Wealth Planning Archives | Page 11 of 21

What Investors Should Know About the Midterm Elections

October saw the best month on record for the Dow since 1976 — a nice reversal after a tough September. The market continues to focus on inflation as the Federal Reserve meets this week to announce a fourth consecutive increase of 75 basis points.

We also have been receiving questions about what next week’s midterm elections may mean for the market — and for your portfolios. The United States is undergoing probably the greatest bout of political volatility since the Civil War. In six of the seven federal elections since the Financial Crisis of 2008, voters have removed the party in power over either the Senate, the House or the presidency.

It is difficult to predict who will win an election, but it is even more challenging to predict how the market will react. The market does not care who wins, but which policies are eventually enacted — and how they may affect the economic landscape. Changing a portfolio based on potential election outcomes is not a prudent decision. The chart below provides some perspective; no matter which party is in the White House and which party controls Congress, the markets have performed well over the long term.

Average Annual S&P Performance Based on Partisan Control

1933-2019 (excluding 2001-02, when Sen. Jeffords changed parties)

Here are a few potential implications from the upcoming midterm election:

1. Stocks have done well under every possible party configuration. Through peace and war, high taxes and low taxes, the market has persevered. Most partisan combinations saw double-digit returns, except for one, and that may have been due to bad luck.

2. The stock market is influenced by many factors, of which only a few are attributable to a president or Congress. Political actions are a small piece of the pie. For example, the 1973-1974 oil shock and the 2008 recession accompanied two of the worst markets in recent history. They both happened to occur when there was a Republican president and Democratic Congress. While certain policy decisions may have impacted these outcomes, a tremendous amount of geopolitical and financial complexity led to the ultimate result.

3. A Democratic House and Democratic Senate is the least probable outcome — but the clearest with regard to policy implications. If the Democrats were to win both the House and Senate, President Biden would be able to focus on remaining portions of the Build Back Better program, including additional spending, tax increases and opposition to fossil fuel infrastructure. The market may like this outcome the least.

4. A Republican House and Democratic Senate would probably bring gridlock after Jan. 3, along with a lame-duck session in Congress in November and December. Such a split in Congress would make it difficult for any real legislative policy changes to occur. As the chart above shows, the market has performed well with this political mix.

5. Republican control of the House and Senate would give them the most leverage. There could still be action during the lame-duck session, but it would require more compromise. The big issue between Congress and White House would be the debt ceiling that must be raised at some point in 2023. When one party controls Congress and the other party controls the White House, the market historically has seen positive results.

Simply getting to the election has acted as a catalyst for the stock market. The chart below shows the S&P 500 performance for the six months following midterm elections going back to 1950, and in each case, we have seen positive returns. The S&P 500 has not declined in the 12 months following a midterm election since 1942. Volatility in the market tends to be higher during midterm election years, and this year has been no different — with inflation, rapidly rising interest rates and geopolitical turmoil overseas.

Politics is an emotional game. and some of our worst biases and behavioral mistakes show up when we let our emotions influence our decision making. Investing is no different. We are here to work with you through the political noise and election-year volatility, regardless of the political winds.

Here Comes the Best 6 Months of the 4-Year Presidential Cycle

S&P 500 performance, November-April during midterm years

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: American Funds, Baird, Carson

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Social Security’s Biggest Benefit Jump in 40 Years Is Coming Next Year

As we approach the end of the year, the IRS and Social Security Administration have released their 2023 adjustments. High inflation has led to a high cost of living adjustment (COLA) that will hit Social Security benefits next year: The 8.7% increase is the largest ever granted to today’s retirees, and it comes on the heels of a sizable 5.9% increase in 2022. The last time COLA exceeded 6% was more than 40 years ago, during double-digit inflation. As shown in the chart below, the average COLA before 2023 was 3.7%, and over the last decade, the average increase was only 1.9%.

2023 COLA is the highest ever for today’s retirees

Social Security cost of living adjustments, 1976-2023

Chart showing each Social Security adjustment since 1976 — *Source: Social Security Administration 2023*

On average, Social Security benefits will go up more than $140 per month – from $1,681 to $1,827 — and the average disability benefit will increase by $119 per month. To find out exactly how much you will receive next year from Social Security, you can calculate the change by multiplying your net Social Security benefit by 8.7%. The chart below provides average Social Security benefits for different recipients and may help provide further clarity.

Estimated average monthly Social Security benefits in 2023

The table shows the average monthly Social Security benefits for different qualifying recipients both before and after the 8.7% cost of living adjustment.

Chart showing average Social Security benefits before and after the 2023 adjustment — *Table: Gabriel Cortes/CNBC; Source: Social Security Administration*

The threshold for the taxation of Social Security benefits is not indexed to inflation and remains constant. As the benefit and other retirement income adjusts upward over time, more people will cross the threshold and pay more in taxes for their benefits. An individual’s Social Security income is taxed based on a combined income formula that includes wage income, interest, dividends, pension payments and taxable distributions from 401Ks and IRAs. If your combined income is above $34,000 for a single person and $44,000 for a couple, up to 85% of your benefit could be taxed.

The COLA should not influence the timing of when you file for Social Security. COLA takes effect automatically for all clients 62 or older, regardless of whether they are currently collecting or have filed for benefits before Dec. 31. Before age 62, an individual’s future benefit is adjusted for inflation through a different methodology.

The decision to start collecting benefits should be driven only by your circumstances, such as age, life expectancy, marital status and cash flow needs.

There are tradeoffs to consider for filing earlier or later than full retirement age; filing early permanently reduces the amount of monthly benefit, for example.

The IRS announced on Friday that due to higher inflation, it is raising contribution limits for retirement savings plans for 2023 based on cost-of-living adjustments. According to Mercer, the limit increases are the largest ever.

Individual contributions to 401Ks or similar retirement plans will see a $2,000 jump to $22,500, for those under the age of 50. Those who are 50 or older will be permitted to contribute an additional $7,500 per year, for a total of $30,000. At the same time, the IRS raised the limit for contributions to a pre-tax or Roth IRA to $6,500, up from $6,000, where it has been the last four years. Those 50 and older can still make an additional $1,000 catch-up contribution, which is not adjusted for inflation.

Income limits for a Roth IRA will increase as well. The income range for married couples filing jointly increases to $218,000 to $228,000 (from $204,000 to $214,000). For those filing as single, the income phase-out range for Roth IRAs increases to $138,000 to $153,000. SEP IRA contribution limits will go up to $66,000 from $61,000.

This year’s COLA can help you keep up with higher costs. In the short run, managing withdrawals from the portfolio may help smooth out the tax bumps during a period of high inflation. In the long term, however, tax planning should be a multi-year approach and strategic in nature.

Whether you are planning for the next year or next decade, managing taxes throughout retirement needs to be well thought out, working with your financial advisor and tax professional to understand the tax impact of any planning decisions.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Blackrock, CNBC, Fidelity, Social Security Administration

Promo for an article titled Here’s What You Should Know About Asset Allocations and Volatility

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Here’s What You Should Know About Asset Allocations and Volatility

Last Friday, stocks capped off a volatile week of trading after the previous day’s release of the Consumer Price Index (CPI) for September came in hotter than expected. Initially, this weighed on the markets as investors braced for the Federal Reserve to continue aggressively raising rates. After the release of the CPI report on Thursday, the S&P 500 opened down more than 2.4%, but by the end of the day, we had witnessed the fifth-largest intraday reversal from a low. The S&P 500 ended up 2.6% Thursday, reinforcing just how volatile this market is – much like previous bear markets. Then on Friday, the S&P gave back the gains from the day before, ending down 1.55% for the week.

The increase in volatility is not just in the stock market. Volatility has spiked in a range of markets from currencies to bonds, raising concern about the ability of the global economy to cope with higher U.S. rates. If these trends continue, the Fed may moderate its pace of tightening and slow the pace of reducing its balance sheet. The dollar has surged to new all-time highs on a trade-weighted basis, driven by a combination of relatively high U.S. yields and demand for safe-haven assets during global political turmoil. Fed officials have made it clear that financial market volatility alone will not affect their rate decisions.

As seen in the bar chart below, the only positive asset class other than cash through the first three quarters of the year has been commodities. (And gold, the most well-known commodity, is down almost 10% year to date.) In some instances, bonds are down as much as stocks this year. This begs the question: Is asset allocation dead? Does the old-style box chart investing —allocating money into growth and value, small cap, mid cap, large cap and international stocks as well as in bonds, as seen in the second chart below — not work anymore?

U.S. Markets YTD % Returns

Chart showing U.S. Markets year to date returns — Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg Municipal Bond Index, Bloomberg US Aggregate, Bloomberg US Treasury Inflation Protected Notes (TIPS), Bloomberg US High Yield-Corporate, S&P 500, MSCI World ex USA, MSCI EM, Dow Jones US Select REIT, Dow Jones Global X US, and Bloomberg Commodity Index. Data as of September 29, 2022.

U.S. Equity Style Box Performance

For investors whose experience this year has them questioning asset allocation, the following may provide perspective on why we believe it remains effective.

• What we have seen in 2022 is unusual. The aggregate bond index (AGG) has been around since 1976. Since that time, the index has been negative four times, the worst being a decline of 2.9% in 1994. In each of those years, the S&P 500 has been higher by an average of more than 20%. This year appears to be an anomaly.

• The picture is more complicated on a quarterly basis. Since 1970, the S&P 500 has had 50 negative quarters, and the AGG has been lower in 16 of them. During the worst quarter of 2008, when stocks were down the most, the AGG was up. The third quarter of 1981 had been the worst quarter for the AGG until the second quarter of this year. The chart below shows the AGG’s total return each year. The red dots show the largest peak-to-trough decline each year. The average intra-year decline has been 3.2% versus an average decline of 14% for stocks. Historically, after bad years of performance, bonds tend to deliver strong returns in the years that follow.

Bloomberg U.S. Aggregate Annual Returns and Intra-Year Declines

Chart showing U.S. Aggregate intra-year declines — Sources: Bloomberg, FactSet, JP Morgan Asset Management. Returns are based on total return. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1976 to 2021, over which time period the average annual return was 7.1%. Returns from 1076 to 1989 are calculated on a monthly basis; daily data are used afterwards. Guide to the Markets — U.S. Data are as of September 30, 2022.

• Bonds can go down as well as stocks. The historical correlation between the S&P 500 and the AGG is close to zero. Stocks and bonds tend to each go their own ways relative to performance, rather than moving in decidedly opposite directions. It is also important to remember that bonds, like stocks, can and will go down, especially in an environment of rising interest rates.

• Dislocations can create opportunities. We do not think that traditional asset allocation is dead. While all but cash and commodities are negative this year, stock and bond valuations have improved. Diversification within stocks and bonds will continue to add value to a portfolio. Vanguard’s chief economist for the Americas, Roger Aliaga-Diaz, recently commented that “market volatility means diversified portfolio returns will always remain uneven, comprising periods of higher or lower – and, yes, even negative returns.” He went on to add:

“The broader, more important issue is the effectiveness of a diversified portfolio, balanced across asset classes, in keeping with the investor’s risk tolerance and time horizon.”

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Kestra Investment Management, Morningstar, CNBC, Vanguard, JP Morgan

Promo for article titled Worried About Retirement in a Down Market? Consider These Strategies

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Worried About Retirement in a Down Market? Consider These Strategies

The S&P 500 reached a new low last week, closing 25% down from its January peak. Markets may fall even more from here: Since 1961, the average peak-to-trough decline during drawdowns of 25% or more has been 38%. However, historical drawdowns of 25% or more have delivered a forward one-year return of 27% on average, with longer investment time frames proving even more compelling.

Timing the bottom of this market is difficult, if not impossible, for those considering going to the sideline and waiting to get back in after the market falls further. History suggests that those who stay the course have been rewarded.

Chart showing S&P 500 market performance during and after drawdowns of 25% or more since 1961 — *Source: Bloomberg and Goldman Sachs Asset Management. As of October 6, 2022*

We read a lot about market returns averaging 8% to 10% per year, but as the chart shows below, such returns are not common at all. The 8% to 10% average comes from many years of outsized returns, followed by weak or negative returns and a few years of average returns. If you are not invested in the market or decide to move to the sidelines, it becomes much harder to obtain average returns. We cannot control the sequence of returns – i.e., what the market does on a yearly basis. It’s no secret that investing is not predictable; the market can be up 10% one year and down 10% the next year.

Chart showing S&P 500 Annual Returns from 2000 to 2002

When you are in the accumulation phase, the sequencing of returns does not have a significant impact on your ending balance. However, when you are entering retirement or taking annual distributions from the portfolio, the sequence of returns can make a big difference. A down market early in retirement — on top of taking distributions from the portfolio — can eat into your wealth through no fault of your own, other than bad timing.

While we can’t control bear markets, we can control how we respond to them. The key to overcoming sequence-of-return risk is to draw down as little as possible during that down period. Here are some strategies for the newly or nearly retired to consider:

Revisit your need for distributions:

Take another look at how you are planning to fund your expenses and consider alternate strategies to minimize how much you take out. For example:

• Healthcare expenses: If you funded an HSA account, make sure you use those funds for qualified health expenses before withdrawing from the portfolio.

• Charitable giving: Consider making a large gift to a donor-advised fund during an up year in the market. That fund will become your charitable checkbook so that you do not have to tap into the portfolio during down years in the market.

• Flexible withdrawals: Consider taking out more during up markets and pulling back when the market is struggling. This could help you ride out the down market by withdrawing as little as possible.

Build up cash accounts

One way to limit how much you need from retirement accounts is to build up liquidity in your cash accounts. By maintaining short-term cash and cash equivalents — such as CDs, fixed income, and money market accounts — you can keep from having to draw down your retirement funds prematurely. For the first time in many years, money market rates and short term bond rates offer attractive yields, and you can get paid to be in cash with those monies.

Be wary of debt

It makes sense to enter retirement with as little debt as possible. Excessive debt in retirement can affect not only your financial health, but also your physical and mental health as well, due to the strain of paying off debt without income from work.

Know your retirement account options

Once you reach a certain age (72) or older and have a traditional IRA or 401K, the IRS requires you to take an annual required minimum distribution (RMD). Roth IRAs do not have RMDs, allowing you to withdraw funds without penalty or tax. It may make sense before retirement to convert some or all of a traditional IRA to a Roth IRA. This does require that you pay tax on the conversion amount at the time of the conversion. During a down market, doing a Roth conversion can reduce the taxes that you will pay since the value of the IRA is down, and it allows a future market recovery to happen in a tax-free account.

We fully recognize that bear markets are painful and challenging for all investors. Planning for retirement is a long road trip. On most long road trips, you are bound to run into some trouble — unexpected pit stops, flat tires or even a cracked windshield. But these bumps don’t last for the whole trip, and they do not ruin the overall journey. It is more important than ever to keep perspective and realize that these down markets don’t last forever, and good times have historically lasted much longer than the bad.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Goldman Sachs, Kestra Asset Management, Robert Baird, NYU

Promo for article titled Fourth-Quarter Outlook: Midterms, More Volatility and the Fed

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fourth-Quarter Outlook: Midterms, More Volatility and the Fed

Time slows down for no one. It is hard to believe we are already in the fourth quarter of 2022.

The third quarter of the year saw financial assets continue their decline, as all asset classes — other than cash — delivered negative returns. The Fed’s third consecutive rate hike of 75 basis points (.75%) put further pressure on stocks and bonds. The summer rally we saw in July and early August was erased during the second half of the quarter as inflation continued to rear its ugly head.

The strong correlation of returns between stocks and bonds remained, as bonds were down almost 5% for the quarter. Credit quality in bonds has remained stable this year. However, slower growth, persistent inflation and higher rates could increase credit risk in the coming months. The S&P 500 and NASDAQ both had their worst months since 2008, and the Dow had its worst month since 2002.

International stocks remain challenged by higher energy costs and the ongoing war in Ukraine. Developed markets were down over 9%, and emerging markets were the worst performing in the third quarter, down over 11%. The United Kingdom took strong action last week to step in and purchase bonds to help their markets with additional liquidity.

Chart showing returns for the third quarter of 2022 by asset class

As we head into the fourth quarter, the main drivers of the market continue to be inflation, China’s path to reopening from the pandemic and war in Ukraine. At the end of the third quarter, we saw a big bounce in short-term interest rates, with the 2-year Treasury trading close to 4.3%. As rates rise, bond prices fall. We are currently seeing high-quality fixed income valuations sitting near 10-year lows.

At the same time, S&P 500 forward Price to Earnings (PE) multiples are almost 10% below their long-term averages. These attractive valuations in stocks and bonds historically have led to significant long-term investment opportunities. The chart below shows how the market has responded following a bad month of September — and as we previously wrote, this September was one for the record books. The only instance of a continued slide occurred during the Great Financial Crisis, and we do not believe that this market is similar.

Chart showing October market performance after poor September results

What do we expect for the fourth quarter?

As earnings season starts in a few weeks, most companies are in the process of reducing their earnings forecast based on continued inflationary pressures and higher borrowing costs from rising rates. Only 7% of stocks in the S&P 500 are trading above their 50-day moving average. A month ago, that number was more than 90%. Leading economic indicators continue to show weakness in the global economy, and more economists think a recession may occur in 2023. As we have written many times, the stock market is a leading indicator. By the time the recession arrives, the stock market will be looking ahead and ramping up for the recovery phase.

Here’s what are we watching:

The Federal Reserve: The Fed has forecasted that the Fed Funds rate may move closer to 4.5% by the end of the year. Short-term rates have risen along with the higher Fed Funds Rate. If the Fed indicates it may ease interest rate hikes, we could see a market rally.

International banks: Over the weekend, rumors of potential liquidity issues at Credit Suisse spread through the markets. Questions about risk management and the firm’s ability to compete against larger Wall Street banks sent the stock plunging. Investors fear another “Lehman Brothers moment,” but since the Great Financial Crisis, we have seen a complete overhaul of the banking system to minimize another Lehman scenario.

Market volatility: Market volatility is always unsettling, but historically it is not unusual. We view volatility as an opportunity to purchase more of what you own when we have larger movements in the market.

Midterm elections: As we recently wrote, the S&P 500 has historically outperformed the market in the 12-month period after the election, with an average return of 16.3%. Since 1962, the S&P 500 has not experienced a negative return either six or 12 months following the election. The stock market has historically preferred when one party is in the White House and the other party controls Congress, even if no major legislation is passed.

Bear markets do not last forever. We are in a bear market for the Dow, S&P 500 and NASDAQ. Going back to 1929, the average bear market lasts 20 months and has an average loss of 41%, as seen in the chart below on the right. However, the average bull market lasts 51 months and has an average return of 161%. The chart on the left shows how long it may take to get back to the all-time market highs seen in January, depending on the average annual return achieved. Staying invested during these times allows you to participate on the upside when the market recovers – which, historically, it always has.

Equity scenarios: Bull, bear and in between

Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. (Left) The current peak of 4797 was observed on January 3, 2022. (Right) *A bear market is defined as a 20% or more decline from the previous market high. The related market return is the peak to trough return over the cycle. Bear and bull returns are price returns. **The bear market beginning in January 2022 is currently ongoing. The “bear return” for this period is from the January 2022 market peak through the current rough. Averages for the bear market return and duration do not include figures from the current cycle. Guide to the Markets — U.S. Data are as of September 30, 2022.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: JP Morgan, Carson Investment Research, CNBC, Schwab

Promo for an article titled Here's How the Fed Hopes to Get Inflation Pressures Under Control

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Here’s How the Fed Hopes to Get Inflation Pressures Under Control

Last week, the Federal Reserve raised the Federal Funds Rate by another 75 basis points (.75%) for the third consecutive meeting. The current range is 3.00% to 3.25%. The Fed expects the Federal Funds Rate to reach 4.50%, implying another 125 basis points (1.25%) of tightening through interest rate hikes. Chairman Jerome Powell hinted that the goal of taming inflation is likely to induce a recession: “Reducing inflation will likely require a sustained period of below-trend economic growth. No one knows whether this process will lead to a recession or, if so, how significant the recession will be.”

At the same time, the Bank of England, Sweden’s central bank, Bank of Canada and European Central Bank have all raised rates by a minimum of 50 basis points (.50%) in the last few weeks. The global outlook is driven by the impact of central bank actions, as well as war in the Ukraine and lockdowns in China.

Powell’s comments pushed stocks sharply lower and sent the U.S. dollar to a 20-year high. (See our previous article: What Does a Stronger U.S. Dollar Mean for You?) Last Friday, stocks closed at their lowest levels since the pandemic in 2020. Stocks have struggled since an unexpectedly hot inflation report in August shocked investors who were looking for price relief. On top of the recent inflation report and the Fed raising rates again, September historically has been the worst month in the stock market, dating back to 1897. Since 1944, only two months have averaged negative returns, with September averaging down .56%, as shown in the chart below.

Theories abound as to why this is the case. It is generally believed that investors come back from summer vacation and want to sell holdings to lock in gains for the year, while others speculate that September marks the beginning of the period when mutual fund companies start to pay distributions, which triggers tax-loss selling. October has seen the largest decline in terms of percentage — think of the crash of 1987 — but historically has been a strong month on average, returning almost 1%.

Chart showing that since 1944, only two months have averaged negative returns, with September averaging down .56%, — *Source: CFRA BMO*

Historically, when stocks have decreased in value, the bond market has been there to offer a “buffer” or help mitigate downside risk. As the chart shows below, in each instance that the S&P 500 has decreased, going back to 1977, bonds have increased. However, that has not been the case this year. Through the end of August, the S&P 500 and the Bloomberg U.S. Aggregate Bond Index are down double digits. Over the last many years, the stock market has been the primary source of returns as money market and bond yields have been close to 0%. These conditions are sometimes called “TINA,” an acronym for “There Is No Alternative.”

We are moving from TINA to TARA — There Are Reasonable Alternatives. With the Fed Funds rate at 3% and the 2-year Treasury bond over 4%, savers can earn more money on their cash alternatives, and investors do not have to reach for excess yield either in the stock market or through lower credit risk in the bond market.

Chart showing that in each instance that the S&P 500 has decreased, going back to 1977, bonds have increased — Sources: Capital Group, Bloomberg Index Services Ltd., Standard & Poor’s. Returns above reflect annual total returns for all years except 2022, which reflects the year-to-date total return for both indexes. As of August 31, 2022.

The Fed has made it abundantly clear that it is willing to sacrifice growth for lower inflation. Growth expectations were revised lower for this year and next. The Fed’s new forecast for 2023 Gross Domestic Product (GDP) is 1.2%, with an unemployment rate of 4.4%. The Fed needs both GDP to decline and the unemployment rate to increase for inflation to return to its 2% target level. This is because if the overall output of the economy is increasing, price increases may follow as demand outpaces supply. If GDP is declining, corporate profits are less, and demand is decreasing — which in turn may lead to price decreases.

Much of the most recent inflation increase has been attributed to wage growth. If unemployment increases, then the upward pressure on wages may subside, bringing inflationary pressures down. The economy will be better off the sooner the unemployment rate reaches the “natural rate of employment,” which is the rate that is neither too low and inflationary nor too high and recessionary. At the same time, for the economy to turn the corner, demand and growth need to subside to help with inflationary pressure.

Should inflation begin to recede through a soft labor market and slowing GDP, markets may rebound on prospects for an end to the aggressive rate hikes of 2022. We will need to see several months of evidence that services inflation and wage inflation are trending down. It is critical to remain forward-looking and invested. The fourth quarter is historically the strongest quarter of the year. Missing out on the market rebound, when the largest up days typically occur in a bear market, can be detrimental to the long-term plan that has been constructed for both the good and bad times.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: American Funds, CFRA BMO, Schwab

Promo for article titled Tips for Planning Charitable Donations, on North Texas Giving Day and Beyond

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Tips for Planning Charitable Donations, on North Texas Giving Day and Beyond

Today is NTX Giving Day in North Texas. It’s an annual tradition through which the Communities Foundation of Texas connects donors with charities in need and fulfills its mission to put giving to work throughout our local communities.

What a great time to think about making charitable donations for both philanthropic and tax purposes! No matter your interests, making gifts to causes you care about can be one of the most meaningful uses of your money. In the end, what really matters is helping an organization that matters to you. The tax benefits from a donation are just icing on the cake.

Along with the intangible rewards that come from helping others, charitable giving may offer a financial benefit for you and your family.

Most donations to charitable organizations come in the form of checks and credit card payments. However, there may be more efficient ways to donate, which in turn help both the charity as well as your pocketbook. Understanding the benefits for different type of donations is important. Here are some options to consider:

• Cash, check or credit card: This is the most simple and straightforward way of donating to charity. It is important to keep a bank record or a receipt from the charity to substantiate a cash gift. Annual income tax deduction limits for gifts to public charities are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if held for more than one year, and 60% of AGI for contributions of cash. If contributions are made in excess of those limits, the excess may be carried over for up to five years. If you do not have appreciated assets to give or want to give cash, it may be beneficial to combine or “bunch” two years’ worth of charitable contributions into one year so you can take advantage of itemizing deductions.

• Appreciated stock: If you donate stock that you have held for at least 12 months, you can deduct the full value of the investment without having to pay capital gains on the appreciation. The current fair market value of the stock is deducted from your taxable income. Often, clients may donate the stock with the biggest winnings, which maximizes savings on capital gains, and then buy back the same stock with cash, which in turn, raises the cost basis. As the chart below shows, if you were to sell appreciated stock and then donate cash to charity (compared to gifting appreciated stock), not only would you save on taxes (the charity does not pay capital gains tax), but the charity would also receive additional monies!

Chart showing strategy for charitable donations involving appreciated stock — This hypothetical example is only for illustrative purposes. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor’s income tax rate (24% in this example), minus the long-term capital gains taxes paid. Reprinted from Schwabcharitable.org.

• IRA Qualified Charitable Distributions (QCD): This is an option only for donors over the age of 70 1/2. QCDs allow individuals to donate up to $100,000 annually directly from their IRA to charitable organizations. This reduces the value of the IRA, and the QCD does not count towards the donor’s taxable income. It also counts toward the annual required minimum distribution.

• Donor Advised Fund (DAF): Picture a donor advised fund as your family foundation, without the headache and administrative hassle of setting up a family foundation. A DAF is a charitable account established at a public charity or community foundation that allows donors to recommend grants over time. The donor decides the timing of the donation, the charity that will receive the donation and the amount of the charitable donation made from the DAF. The donor claims the tax deduction upon funding of the DAF. There is not a requirement that the DAF distribute 5% of the fund each year, which may allow the DAF to grow, expanding the available dollars to donate to charities.

At CD Wealth Management, charitable giving is a significant part of our company’s culture. We believe in giving back with our time as well as our pocketbook. We support many causes in the Dallas-Fort Worth area, and we encourage team members to be involved in the community. Each year, during the holiday season, the company makes a charitable donation in each one of our team members’ names to their charity of choice, offering an additional thanks and helping a great cause at the same time.

Please do not hesitate to reach out to us to discuss your charitable options to help you determine the best way to give for your situation. If you are interested in taking part in NTX Giving Day, click here. (Please note that all funding options described above may not be available for NTX Giving Day.)

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Baird, BMO, Schwab

Promo for article titled Is a Roth IRA the Right Choice for You? Here’s What You Should Consider

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Is a Roth IRA the Right Choice for You? Here’s What You Should Consider

In the financial planning process, clients often ask us if it makes sense to open a Roth IRA or convert a traditional IRA to a Roth IRA. As a refresher: With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. Roth IRAs are best suited for individuals in a lower tax bracket who expect to be in a higher tax bracket when they start taking withdrawals later in life. A traditional IRA may be best suited for those who expect to be in the same or lower tax bracket when they start taking withdrawals in retirement.

There are three main distinctions between a traditional IRA and a Roth IRA: eligibility, tax treatment and withdrawal requirements. The chart below provides a good summary on the differences.

• Eligibility – With both types of IRAs, the owner must have earned income to be eligible to contribute. For a Roth IRA, you must remain under a total income threshold to be eligible to contribute (income limits can be found here). There are no such limits with a traditional IRA; anyone at any income level can contribute.

• Tax treatments – Contributions to a Roth IRA won’t provide any immediate tax benefit because they are not deductible. Contributions to a traditional IRA may be deductible if you are not a participant in an employee-sponsored plan. Withdrawals from a Roth IRA can be tax-free if requirements are met. Withdrawals from a traditional IRA are typically fully taxable as ordinary income.

• Withdrawal requirements – Both traditional and Roth IRAs allow for withdrawals of any amount once you reach age 59½. Once the owner reaches age 72, traditional IRAs are subject to the required minimum distribution (RMD) rules, forcing money out of the IRA and triggering ordinary income. There are no RMD rules related to Roth IRAs; owners can leave the money in the Roth IRA to grow tax-free as long as they want. A Roth IRA’s beneficiaries generally will need to take RMDs to avoid penalties, although there is an exception for spouses.

Chart showing the differences between traditional and Roth IRAs

For those who are not eligible to contribute to a Roth IRA, there still is a way to take advantage of the tax-free growth. The Roth conversion, also known as a “back door Roth IRA,” allows a taxpayer to withdraw funds from a traditional IRA in a taxable distribution and then roll those monies into a Roth IRA. There are no income thresholds for a Roth conversion. If your tax bracket in retirement may be higher than your current tax rate, it may make sense to convert to a Roth IRA from a traditional IRA. This could happen if you accumulate significant savings in your retirement accounts or achieve top earnings later in your career. Here are five potential reasons to convert to a Roth IRA:

1. Portfolio losses: By converting a traditional IRA to a Roth IRA, the tax will be assessed on the value on the date of the conversion. If you convert to a Roth IRA while the value is lower, the amount of tax owed will be less, and the rebound in value can grow tax free.

2. Anticipating higher tax brackets: If you expect your tax bracket to be higher in retirement, then you may prefer to pay tax on savings now, while you are in a lower tax bracket, and then access those funds tax-free in retirement.

3. Longer growth horizon: Roth IRAs have no RMD obligations, whereas traditional IRAs have RMD after the age of 72. Money in a Roth IRA can stay invested in the stock market longer, giving additional opportunities for growth.

4. Helping your heirs: If your traditional IRA is passed on to your heirs, they will also owe taxes on their withdrawals — and they must be completely withdrawn after 10 years. The Roth IRA withdrawals will be tax free, so you are effectively gifting tax savings to your heirs.

5. Paying for Medicare: If you are enrolled in Medicare Part B or D and your modified adjusted gross income (MAGI) is above a certain threshold, you pay a surcharge on top of your Medicare premium. Withdrawals from a traditional IRA are included in MAGI, while withdrawals from a Roth IRA are not.

Keep in mind the two biggest drawbacks to a Roth IRA conversion are that you must pay income taxes on any pre-tax funds you convert in the year you make it, and you cannot change your mind once you convert. It generally makes sense to use taxable assets rather than proceeds from the converted IRA to pay the tax cost of the Roth IRA conversion. This is because — all things being equal — the rate of return is generally higher for a Roth IRA because no taxes are due for any gains inside the Roth IRA.

Please remember that CD Wealth Management does not offer tax advice, but we work closely with your CPA and attorneys to ensure the right strategy is in place for you and your situation.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Fidelity, Schwab

Promo for an article titled The Importance of Compound Interest and Tax Planning on Your Portfolio

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Importance of Compound Interest and Tax Planning on Your Portfolio

Benjamin Franklin famously once said that “Money makes money. And the money that money makes, makes more money.” He was referring to compound interest. When interest you earn on a balance in a savings or investment account is reinvested, you earn even more money. You aren’t just earning interest on your principal balance; you are earning interest on your interest as well.

For example, if you make a one-time investment of $10,000, then earn 9% per year, the chart below shows the power of compounding your money. After 10 years. the initial $10,000 investment would be worth more than $24,000 — and after 30 years, it would be worth more than $133,000.

Chart showing returns on compound interest versus simple interest over time — Source: Investor.gov, as of November 4, 2021. This hypothetical example assumes the following: (1) starting investment of $10,000; (2) no additional pre-tax contributions; (3) an annual rate of return of 9%; (4) the ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pre-tax contributions are subject to taxes when withdrawn. Distributions before age 59 1/2 may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 9% annual rate of return also come with risk of loss

There is a shortcut to help you estimate the value of a future investment, called the Rule of 72. It’s a quick way to estimate approximately the number of years it will take to double your money using compound interest. As seen in the chart below, if you earn a 6% compounded return per year on your investment, then in about 12 years your money would be worth double. If you annualize 12% a year for 48 years, $10,000 could turn into over $2,500,000! To use the Rule of 72, simply divide 72 by the expected annual rate of return and that will provide you the number of years it would take to double your investment.

Chart explaining the Rule of 72 as it regards compound interest

Simple interest is interest that is earned based solely on the principal amount and is not reinvested. For example, if you have $1,000 and earn a 5% annual interest rate, you will get $50 a year in simple interest. In the second year, you would earn another $50. To calculate how long it would take to double your money with simple interest, the formula would be 1 divided by the rate of return. For example, if you made the same investment of $1,000 earning 5% simple interest, it would take you 20 years to double your money. Note that if you were able to reinvest the money and have it compounding, then it would take approximately 14.4 years to double.

It is important to consider tax implications prior to making any investment. If an investment is going to pay 10% interest on your principal and is in a taxable account, your actual return may be only 6% if you are in a top tax bracket and the income is taxed as ordinary income. If you are not able to reinvest the income, then the income becomes simple interest, and your money can take even longer to double. Suddenly, the 10% investment return that sounded great may not be nearly as good.

Taxes can dramatically impact your investment portfolio, both in the short and long term. There are different types of taxes on investments, and each one is taxed differently:

• Capital gains are profits from the sale of an asset. If you own the asset for more than one year and you sell for a gain, then you will pay long-term capital gains tax. The rate depends on your income level and can either be 0%, 10% or 20%. If you own the asset less than a year and sell it for a gain, then the gain will be taxed as ordinary income.

• Dividends usually are taxable income in the year that they are received. Even if you reinvest the dividend income, you pay tax on that income that year. There are two types of dividend income – qualified and non-qualified. Non-qualified dividends are taxed as ordinary income. Qualified dividends are taxed at either 0%, 15% or 20%, based on income level.

• Investments in 401Ks or IRAs allow you to defer taxes while the money is inside the account. Taxes are paid when you make a withdrawal, and that money is then considered ordinary income and is taxed at your income level.

Portfolio design and allocation are very important in order to minimize the tax impact on your returns. Structuring the portfolio to have the least tax-efficient assets in retirement accounts helps ensure that those assets are being taxed at ordinary income levels. The chart below shows the difference that tax management can have in a portfolio over time. If your portfolio is managed inefficiently — if it is heavily traded and focused on short-term gains — a $1 million portfolio could miss out on as much as $500,000 of returns over a 10-year period. Compound interest is an extremely powerful tool — whether it is in a retirement account, such as a 401K or IRA, or a taxable account, earning qualified dividends that are reinvested.

Chart showing the impact of taxes on investments over 10 years

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Fidelity, Forbes, Investopedia, Russell Investments

Promo for an article titled Student Debt, Loan Forgiveness and the Crazy Cost of College

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Student Debt, Loan Forgiveness and the Crazy Cost of College

Those of us with kids or grandkids are well aware of the crazy cost of college today. Between 1980 and 2020, the average price of tuition, fees and room and board for an undergraduate degree increased 169%. In 1980, the price to attend a four-year college full time was roughly $10,000, adjusted for inflation. By 2020, the total price had increased to roughly $29,000!

Why have the costs of college gone up over time? There are many reasons: growing demand, pressure to go to college, rising financial aid, lower state funding, cost of administration and increasing student amenity packages to keep up. Aside from tuition payments, public colleges depend on funding from state and local governments. Typically, state and local funding make up about 44% of public four-year college revenues. However, economic downturns like we saw in 2008 and 2020 can lead to funding cuts. To make up for the lost dollars, universities must turn to other sources to raise monies, with the most direct source being higher tuition.

For most people, the cost of college may not be manageable – let alone the cost of graduate school or medical school.

More than half of bachelor’s degree recipients from public or private four-year colleges graduated with debt in 2020, with the average debt load being $28,400.

For college graduates with $50,000 or more of debt, the idea of one day owning a home and being debt-free feels like it’s a world away.

Even before President Biden was elected, one of his objectives was to provide student debt relief. Last week, he announced that the government will provide $20,000 in debt relief to Pell grant recipients and $10,000 for many other borrowers. Roughly 43 million Americans hold federal student loan debt, estimated at $1.75 trillion.

Chart showing the growth of student debt for college tuition from 2006 to 2022

Borrowers eligible for loan forgiveness must make less than $125,000 per year individually or $250,000 if married for the 2020 or 2021 tax year. Private loans will not be forgiven as part of the debt relief act. At the same time, the president also announced an extension of the pandemic pause on student loan payments through the end of the year, with payments resuming in January 2023. The Education Department said nearly 8 million borrowers are likely to have their loans forgiven automatically, and the remaining borrowers will have to apply for loan forgiveness. Current students also are eligible for loan cancellation, provided their loans were obtained before July 1, 2022.

There also is a new income-based repayment plan. For undergraduate loans, the relief act caps monthly payments at 5% of a borrower’s discretionary income; currently, borrowers must pay 10%. For borrowers with original loan balances of $12,000 or less, the balance will be forgiven after 10 years of payments; currently, they have to repay their loans for 20 years.

The plan will provide relief for borrowers at a time when the cost of education continues to surge. Critics question the fairness of the plan and warn about the potential impact on inflation should students with forgiven loans increase their spending. The debt forgiveness plan will not be like the $1,200 relief checks that the government sent out during the global pandemic, however they will be relieved of making loan payments over many years. Critics also believe that this relief bill penalizes those who scrimped and saved for college and worked jobs while in college to pay off their loans.

The elephant in the room remains the exorbitant cost of college, and many fear that government debt relief might encourage future students to take on even more debt, allowing colleges and universities to raise prices even further.

Chart showing the highlight's of Joe Biden's student loan debt plan for college costs, including tuition

Regardless of political beliefs, the affordability of higher education remains a larger issue. Between 2000 and 2021, the cost of college tuition increased at more than twice the pace of overall inflation, despite a slowdown in tuition hikes during the pandemic. As is most often the case with many bills passing Congress, only time will tell the full economic impact of the Student Relief Act.

While the form for forgiveness is not available yet, federal student loan borrower updates can be received by subscribing via the Department of Education’s website here.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Forbes, CNBC, Newsweek, USA Today

Promo for an article titled Are Alternative Investments Too Good to Be True? Here's What You Should Know

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.