Financial Breakaway Newsletter - Markets Turn Hot in January!
Wait, January is over already? How’d that happen?!
Markets Off To A Good Start
• current events •
January had seen the U.S. stock and bond markets move higher, which was a nice relief from the 2022 market routes.
How bad was it last year? Well, the S&P 500 ended last year down ~19%, and the Nasdaq down ~33%, which we haven’t seen numbers like that since the Great Recession of ‘08 or the Dot Com Bubble of ‘01.
The Barclay’s Aggerate Bond Index ended down 13%, which was the WORST year ever for that index (by a long shot).
The traditional 60/40 portfolio, which is considered a quite moderate portfolio in terms of risk was down ~16%. For this portfolio consisting of 60% S&P 500 Index & 40% Barclay’s Ag Bond Index was its 2nd worst performance on record going back to 1976 (46 years).
So where do the markets continue to go this year then?
Well, here’s what I’m watching:
- It is rare for the S&P 500 to post back-to-back years of negative returns. High yield bond losses in 2022 suggest a positive roadmap for stocks and high yield bonds in 2023.
- The Federal Reserve is in the late innings of rate hikes.
- Inflation is set to continue moderating and could well be near the Fed’s target in the 2nd half of the year.
- Risks this year include: Federal Reserve policy error, recession, earnings revision cycle/negative earnings growth, and geopolitics.
P.S. Did you notice I didn’t quote the Dow 30 index above? That was on purpose. I believe the S&P 500 and Nasdaq are a better representation of the U.S. Stock Market and of an individual’s actual equity U.S. equity holdings.
I prefer the “market-weighted” index methodology of the S&P 500 compared to the “stock price-weighted” methodology of the Dow 30.
Quiz: Do you know the random company that has the highest weighting on the Dow 30 Index? (hint -> it starts with a “U”) *see below for the answer.
RMD's Moved to Age 73, What this means to you?
• retirement •
SECURE Act 2.0 passed at the end of last year with many changes to the retirement planning environment.
For those at/near retirement, the big change was when you have to start taking money out of your pre-tax IRA’s or 401(k)’s. Per usual, the wording of this change was quite confusing so…
Here’s a cheat sheet:
- If you were born between 1951 - 1959, you start your RMD at age 73
- If you were born after 1960, then you start your RMD at age 75
- but if you turned 72 in 2022 you do NOT get to skip this year’s RMD
On the face, increasing the RMD age will simply allow people to to delay distributions and the corresponding taxes on these distributions for longer. But if you dig in deeper, for those who can afford to push back these distributions, there may be opportunities to strategically plan out distributions better.
Such as taking income prior to the start of RMD's during lower income years. This could potentially save tax dollars down the road. Combining this with a potential Roth IRA conversion could also be beneficial for many people as well.
Bear markets are frightening, especially if you’re close to retiring. They can make you wonder:
- Should you retire when the market's so bleak?
- Do you have to give up most (or all) of your dreams for retirement?
- What can you expect when retiring in uncertain times - and what can you do about it?
Although times are scary, know that bear markets too shall pass. You're not the first to consider retirement in a declining market with potential losses. History shows there are successful ways to retire, even when the market outlook is bad. You can tap into this knowledge to help you make decisions…
Still Working? SECURE Act 2.0 Affects You Too
• mid-career •
If you are still working this Act has a lot of changes for you too. Here are some of my favorites:
- Higher catch-up contributions - Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually
- Matching for Roth accounts - Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts
- Student loan debt - Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account
- 529 Plans - After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary
There Are Two Types of Money Markets
• investing •
Money market accounts and money market funds often get confused and are two short-term savings vehicles that may look more appealing as rates tick higher. And though they certainly sound similar, these two financial accounts have some big differences.
• what I’ve been reading •
How to Make Fast Friends While Traveling? Play Pickleball - rethinking65.org
Reconsidering Target-Date Funds After a Rocky 2022 - planadvisor.com
Leading with Talent: An Interview with Liz Grams, SHRM CP - fgpm.org
• have a question? reply to this email •
Q: Can I take money out of my Traditional IRA without being taxed or penalized?
A: Yes you can, but there are some strict rules to follow.
In most cases, this would fall under what the IRS calls the 60-day rollover rule. This rule simply states you have 60 days from the date you receive an IRA distribution to roll it over to another IRA or to put it back into the IRA you took the distribution from. Hence the name, 60-day rollover rule.
If you fail to put the money back into an IRA within the 60-days you may be susceptible to big tax consequences. Essentially the distribution becomes taxed as income (and if you are under the age of 59 ½ there is an extra 10% penalty).
Generally, you can only do this one time a year…not once a calendar year but once a rolling 12 months.
But let’s say you DO miss the 60-day deadline, what happens then?
There basically are two options if the 60 day IRA rollover is NOT met:
- Self-certification process, see details here (https://www.irs.gov/pub/irs-drop/rp-16-47.pdf) + See Section 3.02 for conditions to be eligible + May have to present this self-certification to the IRA trustee/custodian to get them to approve it and report as such on relevant tax forms + Could be later subject to IRS scrutiny potentially + No IRS fee
- Request a Private Letter ruling, but this could be expensive (10K fee to IRS plus professional fees to draft such a request)
A full Q&A is here on the IRS website (https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement) for both options:
*This is not to be considered financial/tax advice or a recommendation, please evaluate your own personal financial situation with me or your own advisor*
Quiz: Do you know the random company that has the highest weighting on the DOW 30 Index? (hint -> it starts with a “U”)
United Health Group at ~9.5% weighting
Source: https://www.slickcharts.com/dowjones 1.31.23
I ranted about this on my podcast a while back Check out this episode — The Dow 30 Index Needs To Go
Open Virtual Office Hours
• reminder •
Last month I opened time on my schedule in the form of virtual office hours to ensure you have more access to me for questions or conversations in today's market and economic environment.
I’ve had some great feedback from it so save the time’s and link below:
Mondays: 3pm - 5pm
Fridays: 8:30am - 10am