Financial Planning In The Coronavirus Economy

As we’ve discussed many times before, both in person, as well as in our writings, investment risks and expected rewards are related. We are certainly experiencing that now. Here are three encouraging thoughts to keep you grounded right now.

1. PREPARATION BEATS PANIC – While conversations about risk and return during stable times may seem abstract to you, that perhaps we’re “checking the boxes” professionally, we intentionally do this to understand YOU and assess your goals and risk tolerance, in order to invest each account into its most appropriate model. You might have a completed financial plan or retirement plan that drives the conversation about necessary returns to achieve your goals. Even if you do not have a formal plan, our portfolio modeling conversations always center on financial planning principles, i.e. your age, circumstances, risk tolerance, income needs household goals, and the intent for each account.

We have already collaborated with you to help identify the right balance to strike between accepting risk and “reward”, or necessary returns for each account. We then build and manage each broadly diversified portfolio using thoughtfully-researched investment positions. We’ve already done that…together.

We’ve already prepared the hard work on the front end to assemble your purpose-driven portfolios. Today’s hard work is recognizing that your investment plan is in place, we have accounted for periodic declines, even severe ones, and “active patience” is the best strategy for riding out this current environment.

2. PATIENCE WINS – Our advice on investing during volatile times remains the same: patience wins. That is fact-based going back 75 years to the end of World War II, i.e. the ‘modern investing era.’ Numerous studies conclude that sticking with initially-modeled portfolios through market cycles leads to investment success. Risks do drive expected returns.

However, we also understand that for some people fear may be stronger than greed, which motivates some clients to sell or change models for fear of “losing everything.” These few clients usually make emotional portfolio changes at or near market bottoms. They receive the initial satisfaction that they “did something” to preserve their capital; though ultimately most of these clients wind up financially lesser off because they either don’t go back into their previous models, or they re-enter after the news has brightened and the markets recovered past their sell point. Consider this:

As a train needs its engine to move, markets require risks to drive them onward and upward.

Rather than focusing on daily headlines and account balances, try to understand that your portfolios are already geared to weather today’s declines, and to recover when the recovery happens. Since 1945, the market has always recovered, so why should this time be any different? Ben Carlson, author of “Don’t Fall For It: A short History of Financial Scams,” wrote:

“Every successful investor must understand there is a sacred relationship between risk and reward. There is no proven way to earn a high return on your capital without taking some form of risk nor is it possible to completely extinguish risk from your investments.”

We simply define “high” in the above statement as anything above cash returns, and specifically not inappropriately aggressive. That would be imprudent.

3. WE STAND WITH YOU – As we work our way through the pandemic’s effects on our social lives and your portfolio, you might be wondering if your risk tolerance isn’t what you thought it would be during a crisis like this. If so, consider yourself normal! Even those who cognitively understand the wisdom of staying the course, emotionally it’s not easy for some. We still suggest that you reassess after the storm has passed. You wouldn’t expect someone to assess the damage to your paint and roof in the middle of a hailstorm, so why do that with your portfolio? Sit tight, let it pass. Once things stabilize, make sure to let us know that you’d like to revisit your risk tolerance and goals in order to ensure your portfolio modeling is correct.

We cover this during your Annual Review and periodic conversations, but if it’s on your mind now, please contact us. Together, we’ll objectively look at your situation and feelings to continue to chart a sensible course forward.

OTHER HELPFUL INFORMATION

As you may know, Congress and the Treasury Department have worked together to provide relief to individuals and small businesses, such as the CARES Act. Click here for an excellent CARES Act Commentary by Steve Leimberg, a well-regarded author in our field.

Some highlights:

  • Tax filing deadlines have been extended to July 15.
  • Retirement contribution deadlines, such as IRAs that had an April 15 deadline, are also moved to July 15, with some deadlines extended to tax filing dates on extension.
  • Required Minimum Withdrawals are suspended for 2020. You do not need to take them. If you have already taken your 2020 RMD, and would like to put it back into your IRA, you are able to do so up until July 15. This does NOT apply to RMDs taken in the month of January, only for those taken February 1 and later. Further, RMDs from non-spouse beneficiary IRAs are suspended, but if you’ve already taken the RMD, you can not roll it back into the IRA, since non-spousal rollovers are disallowed anyway.
  • Mortgage Forbearance – While recent regulations have allowed for certain homeowner’s mortgage forbearance relief, our mortgage experts warn about being careful in this area. It should only be used as a last resort, especially since it has not been made clear how your credit rating may or may not be affected. It could be very difficult for a credit bureau to determine if your situation is reasonable, or a late payment. Be careful, check with a mortgage expert before going that route.
  • Conversion to Roth IRA – This could be a good year to convert part or all of your IRA to a Roth IRA: 1) if your 2020 income is expected to be much lower, then perhaps the tax cost of conversion makes sense, and 2) converting existing IRA assets at lower market prices could provide you with a significant tax benefit as the assets recover in the tax-free Roth.
  • Withdrawals from Qualified 401k/ERISA Retirement Plans – There are many, so if you need relief by accessing your retirement account with us or your company-sponsored plan, PLEASE contact us first as there are also potholes to consider.

Here is the link to our annual ADV-2, which is the most recent annual disclosure form for Silversage Advisors, an SEC-registered investment firm.

Finally, Winston Churchill wrote, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” We shall get through this, and patience is one of our greatest allies. Stay strong, stay healthy.

Jeff Garell, CFP®
Michael Campbell
Bob Emmer, CFP®

“Active Patience” Pays Dividends

Spring thaw came very early for the capital markets, proving once again that sticking to your model and investment plan is the soundest advice during most market downturns. Our firm refers to this as “active patience,” meaning that you consciously do your best to remain calm and invested in your model while the news headlines swirl about.

Since World War II, the markets have recovered 100% of all declines, with recovery times averaging around 2 years, ranging between a few months to 4+ years. Patience wins. Baseball players who get a hit just 30% of the time produce a hitting average of .300, which qualifies for the Hall of Fame. Markets have recovered EVERY TIME. We just don’t know how long it takes to recover. But it doesn’t take decades. You actually have time for your accounts to recover from downturns, and patient investors are rewarded with the returns they need to maintain sustainable retirement income.

Another baseball analogy: Assume a 5- to 7-year market cycle is akin to a 162-game baseball season between late March and early October. If your team goes on a losing streak in June that drops them from first place to a few games back in second place, is the season lost? Do you expect your potential World Series team to win every game during the year? Of course not. Do you expect your accounts to always be up every day and every quarter? Sometimes they are down for a whole year (2018). But the focus is on the whole season, not just a handful of games. Our focus is managing your portfolio to last your lifetime, not just a year or two.

So, back to headlines. Seems lots of people are still worried about a potential recession affecting their portfolios. Once again, paying more attention to the headlines rather than sticking to an investment model has hurt those investors who made changes in late 4Q 2018. We don’t play “what if” games with your hard-earned investment capital. Headlines come and go. Patience wins.

Spring cleaning may not be fun, and some people find estate planning to be a similar task. But it’s essential to have your affairs in order. Has it been more than 10 years since your wills and trusts have been updated? Do you list a trust as a beneficiary of an IRA? Do you know why? If we haven’t reviewed your estate plan with you recently, please call us. We are not attorneys, but we help clients understand the implications of certain beneficiary choices, and we suggest getting highly qualified legal advice for your estate plan.

What Does Tax Reform Mean For Investors?

If you’re like us, visions of sugarplums aren’t the only things dancing through your head this time of year. Major changes in tax policy — the biggest reform in three decades — have given both investors and firms like Silversage Advisors a lot to consider in their financial planning as 2018 comes to a close.

Overall, the tax reform this year provided several ways for investors to reduce their tax bill or increase their refund. The change with the most direct impact has been the decline in tax rates for most income brackets…but there were a number of less-publicized changes as well.

Here’s a brief overview of the most significant tax reform changes:

Higher Standard Deductions

One of the major benefits for many individual taxpayers is the higher standard deduction, which is now $12,000 for individuals — up from $6,350 last year. For married couples filing jointly, that deduction is now $24,000, up from $12,700 in 2017.

With nearly double the standard deduction, taxpayers who typically itemize should revisit whether that strategy is still in their best interest. Of course, if deductions such as charitable donations, interest on student loans, etc. exceed the higher standard deduction, it still pays to itemize.

Limited Mortgage Deductions

Now, homeowners can only deduct interest on mortgages of up to $750,000, down from $1 million allowed by the previous tax policy. This also applies to home equity loans if they are used to purchase a second property. And interest paid on home equity lines of credit is no longer tax deductible.

Business Income Deductions

Tax reform has also brought major changes for the way business income is taxed. For C corporations (where business income is taxed separately from an owners’ income), the tax rate was cut to 21% from 35%.

Other “pass-through” entities — sole proprietorships, LLCs, partnerships and S corps (which have fewer than 100 shareholders and are typically taxed as a partnership) — have also been affected. Many of these business owners will see a new deduction of 20% for qualified “pass-through” business income, a popular form of business income that is not taxed at the corporate level.

For many business owners, the revised deduction will reduce their income and provide the kind of tax savings found in a lower tax bracket. Those in a high tax bracket with a 37% rate could possibly bump down to a tax bracket with the lower rate of 29.6%. This deduction is reduced if the owner’s income is more than $157,500 if filing individually, or $315,000 if married filing jointly.

Limited SALT Deductions

High-income earners in high-tax states like California and New York will likely pay more in federal taxes as a result of the SALT (State And Local Tax) deductions now being limited to $10,000.

For perspective, 33.86% of California returns filed in 2014 included a deduction for state and local taxes according to IRS data. The average California SALT deduction was $17,148.35.

Expanded 529 Education Plans

Traditionally, 529 savings accounts were adopted to help families save for a college education. They allow funds to grow tax-free until withdrawn for qualified education expenses such as tuition, supplies, computers, etc. But for federal tax purposes, the new changes have expanded the use for these plans to include attendance costs for private or religious elementary and secondary school tuition. In many (but not all) states, these new uses have been approved for state tax benefits as well.

For primary education (K-12) expenses, funds in a 529 account can be used to pay for up to $10,000 each year per student (there’s no limit for qualified college expenses). Contribution limits are unchanged at $15,000 per year for individuals and $30,000 for joint filers.

Unchanged Policies

Although tax policy has incurred considerable changes, some policies many thought would be included in the overhaul have remained intact. For example, taxes on capital gains and dividends still start at 15% for taxpayers in the lower brackets and up to 23.8% for those in the highest. And retirement accounts like 401(k)s and IRAs continue to provide the same tax breaks.

For traditional IRAs and employer-offered 401(k) plans, taxpayers can deduct any contributions made to these accounts from their income tax, and delay paying a tax until they withdraw the money in retirement years. For Roth accounts, investors who deposited funds over the years can continue to rely on that money not being taxed when they withdraw it.

It’s always wise to consult your tax adviser and/or CPA when considering year-end tax strategies. We wish you a prosperous new year and are happy to discuss any questions you have regarding the impact this year’s tax reform may have on your wealth planning strategies.

Contact us with any questions at 1-888-969-7500, info@silversageadvisors.com or via this form