For those of you who are continuing to look at your statements, despite our advice to the contrary, you have undoubtedly noticed that your bond and bond fund prices are falling. We all know that bond prices fall as interest rates go up but what does that really mean and what should we, as investors, do about it?

First of all, experts have expected interest rates to increase for 15 years, so the fact that that is now happening is not a surprise. What is a surprise is the speed with which it has happened. But of course, we are also now experiencing unprecedented inflation. Bonds are still a critical part of our portfolios to provide generally “non-correlating” performance with equities and to provide income and lower volatility – usually. But bonds are not a great inflation hedge – which is why we usually recommend TIP’s which have lower coupons but better overall yield when inflation is increasing.

• If you own single bonds, remember that the day-to-day fluctuations of bond prices (as ugly as they can be) do not impact the face value redemption price at maturity. And interest continues to be paid until the day the bond is sold or matures. If you own Treasury Bonds (including TIPs of course) the default risk is really non-existent.
• If you own shares of a bond fund, your share price has been declining, rapidly. But the monthly interest payments are still intact, and as bonds mature in the fund, they will be redeemed at face value and replaced with higher-paying (or higher-yielding) bonds. That eventually helps the overall investment to recover. The replacement of the existing bonds in the fund obviously happens more quickly if the fund owns shorter duration (time to maturity) bonds. Think Vanguard Short Term Bond Fund. Over time, the re-invested dividends will compensate for the decline in price, but this does not happen immediately.

In this period of bond price volatility, one strategy we are starting to selectively pursue is using a TIP fund instead of single TIPs. The fund manager of the TIP fund buys multiple duration TIPs within the fund to better manage the interest rate risk. This is a discussion topic with many of you as we talk over the next quarter.

And time for our annual financial literacy quiz!

As a reminder, financial literacy is defined as the ability to understand and effectively use financial skills and tools, which include personal financial management, investing and budgeting. Ongoing financial education of ourselves, and our children/grandchildren, is considered the backbone of financial literacy so we are furthering the cause by providing some fun and educational questions for you.

Spoiler alert, some of these questions refer to prior “Bernie’s Blog” posts, so feel free to look back as needed. Some questions have more than one right, or wrong, answer.

1. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would your ability to buy something with the money in this account be:

a. more than today
b. less than today
c. exactly the same
d. I can’t imagine the interest rate on my savings being 1% and inflation being 2%
e. No idea. Better call LFS

2. You read that you should have some “liquid” assets. Which of these is most liquid?

a. a boat on the nearest lake
b. the cash in the coffee cans in my backyard
c. my Ameritrade IRA
d. my glass of wine
e. No idea. Better call LFS

3. How much should my emergency fund be?

a. This is a silly question – enough to cover my emergencies of course
b. 3-6 months of average expenses
c. 2 years of average expenses
d. Whatever it needs to be so I can sleep at night
e. No idea. Better call LFS.

4. When will the stock market fully recover?

a. This is not a financial literacy question, so I am not answering
b. Is the stock market down? I don’t know because LFS told me not to look.
c. When the Federal Reserve more aggressively raises interest rates
d. When the war in Ukraine is over
e. No idea. Better call LFS so they can tell me they don’t know.

5. Why are my 2022 Required Minimum Distributions (RMD’s) so high even though the market is down?

a. What’s a required minimum distribution?
b. Because I/LFS did a lousy job planning
c. Because the stock market ended 2021 at a record high
d. Because the government needs my tax dollars
e. No idea. Better call LFS.

6. When interest rates rise, what happens to bond prices?

a. They go up
b. They go down
c. They stay the same
d. They get indexed to bitcoin
e. No idea. Better call LFS

This is Tim blogging today about IRS guidance on the timing of required distributions from beneficiary IRAs.

The 2019 Secure Act revised rules for retirement plans. The IRS just issued preliminary guidance regarding the changes with final guidance expected by the end of the year. This guidance impacts the timing required for withdrawal by heirs.

• Heirs who are spouses, someone less than ten years younger, and disabled individuals will continue to be allowed to take the withdrawals based on their own life expectancy using the IRS tables.
• Generally, for all other heirs the money must be taken out over ten years. It was thought that the withdrawal could be delayed until the tenth year. Under the new guidance:
  • Heirs subject to the 10-year rule are required to take annual withdrawals if the original owner died after the owners required beginning date for payouts (April 1 after the year the owner turned 72)
  • If the owner died before reaching the “required beginning date” the heirs do not have to take annual withdrawals.
  • Heirs of Roth IRA’s also do not have to take annual withdrawals.
  • If the heir is a minor child (but not a grandchild) the 10-year payout does not begin until the child turns 21. At that point, the 10-year clock starts to run. Use expected IRS life expectancy tables until that time.
• A required IRA distribution is required the year the account owner died as there is a 50% penalty for failure to do so.

Since the guidance is confusing, the consensus is to continue with current practice until final rulings are provided. We are always happy to work through individual situations with you.

As we all watch the horrifying events unfolding in Ukraine, we are all thinking about what we can do to help all the people who are suffering and those in the neighboring countries who are opening their homes and their hearts.

For those who are charitably inclined, we want to provide some ideas.

As always, make sure that the organization(s) you are donating to are legitimate and meet your own personal criteria for charitable contributions.  We recommend donating directly through the charity’s website.  Scammers are definitely out there, as we all know.  For those of you who have not done your 2022 RMD yet, you can donate that distribution to a registered charitable organization without paying income taxes on the donation.  Let us know if you are interested in doing this and we will generate the paperwork for you.

Red Cross:  https://www.icrc.org/en/donate/ukraine  Helps with shelter, first aid and medical supplies inside and outside Ukraine.

UNICEF:  https://www.unicefusa.org/   Supports health, nutrition, safe water and protection for children and families.

Doctors without Borders:   https://www.doctorswithoutborders.org   works with local volunteers to help victims access medical care and prescriptions.

And our personal favorite which you may have read about<

AirBnb:  https://www.airbnb.org/  Book a “stay” at a home in a besieged city in Ukraine.  Airbnb is waiving the guest and host fees and the dollars go directly to the host you choose right away.  Just tell the host you will not be using your stay, at least not right now.  Be sure the host is legitimate and has been operating for a while.  OR you can donate to “host” a Ukrainian refugee in another country.  Two great ways to get dollars directly to Ukrainians very quickly!

For those of us who are looking for some good financial news these days, we finally have some!

For the first time in 20 years, the life expectancy tables, which dictate the amount of money which must be withdrawn annually from retirement accounts, have been updated. These tables show a life expectancy at birth of 84.6, up from 82.4.

Why is this good financial news?

Required Minimum Distributions (RMDs) from retirement accounts will be going down in 2022, and not because the market is down!

The Required Minimum Distribution (RMD) is calculated by dividing each retirement account balance at prior year end (December 31, 2021) by the life expectancy factor calculated by these life expectancy tables. That also means the tax bill on these distributions will also be going down.

If you have to take a RMD for 2022, you will use these new tables, even if you have been taking distributions for years or inherited an IRA years ago. The RMDs shown at Ameritrade have been updated to reflect this new guidance.

NOTE: There is also some chatter about an increase to the age at which RMDs are required to start, but nothing official yet.

As always, call or email with questions!

For those of you have heeded our advice the last few weeks and not looked at your portfolios, we have news for you – the stock market has been absolutely terrible. The losses (on paper) are very much reminiscent of March 2020. Just about all equities and bonds are significantly down in January, with a few exceptions like energy stocks/funds. Technology, which has been the star performer over the last two years, is now leading the way down while more defensive cyclicals (big and boring, as we call sometimes call them) are down but not quite as bad.

Before we talk about what to do at times like this, which will feel a lot like what not to do, let’s try to understand WHY this is happening and why it’s happening right now.

This is definitely a perfect storm of external and often related factors which have come together right now:

• Ongoing and worsening inflation. Lots of causes for this inflation, but clearly not transitory. A little inflation is a good thing but the 5%+ we now have, probably not.
• Federal Reserve planning rate hikes and stopping bond purchases. Raising rates is the lever the Fed has to help curb inflation because it slows the economic growth by making it more expensive to borrow money. Over time, the higher rates will translate into higher interest rates for our cash reserves but that good part will take a while.
• Covid 19 variants are here and will likely continue to be here. The hope we all had to have Covid behind us by now is clearly not happening. We are learning how to live with it because we have to!
• Mixed to lower corporate earnings. It’s corporate earnings time and although the majority of companies which have reported to date have actually reported strong results, which were consistent with expectations for Q4, 2021, the forward outlook for most of these companies has disappointed analysts and investors. See bullets above!
• The Ukraine/Russia conflict. The market, much like all of us, doesn’t like uncertainty and the conflict in eastern Europe is certainly creating plenty of that.

So now what?

As one of the financial pundits said this week, his best advice is to “sit on your hands and do nothing.” That’s easy to say and hard to do, so let’s expand a little:

• Do not look at your portfolio every day. We are watching and we will let you know if we see something which requires your immediate attention. Markets go down. It’s hard to watch but if markets didn’t go down, there would not be any risk. And without risk, there is also no gain.
• At the same time, think about how your stomach feels right now. If you are very nervous, let’s re-evaluate your holdings and consider reducing the risk as the market improves.
• Ensure that your cash reserve is fully funded so that you do not need to sell holdings at a loss to fund expenses. This action will keep the losses on paper! But of course, if you have bonus dollars sitting in your checking account, think about whether you may want to invest some of it. Some good buys right now! Fund your cash reserve first.
• And remember we are always here to talk and answer questions.