Today the U.S. House of representatives is set to vote on the Health Economic Recovery Omnibus Emergency Solutions (HEROS) Act. This would mark the fifth piece of legislation directly addressing the COVID-19 pandemic and the wake of economic peril its left many in. The bill spans 1800 pages and has an estimated sticker price of roughly $3 trillion.
As the country stays mostly under strict stay at home orders due to COVID-19 and states begin to evaluate a return to “normalcy” there are staggering numbers in the wake. The COVID-19 pandemic has caused an incredible shift in the daily lives of households, their income, sense of security and as a result how and where they spend. As we await the retail sales numbers for April and look at the -17.22% YTD return on the Dow we have to wonder if the markets are fairly pricing in all that’s been going on?
Retail Sales Plunge
The most recent Bloomberg Economic survey expects headline retail sales to have dropped another 11.9% in April, adding to the 8.4% decline in March. Core sales in the same survey (less Auto and gas components) likely plummeted another 7.6% following a decrease of 2.8% in March. An important note is the Core sales projection does not include the deeply impacted Auto industry during these times. Signs of this loss of traction show in bankruptcy claims from the likes of: Lord & Taylor, SFP (parent company of Papyrus), Modell’s Sporting Goods, Pier 1 Imports, and True Religion to name a few.
The numbers released today showed a 16.4% drop in retail sales.
Weekly claims totaled nearly 3 Million last week, bringing the COVID-19 count up to 36.5 Million jobless claims. The staggering numbers still have a lag as the rush to claim traditional unemployment and PUA (Pandemic Unemployment Assistance) has left most states systems overwhelmed and understaffed to keep up. As a result, money has not made its way into the hands of many who have been in need and/or making efforts to claim benefits.
Housing Rents/Mortgages lay waiting
Although the CARES act provided some protections in the forms of forbearance and moratoriums on eviction/foreclosure payments will be coming due soon. For renters who still wait for unemployment that may mean the $1,200 has been all that they have received during this time. The same can be applied to homeowners in the same situation, having to stretch the funds across the needs of several months. The issue is that rents will become due,lenders may ask for the lump sum of forbearance payments (e.g. 3 months all at once) unless a modification can be accommodated. The expectation that 3 months of mortgage money would appear during a hardship is not likely, nor has the stay at home relaxed enough to open up many new jobs or returns to previous jobs. As a result, the CARES Act allows for up to 12 months of forbearance, allowing to continually “kick the can” down the road and balloon the debt potentially. There have been talks and proposals of legislation that would require the ability to defer the payments to the end of the loan, potentially easing that looming debt and softening the hammer that otherwise may await the housing market.
Individuals & Small Businesses Lack Funds
As previously mentioned, there are many households still struggling to resolve unemployment issues. From capacity for traditional UI filing to notifications of “needing to speak with a representative” with phone lines constantly jammed it has left many feeling hopeless. Furthermore, the PUA lagged in being setup where hard-hit states such as NJ did not see PUA ready to start paying until almost two weeks ago. This comes on the heels of the SBA’s PPP program that had major issues of going to “not so small” companies with a second round of funding needing to be added.
Finally, returns to employment will not be normal for some time. As we look at capacity issues (e.g. proposed 25% of normal capacity to allow appropriate distancing) there will be less revenue and less staff necessary to run the business. Furthermore, to retrofit certain workspaces with the revenue hits can be a daunting task as well.
Our focus would be an overweight to utility, healthcare and consumer staples positions for the future. There are areas of tech that are certainly benefiting as of the time but a trail off needs to be accounted for if previously “normal” conditions resume and services are paired back or cancelled.
For retirement withdrawal needs the CARES act may seem to present a unique opportunity, but its important to watch out for potential mistakes.
What the CARES Act allows: up to $100,000 in total withdrawals from retirement accounts (IRA, 401k or other tax-deferred account types) with the 10% penalty waived. In addition, there can be the ability to pay back the funds within 3 years of the distribution to eliminate the tax liability. This all may sound very tempting for you to take advantage of but there are pitfalls to consider before moving forward.
Mistake #1: Not accounting for tax impacts
CARES provisions allow for 3 years of “paying back” your retirement accounts, as well as 3 years of spreading the tax cost . Both of these options allow for flexibility on spreading the tax bill and potentially making some (or all) of the distribution tax-free. However, you need to plan ahead on how you are planning to report, pay or potentially offset these taxes. This can become complex and involve retroactive amendments to your previous filing as well as other considerations. What you can do: Work with your accountant as well as your advisor to set a plan around your needs.
Mistake #2: Assuming a 3 year payback on Roth conversions
The CARES laws were rushed to the presses therefore leaving some areas of uncertainty. Roth conversions are one area for you to be weary. To understand more, we have to look at the “intent” of the law rather than the actual “word”. The intent of the law is to allow you additional cash-flow from retirement accounts while softening the tax impact. More simply, this law is designed to allow someone in need to access money during these uncertain times. As previously mentioned, this would allow for the withdrawal and use of the funds for any expenses with an extended “payback” or multi-year tax payment. The law is not designed or intended as a loophole for your Roth conversions. In addition to this, your tax filing necessary to denote the conversion (due to contribution limits) will inform the IRS of the action taken with those funds. What you can do: Currently, until more explicit guidelines are provided from the IRS you should expect to pay the full tax bill for 2020. However, for conversion of shares there is a unique opportunity for you to convert more shares for a target cost during the market pullback.
Mistake #3: Taking funds simply because they are available
The temptation to take money because it is “available” at this time may be on your mind. However, remember that you’d be selling while the markets are down and creating tax costs by doing so at this time. If you move the funds now (if they’re not needed) you are taking away from your compounding future growth. What this means is that you will have less shares held at the point of a market recovery. This may not seem like much now but it can have more major impacts over time. You also need to consider the extra tax costs that you will need to pay as well. Think not only about what you’ll pay on the funds you take but what it may do to your tax bracket as well. What you can do: Evaluate your needs and plan for the tax as well as future value impacts. Your financial planner can depict these for your consideration and review. Also, consider strategies that allow for liquidity in the future.
We understand that your financial needs are unique and require careful consideration. For a free consultation to discuss our services as well as your needs Schedule an Appointment Now.
Right now the precipitous drop of the markets along with fears over the spread of COVID-19 may make it feel like the sky is falling. However, two major opportunities are there if you act.
In the midst of sell-offs that may be giving you a combination of motion sickness and flashbacks to 2008, your first reaction may be to “let it be and ride it out”. Now we are major proponents of a long-term approach but some small moves could make a major difference. So where is the opportunity we speak of? Lets take a look:
1: Roth Conversions
A Roth conversion can make a lot of sense right now for two very compelling reasons. The first is that the dip in your portfolio value will allow you to convert a larger percentage of the balance. The second very compelling case is our current tax rates. With having the tax rates dropped from the Tax Cuts And Jobs Act there are some of the lowest rates you may see. Add to that the additional potential COVID-19 government debts it wouldn’t be a surprise to see taxes rise again in the future. By converting now you would pay today’s rates and pay zero tax for qualified retirement withdrawals. In addition, Roth IRAs will not cause taxation headaches for your estate and therefore are gaining popularity following the SECURE Act legislation.
2: Tax Loss Harvesting
No one likes to loose money. For this reason it can cause a block for us to take action that could be saving you money every year. However, not using the write-off of an investment sold at a loss leaves investors cutting larger tax checks. Be aware that these losses can only be used in non-retirement accounts and you must not trigger a wash sale. Yet strategically using these losses can give you current year as well as carry-forward losses. Take the opportunity during re-balancing of your portfolio to reap the markets write-offs.
Due to the complexity of evaluating these opportunities we strongly advise you partner with tax and financial professionals. Our team will be able to illustrate the impacts of these decisions during our planning process.
Note: the information presented herein is not to be considered individual financial advice. Contact us for an evaluation of your unique situation.
Note: the information presented herein is not to be considered individual financial advice. Contact us for an evaluation of your unique situation and personalized guidance.
The Coronavirus has wreaked havoc on the markets and disrupted many family’s incomes. This may leave limited options and have you considering using money you’ve parked in retirement plans or IRAs. There are important things to know while making an informed decision.
First and foremost, we understand this is a difficult decision. There are plenty of places you may turn that can make you feel “guilty” for considering this option. It would be advisable to only take what you needas you need it but we are here to help you navigate this with knowledge.
Your first thing to consider is your age: if you are under 59 1/2 years old the IRS will consider this an “early” distribution. What that means to you is that they add an additional 10% penalty in addition to your income taxes for taking money. Exceptions to the penalty apply for Disability, Death, Medical Expenses, First Time Home Purchases, Qualified Educational Expenses, 72(t) payments & Qualified Reservist Payments. There are also age 55 rules and Substantially Equal Periodic Payments (SEPP) that are written into the tax code to avoid the 10% penalty. For the details of these exceptions, visit the IRS website or contact us to discuss further. There have been calls for congress to waive the fee along with the current stimulus relief package but nothing has been passed as of this publication.
Regardless of your age, you will need to be aware that these distributions count as income for traditional IRAs & retirement plans. Therefore, as previously mentioned you will need to account for income tax and be mindful of crossing into new tax brackets. Should you have a Roth account your contributions will be tax-free but any earnings can be subject to income taxes and penalty.
Another consideration that you should have is the 60 Day Rollover. This is a 60 calendar day period to refund money taken from retirement accounts and avoid taxes/penalties. This can only be done once every rolling twelve months and it does not require a full refund. Any amounts returned in that time will be deducted from your 1099-R tax document.
Should you be displaced from work but have a spouse with an active retirement plan they may be able to take a 401(k) loan. In this case, you can take money (within plan guidelines) that you’ve saved in a 401k and pay it back to your account over the agreed upon timeline with after-tax money. In addition, you will not have any income tax or penalties involved on the withdrawal. You will pay interest as well as part of the contributions into the account. Should someone separate from the place of employment for the plan before paying it back they can either setup payments with the plan to continue (from your bank account) or choose to let the loan “default”. The default of the 401k loan will not have any burden on your credit but it will trigger the leftover balance to be considered income and potentially trigger the early withdrawal penalty.
There are many options as well as considerations to take into account. We certainly understand that it can be difficult to navigate alone and are here to assist you.
Recently retired individuals and those nearing their time to retire are suddenly flooded with unexpected market losses care of COVID-19. This leaves many recently retired wondering if they’ll have to return to work, and those planning to retire soon considering if they need to push plans back. If you are in either of these two groups it’s time to evaluate your positioning.
Now, you may be asking “do I need to change plans?” and you wouldn’t be alone in asking that question. However, the honest answer is: it depends. Because everyone’s situations, wants and needs are different the question is impossible to answer without additional information. Think of it this way: you bump into your neighborhood physician, mention in passing that you’ve had a few symptoms and ask what is wrong with you. You’ll be told to either make an appointment or seek immediate medical attention. The reason for this (and why our article can’t fully answer the question) is because it would not be in your best interest to have someone diagnose you physically or financially “off the cuff” without proper testing. But let’s take a look at some scenarios and discuss if they need immediate attention or an appointment:
1: Your retirement planning only involved electing your 401(k) savings amount and what investments to buy within the account.
Seek immediate attention.
There are two skill sets that it takes to have a successful retirement. The first is accumulation, aka retirement saving. The second is income/withdrawal planning. Both present challenges however, withdrawals have significantly more variables to plan for. It would be worth the time to sit with a professional to see where you stand.
2: Your retirement plan uses a “bucket” strategy or you have significant cash reserves.
Set an appointment for a check-up
The “bucket” strategy approach constructs 3 separate accounts: cash (right now), bonds (a little later), and stocks (growth/long-term) to purposefully prepare & visualize each accounts purpose. Similarly, a larger cash reserve will also allow you to have the flexibility while riding out volatility. It’s important you review either of these to ensure you have proper positioning across your net worth.
3: Your increasingly concerned about if you will be ok (for both the pre & post-retiree).
Seek immediate attention
First, we don’t ever want anyone loosing sleep because things feel “unknown”. Piece of mind goes an extremely long way. Much like someone who waits to see if their symptoms will pass, its better to get ahold of things before they progress. There are many different things an experienced professional can consider and use to help. But if left without attention, it can compromise the amount of options that you have if any.
4: You’ve recently retired and have started to take money out.
Set an appointment for a check-up
(If you haven’t professionally set a plan seek more immediate attention)
So this one has two different attention levels because if you have planned this is still an important time to team with your planner to regroup. If you haven’t planned, it’s worth your time to ensure that you aren’t causing any future problems. A professional will be able to account for the sequence of returns risk, taxes, inflation and additional setbacks that you may have missed.
5: 50% or more of your retirement relies on your savings/investment accounts.
Seek immediate attention
If half of your monthly expenses or more rely on checks from your investment accounts running out of money is not an option. Because of the larger reliance on these accounts there is limited flexibility to make lifestyle changes to lower expenses. It also means that as prices increase over time (inflation) your reliance on the savings will grow. Pensions don’t traditionally offer cost of life (COLA) adjustments, and the COLA for social security does not make significant strides to cover this gap.
We understand that these are extremely trying times both financially and emotionally for most people. Although it may be intimidating it makes the most sense to know where you stand and if any action is necessary on your part. A little planning can go a long way in these times, and together we will get through this.
April is earnings season and the next big test among the COVID-19 volatility that has punished the markets and investors. As of the time of this article the Dow has posted a 30.27% loss YTD effectively wiping out gains back to October 2016 levels.
The current sell-off activity is largely around what impacts the virus “may have” on businesses and individuals economically. We are only just beginning to see some of the impacts as states mandate closure of non-essential places of gathering (malls, restaurants, bars). This signifies some of the first impacts to individual income outside of the stadium and concession workers of professional sports (the leaders by and large of shut-downs as information became available).
So why is April positioned for additional volatility? The first reason is on the actual earnings reports themselves, as even in a ‘normal’ market there can be steep gains or losses from company earnings. More importantly, the markets will be listening for the forward guidance. This is the part of an earnings call where the outlooks moving forward are reported on and an idea of impacts COVID-19 may be having on such businesses. For this reason, we believe the market has made some attempts to ‘price in’ the potential impacts to businesses with these sell-offs. We also believe that the markets will make significant moves again in mid-April dependent on both the status of COVID-19 coupled with the earnings reports/guidance provided at the time. For this reason we are advising out investors against becoming overly-exuberant on the COVID-19 curve alone and to be mindful of the upcoming earnings that may hold markets until such further guidance is delivered.
The Ocean County Health Department announced late Friday that a Manchester man is the first Ocean County resident to have a presumptive positive test for COVID-19, state and county officials said Friday. He is among 21 new cases in the state of NJ bringing the total to 50 cases of COVID-19 in NJ, Health Commisioner Judith Persichelli said Friday Afternoon.
Schools as well as Universities have taken note early on deploying questionnaires home to gather information on at-home computer access for the possibility of remote schooling. Since that time, there have been moves at the local school level to take half or full staff in-service days to further prepare for the possible needs to teach remotely.
In other news, the markets fought strongly to bring back some of the losses from previous sessions yesterday. All three major indexes (Dow, S&P and NASDAQ) closed out the day with just over 9% gains as we headed into the weekend. The additional liquidity of a Fed bond buy-back program, strong efforts to make COVID-19 testing more accessible to everyone and the relative discount to previous pricing (p/e) on the markets drove Friday’s momentum.
Portfolio re-balancing is a practice that should be added to the practice of investors for proper risk management. Using the three major asset classes for the purposes of simplicity we will look at stocks, bonds and cash. Due to the risks involved on each of these parts of your portfolio they will not grow or drop at the same rates. Therefore, while the markets rise and fall your balances in each of these will take up more or less real estate than they were initially intended to causing ‘portfolio drift’.
Portfolio drift is a naturally occurring part of anyone’s portfolio that is not actively re-balanced. The graphic above shows an instance of portfolio drift in a growing market, where stocks are out-performing bonds. During this time the “target allocation” of 50% stocks, 45% Bonds and 5% cash has drifted to have 65% stocks, 30% bonds and 5% cash. As a result, your portfolio would be riskier than you had intended (and possibly could withstand) due to this drift.
Portfolio re-balancing is a practice where at a regular interval (weekly, monthly, quarterly) chosen by the investor or investment manager these balances are checked. If the allocation is outside a pre-determined threshold there will be a balancing out of the portfolio back to the target allocation. In our illustration above, 15% of the stock allocation would be sold off and re-invested into the bonds of the portfolio, bringing the allocation and risk level of the portfolio back to proper proportions.
A common misconception is that your 401k stays balanced because you have chosen the allocation when you enrolled. This enrollment simply instructs how much of your savings goes into each of the investments. However, the market performance of each of those investments determines how much drift you have in one direction or another. Take a moment to check on your portfolios to discover where your allocation currently stands. Should you not have a ‘target allocation’ it is worthwhile to sit with one of our planners to discuss what would be most efficient for you.
Looking to discuss further? Contact us for a free consultation today!
Markets have been picking up in their volatility as oil prices have plummeted and the Coronavirus has taken center stage. One of the more classic ways investors seek protection in portfolios is through the use of bonds. However, there are many ways to invest into bonds for your portfolio from ETFs, Mutual Funds, Individual Bonds, Closed Ended Funds and managed accounts just to name a few.
Maybe you’ve done some research into the topic (or maybe that’s what you are doing now!) and came across the topic of “Bond Laddering”. This term refers to investments in individual bonds with a strategic positioning of when they will come due; also know as when they will ‘mature’. The way a bond ladder works is to essentially “stack” maturities based on your goals. For the purposes of an example we will use even, round numbers:
Lets say you have $50,000 that you are looking to put into bonds with the longest maturity at any time being 5 years. The most simple way to construct the “ladder” would be to divide our total investment ($50,000) by the number of years (5) making each ‘rung’ of the ladder $10,000. In this case, we would also look at how often you would want money to be available (lets say every 12 months for this example). Therefore, we would seek to purchase bonds with 1 year, 2 year, 3 year, 4 year and 5 year maturities:
Bond 1: (5 year maturity) $10,000
Bond 2: (4 year maturity) $10,000
Bond 3: (3 year maturity) $10,000
Bond 4: (2 year maturity) $10,000
Bond 5: (1 year maturity) $10,000
The purpose of the ladder is to hold bonds until maturity, letting interest gather in the account to either be drawn or pulled into the re-investment. However, there can be instances where opportunity presents itself to trade the bonds before maturity, and replacing them with an equivalent bond of the remainder of its time. When properly done, the ‘ladder’ will allow you to keep funds available within 12 months of any time (see below for re-investment model):
Sample Reinvestment of Ladder (after first 12 months):
Bond 1: (5 year maturity, Purchased with bond that just matured)
Bond 2: (Previous ‘5 year’ that has 4 years remaining until maturity)
Bond 3: (Previous ‘4 year’ that has 3 years remaining until maturity)
Bond 4: (Previous ‘3 year’ that has 2 years remaining until maturity)
Bond 5: (Previous ‘2 year’ that now has 12 months left until maturity)
This approach to bond buying allows you (or your portfolio manager) to have complete control over the bond selection, quality and liquidity. This can help to avoid investor behavior such as outflows from funds or ETFs impact your value of the investment during cycles where money moves from one asset class to another.
For more information about how this can apply to you, feel free to contact us or set up a free consultation!