies that had outsourced manufacturing to other countries experienced firsthand the types of risks associated with offshoring.

The previous administration placed a huge emphasis on reshoring U.S. manufacturing, and the current administration is reiterating that call. Within days of his inauguration, President Biden signed an executive order that increased the domestic threshold for companies to meet to win federal contracts. The order also is designed to limit Chinese clean-tech exports and encourage offshore manufacturers specializing in clean-tech supply chains to relocate to the U.S. The objective is to enable America to produce and scale its own solar, electric vehicle and battery production by bringing supply chains closer to U.S. customers, or at least to rely on countries considered allies. Tech experts consider data to be “the new oil” and therefore it is vital that the U.S. become more self-sufficient in developing and manufacturing semiconductor technology.1

The call for reshoring to generate domestic jobs, data and energy independence is popular, bipartisan and likely inevitable to some extent. Market sectors poised to benefit include construction engineering and machinery, factory automation and robotics, electrical and electronic equipment manufacturing, application software and other auxiliary services. Moreover, North American, European and South Asian banks should see enhanced economic activity associated with reshoring.2 If you’re interested in ways to incorporate reshoring growth potential into your portfolio, please give us a call.

With that said, the decision to bring operations back to the U.S. involves a lot of considerations. These include the risks of running out of inventory, potential labor strikes, tariffs, intellectual property rights, government incentives and the value of the Made in USA label — not to mention the impact of future pandemics. One of the biggest challenges is reskilling the U.S. labor force to manufacture things like semiconductor chips used in mobile phones. We do not currently possess that level of expertise on a mass scale, so it will take time and resources to train our labor pool to the level of Germany, Switzerland, Japan and other countries.3

Companies (and by extension, shareholders) also need to see a return on their reshoring investments. In addition to corporate management exploring ways to offset the higher operating costs associated with reshoring, policymakers are expected to facilitate this effort via tax breaks, low-cost loans and other subsidies.

The “State of North American Manufacturing 2021 Annual Report” found that manufacturers are more concerned with the higher costs associated with reshoring than they are with other risks, such as supply chain shortages, proximity to market, demand for U.S.-made products and potential shipping disruptions.4 In other words, the carrot for reshoring needs to be worth their effort from a strictly financial perspective. That will be much harder to achieve given the lack of skilled workers, higher cost of wages and potential labor shortages in the U.S.

The other factor is that Asia not only showed supply chain resiliency during the pandemic, but its growing population represents a tremendous market for U.S. companies. This means they are less inclined to move operations to the U.S. and subsequently incur higher shipping costs to get the goods back to the lucrative Asian consumer market.5

Content prepared by Kara Stefan Communications.

1 Bank of America Merrill Lynch. 2021. “Made in America.” https://www.bofaml.com/en-us/content/reshoring/made-in-america.html. Accessed June 22, 2021.

2 Bank of America Merrill Lynch. July 23, 2020. “The USD 1 trillion cost of remaking supply chains: Significant but not prohibitive.” https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID20_0734/cost_of_remaking_supply_chains.pdf. Accessed June 16, 2021.

3 Deborah Abrams Kaplan. Supply Chain Dive. April 8, 2021. “Supply chains do the math on reshoring’s pros and cons.” https://www.supplychaindive.com/news/supply-chains-reshoring-decisions-sourcing-manufacturing-china/597596/. Accessed June 22, 2021.

4 Edwin Lopez. Supply Chain Dive. June 7, 2021. “Supply chain managers shift reshoring focus to total cost of ownership.” https://www.supplychaindive.com/news/inventory-supply-chain-managers-TCO-reshoring-Thomas/601148/. Accessed June 22, 2021.

5 Matt Leonard. Supply Chain Dive. June 17, 2021. “Tariffs, pandemic may not be enough to drive reshoring.” https://www.supplychaindive.com/news/reshoring-china-north-america-supply-chain-biden-forecast/601971/. Accessed June 22, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

07/21 – 1727346C