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.

Thus far in 2022, there are just a few changes which impact IRA’s and 401K’s. There could be additional changes later in the year of course.

For 401K/403B:

• The maximum employee contribution has been increased from $19,500 to $20,500. The catch-up contribution for employees age 50 and over has been increased from $26,000 to $27,000.

For Traditional IRA’s:

• No change to the contribution levels but the income deductibility level has been increased. We will review with you individually as needed.

For ROTH IRA’s:

• No change to contribution levels – still lower of earned income or $6000 for each spouse. Catch-up contribution of additional $1000 for age 50 and over.
• Contribution eligibility has increased:
  • Full contribution with Adjusted Gross Income (AGI) less than $129,000 for a single taxpayer. Phase-out between $129,000 and $143,999. We can help with the phase-out math.
  • Full contribution for each with total Adjusted Gross Income (AGI) less than $204,000 for married/filing jointly taxpayers. Phase-out between $204,000 and $213,999. We can help with the phase-out math.
• 2021 contributions can be made until April 15, 2022. Remember to use a deposit slip that we will provide to ensure that contribution is applied to 2021.

Call with questions or if we can help get these changes made for you.

As promised earlier in the month, we are now going to re-introduce you to Roth IRA’s, but this time, as great financial gifts for your lucky and hard-working children or grandchildren. As I said earlier, there are very few investments which grow tax free, but 529 plans and Roth IRA’s do just that!

Many of you are familiar with Roth IRA’s, but for those of you that are not, here is a brief overview:

Roth IRA’s were created by the Taxpayer Relief Act of 1997 to help Americans save for retirement. These IRA’s have become enormously popular in the last 20 years but there are some important considerations:

• The dollar contribution limits are the same for Roth IRA’s and traditional IRA’s. Eligibility for a Roth IRA requires “earned income,” subject to an income cap which is not present for traditional IRA’s.
• Contributions are made with after-tax dollars, unlike those in traditional IRA’s or most company sponsored retirement plans
• Because the contributions are made with after-tax dollars, the contributions can be withdrawn at any time, without tax or penalty. This might be important for young investors like your children or grandchildren who might need the money they invested before retirement
• Unlike traditional retirement plans, the earnings can also be withdrawn tax-free, subject to owner age and account duration rules, and there is no requirement for distributions to begin at 72 years of age

As I said above, there is a requirement for the Roth IRA account holder to have “earned income” in order to be able to contribute BUT the actual contribution can be funded by anyone (YOU in this case) as long as the dollar amount of the contribution does not exceed the owner’s earned income or annual maximum allowed.

Head spinning? How about an example? You have a 19 year old grandson who worked over the summer stocking shelves in the middle of the night for Kroger. He earned $2000 and will receive a W-2 from Kroger. I am guessing he probably can’t invest this $2000 in a Roth IRA because he is saving every penny for college, BUT you can fund it for him. You have until April 2022 to make this 2021 Roth contribution. We will help you understand eligibility requirements and then help you actually pull this off.

Want to read more about Roth IRA’s?  See attached link. https://www.investopedia.com/terms/r/rothira.asp

Back by popular demand, the next two Bernie’s BLOG posts will provide info on some great financial holiday gifts for you, your children or grandchildren. This blog will cover 529 educational plans and the next one will re-introduce many of you to Roth IRA’s. By the way, we are not suggesting that you forego fun gifts for your offspring, but we really like the idea of longer term not nearly as “fun” gifts to help secure the financial futures of your lucky family members.

As many of you know, there are very few investments which grow tax-free, but 529 plans and Roth IRA’s do just that, at least for now.

529 plans are state run educational savings plans which can be used for very broadly defined educational expenses for adults or children. These funds can be used for pre-college, trade school or college tuition/fees. The investments in a 529 plan can be made by anyone, subject to gift tax requirements, and are made with after-tax dollars although some states offer a state tax credit to parents who contribute in their state of residence (North Carolina does not offer this credit at this time). The funds in a 529 plan can be moved to another child and the funds do not have to be used in the state in which the plan was funded. Unlike other investments, 529 plans are controlled by the account “owner”, not by the child. Taxes and penalties are due if money is not used for educational expenses, but again, the definition of educational expenses is quite broad and usually includes computers, books, and room and board.

These plans carry low management fees because they tend to be “target date” funds where the investment mix is automatically rebalanced as the child gets closer to college age.

Although 529 plans are not LFS managed assets, we would be happy to assist you in starting one for your children or grandchildren, or even yourself! There is no minimum dollar requirement to open an account and dollars can be added throughout the year.

If you want to read up, see link below, or feel free to call us to talk more.

https://www.investopedia.com/terms/1/529plan.asp

It’s Marci on the blog this week with the age-old question: “How much can I safely spend from my portfolio without running out of money?”

The 2021 Ameritrade/Schwab annual conference was held late last month, virtually, so we had opportunities to drop in on several different sessions of interest and the session on this topic obviously caught my attention.

Historically, we as investors have relied on four components for income from our portfolios: bond coupons, stock dividends, capital gains, and principal. In today’s environment though, with interest rates on bonds and cash at record lows, and stocks at record highs, it’s logical to wonder whether the 4% rate that has been generally agreed upon as the acceptable safe withdrawal rate is reasonable now.

As we know, past performance is not a guarantee of future results, but the presenter of this session attempted to use historical market returns to determine what a sustainable withdrawal rate would have been over thirty-year spans beginning every year since 1871. The major factor outside of market performance that he considered in his analysis was the sequence of returns.

As an example, consider the following: The average market return over the period is 10%. In the first scenario, the first two years are 0% and the next two years are 20%. In the second scenario, the first two years are 20% each, and the next two years are 0%. The 10% average holds in both cases, but the portfolio amount, and therefore the withdrawal amount varies greatly. So, what did he learn from this analysis to share with all of us? Going back in history through times that included the Depression, the dot.com bust, the financial crisis of ten years ago, and most recently, the coronavirus-driven downturn, as well as many, many years of double-digit market gains, the safe withdrawal rate that worked through all of that: 4 to 4½%. And interestingly, that percentage held in his analysis in with stock/bond allocations ranging in some studies from 40/60% to 70/30%.

Obviously, this analysis is not the only consideration when spending from portfolio, but I thought it was interesting and hope you do too!