I hope this note finds you healthy, having a productive day, and your life not too out of order.
We understand this is a tense time and we are on your team to help put recent events into context. At some points in all this we understand that it feels like our world has stopped spinning to slow the spread of this disease. So what can you do to keep living your life and also, maybe, find a way to take advantage of the financial opportunity these unusual circumstances present?
To protect our mental and physical health from the stress of the uncertainty, we first and foremost recommend limiting media intake. While the likelihood of contracting this disease is relatively very low, we may just end getting ourselves sick from a different illness due to the stress. Some ways we recommend to continue to bring joy and balance to your life are to get outside and get fresh air, take the dog for an extra long walk, exercise, listen to your favorite music, read a great book or watch a funny movie. Warning – all of these activities may make you feel calmer and more happy.
But in all seriousness we care deeply about you and your well being. We know that many of you are scrambling for Plan B as travel plans are cancelled, schools are closed, places of employment shut down and grocery store shelves are empty. As we have discussed over the years, if we don’t take care of ourselves then the best financial plan in the world is all for nothing. We want to make sure that when the market does recover that you are personally positioned to enjoy what you have worked so hard to build.
Now onto the financial side of this equation. We may want to ask, what opportunities does a decline in market values afford? Several. First, we understand that no one invests because they look forward to times like these. But you have also invested many hours into a plan to prepare for these type of circumstances. You have a plan for this. We know that wealth accumulation is not a straight line and in order to achieve the long term rewards we are challenged to endure short term setbacks. But, if you dig one layer deeper, these challenging times can also provide opportunity.
With that in mind, we wanted to provide reasonable actions you could consider to potentially take advantage of the current environment. We intentionally chose to format these concepts in a light, fun way and hope that your visit to “Logic Lane” and all the neighbors that live there can provide you with a few ideas. We wish we could find the address of Logic Lane because we might just pack up and move there today!
Meet the residents of Logic Lane and what they are up to this week:
1. Savvy Susan - Susan loves a sale. She knows a buying opportunity when she sees one and understands investments in stocks should be for the long haul. Susan is considering moving some of the cash she kept on the sidelines into the US stock market while values for the Dow Jones Industrial Average are at 2017 levels.
2. Generous Grandpa George – George is disappointed that the SECURE Act eliminated the ability for his children to stretch the Required Minimum Distributions from his IRA at his death. He was planning to convert his IRA to a Roth IRA so that when his kids receive their inheritance, they won’t have a tax bill associated with their new required 10 year distribution window. But, while generous, George is also busy and didn’t get around to doing the conversion yet. At the end of 2019 his IRA was worth $100,000 and today it is worth $70,000, as George likes to invest for high expected rates of return. He can now do his IRA conversion and pay taxes on $70,000 instead of $100,000. Your procrastination paid off George.
3. Mortgage Molly – Molly bought her condo in November 2018 and signed a $400,000, 30 year loan at 4.875%. Her monthly principal and interest payment is $2,117. Molly knows her rate is “somewhere in the 4s” but like George, Molly is also busy. Molly read that mortgage rates had decreased with the low interest rate environment, called a mortgage broker and just locked in at 3.375% on a 30 year mortgage. Her new payment is $1,768 (a reduction of $350 per month) and her breakeven is 18 months. Good job, Molly.
4. Tax Smart Tara – Beyond her retirement accounts, Tara has lots of investments in regular, taxable, investment accounts. She has been investing regularly into this account over many years, but with the sharp market decline some of her investments are currently worth less than what she paid for them. For example, her US Stock position is currently valued at $200,000 and she paid $300,000. She has an unrealized loss of $100,000. Tara is tax smart and so she realizes there is an opportunity here. She sells her entire position, locks in her $100,000 loss on paper and immediately buys another US Stock investment, dissimilar enough to avoid the IRS wash sale rule. Tara has “tax loss harvested” her position and now has a $100,000 tax loss carry forward to use to offset future taxable gains. Sara is subject to the Net Investment Income Tax, the 20% capital gains rate and 5% state tax rate so her tax strategy could save her $28,000 in taxes in the future. Way to be tax smart, Tara. We understand this is an advanced concept and not something you should implement on your own. We are here to discuss if this topic is relevant to you.
5. Retiring Roger & Rebecca – Roger is retiring in 2021 and doesn’t think he will have time to get his investments back and will have to postpone his retirement. Roger is 65 and he and Rebecca have saved $3.4M, their high water mark in February 2020, for retirement. Their account today is at $2.89M. They’re worried. Their investment account is down 15% and they planned on withdrawing $10,000 per month, plus both of their Social Security payments for a total pre-tax retirement income of $15,000 in 2021. Roger and Rebecca have spent many years building out their entire financial plan and are excited for their retirement, but don’t understand what this market actually means for their bottom line and retirement plans?
With thoughtful planning, Roger understands if his portfolio decreases by 25% to $2.55M, it would be recommended to start withdrawals at $9,500 instead of $10,000 to give the portfolio the best odds of lasting 30 years. Roger and Rebecca have done a lot of work to understand their spending. They know that to maintain their basic qualify of life they need $6,000 per month of income, for their most comfortable life they need $10,000 and to do all the international travel they desire they need $15,000. They realize that with their comprehensive retirement planning that it isn’t an “all or nothing” and feel very comfortable that they could support a wonderful retirement on $14,500 per month instead of $15,000 per month if their portfolio were to lose 25% of its value. If markets continue to decline and their investments were to temporarily be worth 40% less, they would be comfortable dialing back to a total income of $12,000 (withdrawing $7,000) per month until their portfolio starts to recover. Roger and Rebecca are back looking forward to their retirement and are headed out to meet another couple for nine holes on a Friday afternoon.
5. Nice Nancy & Caring Carl – Nancy & Carl live around the corner on a street with several elderly neighbors. They are checking in on them and picking up extra things at the store when they go. They are also donating to their local food bank with hearty soups, microwaveable meals, and other non perishables. They are avid hand washers, limiting media intake, putting on great feel good music at home, watching funny movies, and making sure to get out for fresh air and a walk every day. They do warn us that these activities might make us more calm and happy. We are too busy hoarding toilet paper and crying over March Madness to care. We are going to try to be more like Nancy and Carl.
We hope that some of these stories provide logic, reason and if you are a client of ours, the sense of calm that you have a plan for times like these. This is what we plan for because we know that times like these can and do occur. As a nation we have a great track record of recovering from these times and we like those odds for predicting the future as well.
If you think this perspective would be helpful to any neighbors, friends or family, please feel free to forward it along.
All our best and we hope you can get outside for some fresh air this weekend,
Christy Raines, CFP® AIF®
The preceding are hypothetical case studies and are for illustrative purposes only. Actual performance and results will vary. These case studies do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted for your specific situation. Thank you, Christy