A client sent us this cartoon so we thought we would share with you. We LOVE investment advising humor so feel free to send us what you see too!

I well recognize that the title of this blog is a bit of an oxymoron (how do we limit something which is required???) but Investopedia recently published an article on this very topic. Not necessarily new ideas here but an interesting different perspective on this question, which we all ask nearly every day.

Four strategies are discussed by Investopedia if the money from the IRA is not needed for expenses right when the investor turns 70 ½:

• Delaying retirement
• Converting to a Roth IRA
• Managing the timing of the initial distribution
• Donating to a charity from your IRA

Delaying retirement past 70 ½ is a possible way to delay paying income taxes on your retirement account. This rule, which only applies to a 401K at your current employer, allows you to delay taking your RMD and PAYING THE TAXES on it until you actually retire. Note that this does not postpone required distributions from other retirement accounts; it only applies to a 401-K at your current employer. This is an interesting idea but I’m not really buying this one.

Converting to a ROTH IRA is a great option since it eliminates taxable required distributions forever, not only for you, but also for your heirs. The downside is that you have to pay tax on the conversion amount in the year of conversion. That obviously can be very expensive in that year. It is a possible option for investors who have the cash to pay the tax outside of the IRA and who do not need the required distributions for current expenses. Think of a ROTH IRA conversion, not only as a strategy to reduce your current required minimum distributions, but also as an estate planning tool since you are leaving a tax free asset to your heirs. I’m sure we all know one person this caveat applies to. I suggest we all get to know more!

Managing the timing of the initial distribution is another way to postpone the initial distribution. The first distribution is required by April 1 of the year following the year the retiree turns 70 ½. After that, distributions are required to be taken annually by December 31. This timing means that a retiree could have to take two distributions in the first year, which could push the retiree into a higher tax bracket. In almost all cases, we recommend going ahead and taking the initial distribution in the year you turn 70 ½.

We have talked in earlier blogs about donating to a charity from your IRA. As a reminder, you can donate your RMD up to $100,000 to an IRS qualified charity and not pay taxes on that amount. This option is only available in IRA’s, not 401K’s or other employer-sponsored retirement plans, so if you want to do this when you are 70 ½, you will need to roll over your 401K – which we can help you with.

As always, we can discuss any of these options in more detail with you!

-Lori

There was a recent article in Money Magazine which claimed that 2/3 of Americans have dollars in savings accounts which pay less than 2% APY. The article went on to say that 20% of the population earn less than 1% and 25% earn nothing at all on their savings accounts.

While all of you proved your financial literacy a few blog posts ago, we know that you may have family members or friends who might benefit from a reminder about online high yield savings accounts. These accounts are great for that very important cash reserve that we always talk about. Account owners can get quick access to cash while generating some income. Remember that savings accounts of any type are not LFS managed assets, but we are happy to help you (or the friend you are asking for) get an account opened.

Online high yield savings accounts currently pay about 2.5% APY. These online banks can pay higher interest because they have lower expenses. Generally they have no branches or checking privileges and will often limit the number of transactions per month. That means that account holders will need to electronically link their online savings account to their checking or credit union account. Luckily this is easy to do.

There are many online savings accounts available, as a quick online search will reveal. They have slightly different features, so read the fine print. We like Synchrony (link attached) because it is FDIC insured up to $250,000 with no monthly fees and no minimum balance. Withdrawals can be made online 24/7, by phone or via ATM. Synchrony High Yield Savings accounts are currently paying 2.3% APY.

Lori

https://www.synchronybank.com/banking-resources/faq/?UISCode=0000000

There have been a number of recent Wall Street Journal articles which highlight how the ever increasing number of choices in just about everything we do in life has made us less and less capable of, and willing to, actually make a decision. One of the recent articles entitled “America Shows You Can Have Way too Much of a Good Thing” poked fun at the choices we have in life – in everything from the types of yogurt on the shelf to the number of Netflix movies.

We especially enjoyed the reference to the number of mutual funds (pegged at 9356 in this article) and the author’s poke at how many are really needed.

But that got us thinking…. How many are really needed and then how can we make this simper every day for all of us?

Of course there is no agreement in the investment advisory community about how many mutual funds are needed in an individual portfolio. The number needed depends on the investment objectives – which are different for each client and each portfolio. Of course all portfolios also need to be sufficiently diversified to minimize the risk that assets will have to be sold when the market is low in order to access cash.

Our goal is to achieve your investment objectives with fewest number of funds possible. We are always challenging ourselves to consolidate and simplify. For example, there is no reason to have multiple funds with the same large cap holdings. If the holdings are the same, let’s just use the one with lower expenses.

This article made me count how many mutual funds we actually have clients in. The answer is fewer than 100 – or about 1% of that 9356 total count.

But our 100 count and the 9356 count don’t include ETF’s, individual stocks/bonds, any securities on foreign exchanges, money markets etc etc.

Exhausted yet?

Lori

There has been a lot of recent press about the inverted yield curve so without getting too geeky, I thought I would learn something about it and then share with all of you. The answer to “what it is” is much easier than the answer to “why should I care”.

Easy question first…

In a normal economic world, there is a lot more uncertainty in the economic outlook 30 years from now than there is 2 to 3 years from now. To compensate for that uncertainty and risk, borrowers pay more for long term 30 year Treasuries than for shorter term ones. The result is that we as the bondholders normally get paid higher interest rates for longer term bonds of equal credit quality. In an inverted yield curve world, some shorter term bonds actually pay higher interest rates than longer term bonds. For example, in late 2018, yields on 5 year notes actually fell below the yields on 2 and 3 year notes. This is an extremely rare situation and of course the pundits disagree on why it happens and what it means. There are books written on this subject.

So now the harder question about what it means for all of us average investors…

Historically an inverted yield curve has preceded many of the most recent recessionary periods (2005, 2006 and 2007) when equity markets collapsed. Not all yield inversions have led to recessions BUT when we have had recessions in the last 50 years, there was a preceding inversion in which yields on longer term Treasuries were lower than yields on shorter term Treasuries. An inverted yield curve predicts higher short term interest rates, which might mean that corporations and governments have to curb expansion because it’s just too expensive to borrow money. Consumer spending also slows because of increased borrowing costs. This lack of spending can be a precursor to recession. Historically it’s been 12-24 months after an inversion before a recession hits, if it does at all.

So now what?

No one knows what will happen a year or two from now so we continue the push to develop diversified portfolios for you and recommend healthy cash reserves so that the need to sell equities at an inopportune time is greatly reduced or eliminated. The market will go down – we just don’t know when or how much! In the meantime, the market is looking strong, so keep up the dollar cost averaging and look at those 401K statements as you send them to us!

Lori

Who even knew there was such a thing as Financial Literacy Month? But now that we know, we couldn’t help but dig a bit deeper….

Financial Literacy Month (April) was actually conceived in 2003 with a focus on teaching children and teenagers about money. It was “re-designated” by Barack Obama in 2010 after the financial crisis. Obama wanted us all to remember that the financial crisis of 2009 was caused by Wall Street and by Main Street. The need for improved financial literacy is something that both parties and Congress actually agree on. That alone makes this month noteworthy!

So just what is financial literacy?

Financial literacy is defined as a set of skills/knowledge that allows someone to make financial decisions. It includes an understanding of how

• money works in the world
• someone manages to earn money
• a person invests the money
• to donate money to help others

I evaluated a number of literacy quizzes to provide to all of you to test your knowledge. The good news is that they were all way too easy for all of you — you have clearly demonstrated the skills listed above. And taking quizzes reminded me of studying for my licensing exam — so I put a quick end to this part for me. BUT knowing how competitive some of you are, I decided to include a couple of questions below from the FINRA Investor Education Foundation to test your knowledge….

1. If interest rates rise, what will typically happen to bond prices?
   1. Rise
   2. Fall
   3. Stay the same
   4. No impact
   5. If I knew this, I wouldn’t have to hire you.
2. And harder…. If you owe $1000 on a loan and the interest charged is 20% compounded annually, if you pay nothing off, how long will it take for the amount you owe to double? (HINT: Remember the rule of 72)
   1. Less than 2 years
   2. 2 to 4 years
   3. 5 to 9 years
   4. 10 or more years
   5. This is a dumb question. I have terrific financial literacy and would never do this.

The one take-away for you…. It’s clear financial literacy is important to you. We can absolutely help build financial literacy in your children and grandchildren.