Unplanned Retirement

Unplanned Retirement

With job losses this year reaching 40 million, many Americans are being forced into an unplanned retirement. Maybe they wanted to work until age 65 or later and find themselves out of work at age 60 or 62. Job losses due to Coronavirus layoffs may be the most common reason today. However, many people also enter early retirement due to their health or to care for a spouse or parent.

Each year, the Employee Benefits Research Institute publishes a Retirement Confidence Survey Report. Here are some findings from their 2020 report published in April:

  • 48% of current retirees retired earlier than they had planned. Only 6% retired later than they originally planned.
  • Less than one-half of workers have tried to calculate how much money they will need to live comfortably in retirement.
  • Of workers who reported their employment status would be negatively effected by the Coronavirus, only 39% felt confident that they will have enough money to last their entire life.

Half of all retirees retired at a younger age then they had planned. That statistic has remained very consistent over the years. In the 1991 report, it was 51%. This is a reality that more people should be preparing for. If you want to retire at 65, 70, or “never”, will you be prepared if you end up retiring at 64, 60, or 55? Certainly, if you enjoy your work, keep on working! But sometimes, the choice is not ours and people find themselves in an early, unplanned retirement.

If you have lost your job or just want to be better prepared should that happen, you need to plan your retirement income carefully.

Unplanned Retirement Steps

  1. You should begin with a thorough and accurate calculation of your spending needs. Not what you want to spend but what you actually spend. Determine your health insurance costs until age 65 and for Medicare after age 65, including Part B premiums, and Medicare Advantage or Medigap coverage, and Part D prescription drug coverage. Read more: Using the ACA to Retire Early.
  2. Reduce your expenses. This will require setting priorities and determining where you can do better. Still, there may be some low hanging fruit where you can save money with little or no change in your lifestyle. Read more: Cut Expenses, Retire Sooner
  3. Calculate your sources of retirement income. Read more: When Can I Retire?
  4. Be careful of starting Social Security at age 62. This is very difficult for people to not access “free money”, everyone wants to do it. Be sure to consider longevity risk and the possible benefits of spending investments first and delaying Social Security for a higher payout later. Read more: Social Security, It Pays to Wait
  5. Consider going back to work, even part-time, to avoid starting retirement withdrawals. The more you delay your retirement, the more likely you will not run out of money later. Here’s the math on why: Stop Retiring Early, People!

Be Prepared for the Unexpected

I think the best way to survive an unplanned retirement is to achieve financial independence at an early age. If you could retire at 50, plan to work until 65, and end up retiring at 60, it’s no problem. This requires saving aggressively and investing prudently from an early age. And that’s why retirement planning isn’t just for people who are 64. Retirement planning should also be for people who are 54, or 44, or even 34. Plan well, and an early retirement could be a good thing. It’s your chance to begin a new adventure!

If – surprise! – you do happen to be facing an unplanned retirement, let’s talk. We can help you evaluate your options for retirement income and establish a process and budget. Our retirement planning software can help you make better informed decisions, including when to start benefits, how much you can withdraw, and if you have enough money to last your lifetime.

It certainly is a shock to people when they end up retiring earlier than they had originally planned. However, it is very common and about half of all retirees are in the same situation. Unfortunately, not everyone who has an unplanned retirement will be having the comfortable years they had hoped. Basing your retirement on the assumption that you will work until age 70 or later may not be realistic. It could even set you up for failure if you end up needing to retire early. Whatever your age, retirement planning is too important to not seek professional help.

Adding Convertible Bonds

Adding Convertible Bonds

This week, we are adding Convertible Bonds to our Premiere Wealth Management portfolios. This will shift 2-6 percent of portfolios from equities to our Alternative Investments sleeve. What are convertible bonds and why now?

Convertible bonds and are unique in that they have an option to convert from a bond into shares of stock of a company. Why would you want to do that? Let’s say a $1,000 bond has an option to convert it into 20 shares of stock. That would give a convert price of $50 a share. If the stock price stays at $40 a share, you would just let the bond mature and get back your $1,000 in principal. But if the stock price rises to $60 a share, you could convert your $1,000 bond into 20 shares. Then you could sell the shares for $60 a share, or $1,200. And while you wait, the bond pays interest.

Benefits of Convertible Bonds

Why do companies offer convertible bonds? There are a couple of benefits to the company:

  • Convertible bonds typically pay lower interest rates since there is also potential upside for investors. This saves the company on interest costs versus issuing regular bonds.
  • If the bonds do convert to stock, the company issues new shares and does not have to use cash to pay back the loan. Imagine borrowing $100 million and then paying it off by issuing stock!
  • Compared to issuing new shares right away, a convertible bond delays diluting existing shareholders for several years. The interest expense is deductible for the company, whereas paying a stock dividend would not.

Here are the benefits for investors of convertible bonds:

Other Considerations

What are the risks of convertible bonds?

  • Companies who issue convertible bonds can be lower credit quality, and more than half do not carry a credit rating. Some of these bonds will default.
  • The volatility of convertibles can be closer to stocks than it is to high quality bonds like Treasury Bonds. Once the stock price is above the convert price, the price of the bond will be about as volatile as the stock.

How to invest in Convertible Bonds?

Because Convertible Bonds are closely related to equities, I consider them more of a substitute for stocks rather than fixed income. For this reason, we reduced equities to purchase a Convertible Bond Fund. I would recommend buying a fund rather than individual bonds. The fund can research the credit quality of unrated issuers and will diversify into a large number of bonds.

The fund we are adding has a 27-year track record and a five-star rating from Morningstar. Here is the most recent quarterly fact sheet on the fund. We will invest in the Institutional Share class, which has a lower expense ratio. Typically, investors would need $1 million to buy the institutional shares, but I can buy shares for my clients as a Registered Investment Advisor.

Why now?

We have had a very strong rebound in stocks markets since the lows of March. While there are a lot of reasons for optimism, the economic recovery from the Coronavirus seems to be priced into stocks. Bond yields are near zero, and offer little return potential compared to stocks. In this environment, I would like to add alternative investments that might offer returns better than bonds, but with less downside risk than stocks.

Currently, we have 10% allocated to Alternatives, using Preferred Stocks and a Hedge Fund replication strategy. Adding Convertible Bonds, our target weighting in Alternatives will be to 12-16 percent. No one can predict what markets will do in the near future. What we can do is to diversify our sources of return and risk. We can evaluate which investments have offered effective risk-adjusted returns historically and how they might work today. If you have questions about investing during the Coronavirus, please send me a message.

Past performance is no guarantee of future results. Investing in convertible bonds carries risk of loss.

Safe Investing During Deflation

Safe Investing During Deflation

How do you begin to think about safe investing during deflation? Last week, the US Bureau of Labor Statistics reported that the CPI-U fell 0.8% in April. The Consumer Price Index is a basic measure of inflation and has almost always been positive throughout US History. Deflation is not a good environment for building wealth.

While this could be a temporary blip due to falling energy prices in April, we certainly are not out of the woods from the economic damage of the Coronavirus. With 20.5 million people filing for Unemployment in the last two months, there could be an extended reduction in consumer demand. And we know from Econ 101 that when demand shifts down, there becomes an oversupply of goods, and prices fall. That’s deflation.

I think that any deflation will be temporary and that the global economy will recover. But the amount of time this takes could be anywhere from months to years. And while I am studying projections of the depth and duration of this likely recession, my readers know what I think about expert predictions. They are wildly inaccurate. Trying to time the market based on economic predictions is likely to do worse than staying the course.

Deflation Is Anti-Growth

What might deflation mean for investors? Historically, stocks do poorly during deflationary periods. Commodities and Real Assets also can lose value. If millions of people lose their jobs and income, how are they going to afford a mortgage and buy a house? We know from 2008 that house prices can go down when people cannot buy houses.

No one has a crystal ball to know what will happen next. But, I think investors can and will want to make small adjustments to their investment portfolios because of the possibility of deflation. With the market rebounding incredibly well from the March lows, the upside versus downside potential in the near term has worsened.

It is okay to want to have some of your investments in a safe asset. The challenge that we discussed in the previous blog is that we are near zero percent interest rates today on cash, CDs, and Treasury Bills. While this would technically preserve purchasing power in a deflationary environment, we can do better and should be looking to grow.

Fixed Annuities For Capital Preservation

My suggestion for a safe yield today: fixed annuities. This week, I had a client purchase a 5-year annuity at 2.9%. That is 2.6% higher than a 5-year Treasury bond today (0.307%). Both are guaranteed, yet the annuity gets a bad rap. Sometimes, an annuity is the right tool for the job. Sometimes, it is not. Unfortunately, because some unscrupulous salespeople sold annuities which were unsuitable for the buyers, investors have negative perceptions.

I keep bringing them up because they are an objectively effective fixed income solution that many savers would appreciate. Because I want every investor to make informed decisions, here is what you need to know about Fixed Annuities.

Annuity Basics

  1. An annuity is issued by an insurance company and is a contract between the company and you. There are many flavors of annuities, but the kind I am discussing today are Fixed Annuities, specifically Multi-Year Guaranteed Annuities (MYGAs).
  2. A MYGA has a set term (3, 5, 7, or 10 years commonly) and a fixed rate of return. In this aspect, it behaves similarly to a CD.
  3. An Annuity is a tax-deferred retirement vehicle. You will not pay any taxes on the gains from the annuity, until you withdraw the money. At the end of the term, you can roll into a new annuity and continue to defer the gains. This is called a 1035 Exchange. There are no income restrictions or contribution limits to annuities.
  4. If you withdraw from an Annuity before age 59 1/2, there is a 10% penalty on the gains. Annuities are most popular with investors over 55, but younger people who know they are not going to need the money until retirement can also use a MYGA towards retirement saving. You can invest IRA money (Traditional, Roth, etc.) into an Annuity, too.
  5. There are often large penalties if you withdraw money from an annuity before its term is complete. For this reason, it is very important to have other sources of liquid assets. That way you can remain in the annuity for the full term.
  6. What happens if an Insurance Company fails? Annuities are insured at the State level by a mandatory Guaranty Association. In Texas, all insurers pay premiums to the Texas Guaranty Association, which protects annuity holders up to $250,000. This information is for educational purposes only and is not an inducement to buy insurance. If you have more than $250,000 to invest, spread your money over several insurance companies to stay under the covered limit.

How to Use MYGAs

A MYGA is a good substitute for a bond or bond fund. They offer safety and capital preservation, but with a higher rate of return than cash, CDs, or T-Bills available today. While there are some corporate and municipal bonds with higher yields, they are generally not guaranteed and carry risk that the issuer could default and be unable to pay. That’s especially a problem during deflation, as bankruptcies could increase significantly, causing losses to bondholders.

The main trade-off with MYGAs is the lack of liquidity. We want to keep annuity purchases to a reasonable size. I also recommend creating a 5-year ladder, where you divide your total investment into 5 pieces which will mature in 1,2,3,4, and 5 years. Then in each subsequent year, you will have access to 20% of your investment, should you need it. And what you don’t need, you can reinvest into a new 5-year annuity at the top of the ladder.

Lastly, for transparency, Annuities pay a commission. If someone purchases a MYGA from me, the insurance company will pay me a commission on the sale. I generally view commissions as a conflict of interests. However, I’d point out that a 2.9% yield on a MYGA is the net return to the investor.

There are no investment advisory fees for Annuities. For some reason, I don’t hear very many Investment Advisors mentioning that to their clients when they bash Annuities! I want what is going to be best for you. If that’s an annuity, fine, and if not, that’s fine too. The minimum investment on most annuities is $10,000, but if you have a smaller amount, let me know.

Stay Diversified, Increase Safer Positions

Safe investing during deflation can be a challenge. Low interest rates aren’t helping investors. I will continue to recommend diversified portfolios which may have 50% or more in stocks for long-term investors. Still, there is a role for safe investments for most portfolios, and many people may want to have more safe investments. They offer ballast against the risk of stocks and the diversification can give a smoother trajectory to your overall return.

Given the strong rebound we have had from the March 2020 crash, this may not be a bad time to reevaluate your risk profile. If that thought process has you wondering about safe investing during deflation, lets talk about MYGAs. I am an independent agent and can offer annuities from many different companies to find you the best features and rate for your needs.

Coronavirus Market

Coronavirus Market Update

As we enter the seventh week of shut-downs, we are going to share our Coronavirus Market Update. Let’s look at the numbers and talk about stocks, unemployment, interest rates, oil prices, and government assistance programs.

1. Market rebound

From a low of 2237 on the S&P 500 Index on March 23, we are up 27% to 2836 as of Friday’s close. This is a remarkable bounce. Now the market is down only 12% year to date. I have a couple of thoughts on this:

  • The rebalancing trades I placed in March consisted of selling bonds and buying stocks. Overall, those trades have been profitable and beneficial for clients. At the time, it did not feel good to buy stocks in the midst of such carnage. Rebalancing is usually a contrarian action; we buy when markets are down and sell when markets are up.
  • If you thought the best move in March was to bail out and increase cash, it didn’t work. The market bottom will often be significantly ahead of an economic bottom. The market is a leading indicator. You won’t get an All-Clear to come back into the market.
  • Was that THE bottom? Will we retest lows? I don’t know and it is not predictable. We have up come very far, very fast and as I will discuss below, we are only seeing the tip of the iceberg of the economic fallout. The market has had a 26% move in a month and I am going to rebalance again. Because we made deliberate trades in March, some portfolios may now be overweighted in stocks after this quick rebound. Those trades will happen this week.

2. Unemployment

There have been 26 million unemployment claims since the start of the Coronavirus. Approximately one out of six workers have been laid off and this number excludes most independent contractors. A report from the Federal Reserve Bank of Boston projects that 18% of homeowners and 36% of renters in New England will be unable to make their housing payments.

These levels of unemployment have not been seen since the Great Depression, when unemployment reached 24% in 1933. This will have a ripple effect on consumer spending, defaults on loans, mortgages, and credit cards, the auto industry, real estate prices, and so on. For the economy, this will likely have an impact for at least 12-18 months.

Markets go up when there are more buyers than sellers. That’s it. So, the action over the past month tells you that there is money on the sidelines, in spite of rising unemployment. The wealthy are less wealthy, but they are rebalancing and looking for profits in a strong market. They are also bargain shopping for great companies which may have been trading at multi-year lows in the past month.

3. Oil prices

This week, massive options selling coupled with no buyers caused the May futures contracts for Crude Oil to sink into negative prices. With people not travelling, demand for oil has plummeted. A few countries have flooded the market with oil and current daily production exceeds demand by 20 million barrels a day. Luckily, Texas is more diversified today than just oil companies, but oil companies are taking a hit.

Oil Companies which have borrowed a lot of money for expansion or acquisition are in trouble and may fail. This is creating fear in the bond market, where the spreads on corporate bonds have widened significantly. At the beginning of the year, corporate bonds were trading at yields very close to Treasuries. Not so today, and that creates opportunity to buy bonds of companies with strong balance sheets.

4. Interest Rates

Treasury bill interest rates fell to zero last month, to match zero rates in Europe and Japan. Today, those levels have increased slightly, but remain around 0.13% to 0.20% for maturities of two years or less. Take aways:

  • You can’t fund your retirement with Treasury bonds today – the returns are too low. These rates are way below historical inflation, and even if we are in deflation for the next year, the returns just don’t work with most people’s required rate of return in their retirement projections.
  • You can move from Treasuries to CDs to Fixed Annuities to increase your yield while maintaining a guaranteed, safe return. Treasury rates are being manipulated by Central Banks. As governments take on trillions of new debt, they somehow become a safer credit and their interest rate falls to zero? This is not what a free-market looks like and it is penalizing the heck out of savers and retirees.
  • Individual investors will choose not to own Treasuries. The Fed wants to push investors out of risk-free assets and into risky assets like stocks or real estate.

5. Government Programs

Individuals have been receiving their $1200 stimulus checks. Many small businesses who applied for the Paycheck Protection Program have been shut out as demand for those loans greatly exceeded the $349 Billion allocated. I’ve heard that only companies who applied on the very first day received funds. Apparently, the Treasury favored community banks and therefore you were actually less likely to receive the loan if you applied through one of the large national banks. However, if you have an application pending, Congress is going to fund further loans. Thank you to everyone who reached out to me to discuss their PPP application.

The SBA also offered the Emergency Income Disaster Loans (EIDL). They announced a week ago that they were no longer accepting applications. I applied for this program about 18 days ago and still have not received a reply. They originally said applicants would receive the money in three days. I sent an email about my application and received back a form letter saying they were still processing applications in the order received. Hopefully, this will work! If you applied for any government assistance for your business, please shoot me an email and let me know where things stand for you.

Final Thoughts

The market has had a great rebound in April and it is a big relief. Losses have been cut by 2/3 and many investors have been buying. From my perspective, investors seem less panicked this year than they were in 2000 or 2008. As a result, most have understood that they need to ride things out and that this will pass.

We rebalanced in March and that worked well. It is part of our discipline and we will look at rebalancing again now that we have recovered 26%. This will be done on a portfolio by portfolio basis and will include a careful examination of the tax implications of any trades. Most of the March trades harvested losses, so we can now realize short-term gains up to those levels.

The economy clearly isn’t out of the woods. Unemployment will probably increase in May. These numbers will grow and many families are going to have to tighten their belts. There is a tremendous amount of government support being directed at impacted industries and small businesses. Hopefully, those funds will start to reach companies soon. Investors need to be patient and have a disciplined plan. We will continue to focus on your long-term success and look at ways to reduce unnecessary risk.

Stimulus Payments to Business Owners

Stimulus Payments to Business Owners

As part of the $2 Trillion CARES Act, there are three programs to provide Stimulus payments to business owners. Unlike the 2008 crisis, this time the government is not bailing out the big banks and Wall Street. Instead, Washington is sending cash to self-employed people and small business owners. They are shoveling money out the door to help you pay your bills, keep your workers paid, and still have a business when we eventually emerge from the Coronavirus shutdown. The scale of this is unprecedented and you should make sure to get your share.

We are going to look at three specific programs and give you links to find more information and apply. The three stimulus payments to business owners include: the Paycheck Protection Program, Employee Retention Tax Credit, and the SBA Disaster Grant. You may be eligible for some or all of these programs.

What if you are self-employed or an Independent Contractor, but not a corporation, LLC, or other entity? You are still a business even if you are the only employee. If you file a Schedule C, you have a business. If you have questions, here’s my contact info.

Paycheck Protection Program

The Paycheck Protection Program is providing $349 Billion in loans to small businesses. These loans are designed to keep employees on the payroll and off unemployment. The loans are forgivable. The government doesn’t want you to pay them back, as long as you spend the money to pay employee salaries and benefits in the next eight weeks.

The PPP is available to businesses from 1 to 500 employees. The Small Business Administration (SBA) guarantees the loans, which will be provided through 1700 Banks and Credit Unions. Your bank is probably already an SBA lender. Technically, the PPP is a 2-year loan at 0.50% interest. Payments are not required for six months. If you spend the loan on allowable expenses within 8 weeks, then the loan will be forgiven. You also have to keep the same number of employees and not reduce payroll during this period. The loan forgiveness will be non-taxable. Steps:

  1. Apply for the loan at your bank using Model Application (link below).
  2. Spend the loan in the following eight weeks on payroll, benefits, and rent.
  3. Apply for loan forgiveness and document that the funds were spent as intended.

You must state on the application that your business was impacted by the Coronavirus and you need this money to meet payroll and expenses. This is easy. Most businesses are “non-essential” and were required to close in your area due to the shelter in place rules. Even if you stayed open, you may have had supply disruptions, or other negative impacts to you business.

Loan Amount and Application

The application provides instructions to calculate your loan amount. You are eligible to borrow two and one-half months of payroll, up to $10 million. Payroll includes gross pay plus taxes. Salary eligible for loan forgiveness is capped to $100,000 per person annually.

Then over the next eight weeks, you can spend the loan on payroll, payroll taxes, employee benefits, including health insurance premiums, retirement plan contributions, and sick leave or vacation. You can also spend the money on rent or mortgage interest for your business property (if you have a store or office, for example). Non-payroll expenses cannot exceed 25% of the total.

Eligible businesses includes corporations and LLCs, but also includes non-profit organizations, sole proprietors, and those who are self-employed or independent contractors. Many businesses can apply for the loan starting on April 3, 2020, and Independent Contractors can apply starting April 10. The program will close once the $349 Billion is gone. Don’t delay!

Here is the required application for the Paycheck Protection Program. Your bank should accept this paperwork for the loan. The SBA is paying all the application or service fees for the loan, so it costs you nothing. If you have a business account at Chase, apply here to get in their queue.

Employee Retention Credit

If you own a business with multiple employees, such you should also know about the Employee Retention Tax Credit. It’s another part of the CARES Act. To qualify, you must have either been temporarily closed down due to local regulations or have your gross receipts fall by 50% this quarter versus last year. For business owners with lower income or part time workers, it may be better to use the Employee Retention Credit rather than the PPP. You have to choose one or the other: if you take the PPP you are ineligible for the Employee Retention Credit.

The Employee Retention Credit is for 50% of income per employee up to $10,000 a year. So the maximum tax credit is $5,000 per employee for 2020. Now if your employees will make less than $5,000 in 2.5 months but more than $10,000 for the rest of the year, you would be better off with the ERC versus the PPP. The ERC is not available to self-employed individuals and will apply to income from March 12, 2020 to the end of the year. Full details and eligiblity here on the IRS Website.

In general, I think the PPP is the better option for most businesses, but it would not hurt to run the numbers. Calculate if the Employee Retention Credit would provide you with more funds. Of course, you won’t get the tax credit until you file your 2020 taxes next year. If you need the funds to meet payroll now, then you need the PPP. The ERC is not available to self-employed or sole proprietors.

SBA $10,000 Disaster Grant

The third of the stimulus payments to business owners from the CARES Act is the SBA Disaster Loan program. The full name is the COVID-19 Economic Injury Disaster Loan Application. They have expanded the eligibility to all businesses. You are technically applying for a loan. As part of the loan application, they will advance your business $10,000 of the loan. This is not called a “grant” on the SBA application, even though the CARES Act calls it a grant, so it can be confusing. They will direct deposit the funds into your business account within a week. The $10,000 Grant does not have to be repaid, but if you borrow more than the $10,000, the rest would have to be repaid. You’re not going to believe this, but even if the SBA does not approve your loan, you still get to keep the $10,000.

You can apply online at the SBA website here; it should take less than 20 minutes. On page one, they ask questions about your business eligibility for the Economic Injury Disaster Loan Program. Most will check the first line: “Applicant is a business with not more then 500 employees.” That qualifies you for the grant, even if you are the only employee.

Next, you will certify that you are not in a disqualifying business (i.e. porn). Third, you will give information about your business, including EIN, gross revenues and cost of goods sold for the 12 months to January 31, 2020. Fourth, information about the owner and the bank information for the deposit. Towards the end of the application, there is a box to check if you want to be considered for a $10,000 advance on the loan. CHECK THIS BOX. This advance is the $10,000 grant under the CARES Act. After you submit, it will give you an application number. Print this page or write it down. You do not receive an email confirmation, but you will be notified of the decision by email.

Which to Choose?

Technically, you can apply for both the SBA disaster grant and the PPP. However, they will subtract the disaster grant from your PPP forgiveness amount. The primary reason to do the disaster grant instead of the PPP is if your PPP would be under $10,000. If you need additional loans beyond the PPP’s two months of funding, do both applications. Also, you can apply for the Disaster Grant right now online whereas most banks are struggling to get ready for the PPP application.

Don’t delay in applying for stimulus payments for business owners. There are limited funds in place and some of these programs are first come, first served. I’ve spoken with some clients who are reluctant to take a bailout of their business and are prepared to tough it out. With everyone going to shelter in place, the economy is grinding to a halt. And when you have a service economy, that’s a catastrophic problem. So, please take the money and use it. Pay your employees. Keep buying stuff. Keep funding your retirement accounts. And of course, replenish your emergency fund or increase it. If you don’t need the money, make a donation to your favorite local charity, because they are also hurting from the shutdown.

CARES Act RMD Relief

CARES Act RMD Relief for 2020

The Coronavirus Aid, Relief, and Economic Security CARES Act approved this weekend eliminates Required Minimum Distributions from retirement accounts for 2020. If you have an inherited IRA, also known as a Stretch or Beneficiary IRA, there is also no RMD for this year. We are going dive into ideas from the CARES Act RMD changes and also look at its impact on charitable giving rules.

Of course, you can still take any distribution that you want from your retirement account and pay the usual taxes. Additionally, people who take a premature distribution from their IRA this year will not have to pay a 10% penalty. And they will be able to spread that income over three years.

RMDs for 2020

Many of my clients have already begun taking their RMDs for 2020. (No one would have anticipated the RMD requirement would be waived!) Can you reverse a distribution that already occurred? Not always. However, using the 60-day rollover rule, you can put back any IRA distribution within 60 days.

If you had taxes withheld, we cannot get those back from the IRS until next year. However, you can put back the full amount of your original distribution using your cash and undo the taxable distribution. You can only do one 60-day rollover per year.

For distributions in February and March, we still have time to put those distributions back if you don’t need them. Be sure to also cancel any upcoming automatic distributions if you do not need them for 2020.

If you are in a low tax bracket this year, it may still make sense to take the distribution. Especially if you think you might be in a higher tax bracket in future years. An intriguing option this year is to do a Roth Conversion instead of the RMD. With no RMD, and stocks down in value, it seems like a ideal year to consider a Conversion. Once in the Roth, the money will grow tax-free, reducing your future RMDs from what is left in your Traditional IRA. We always prefer tax-free to tax-deferred.

Charitable Giving under the CARES Act

Congress also thought about how to help charities this year. Although RMDs are waived for 2020, you can still do Qualified Charitable Distributions (QCDs) from your IRA. And for everyone who does not itemize in 2020: You can take up to $300 as an above-the-line deduction for a charitable contribution.

Also part of the CARES Act: the 50% limit on cash contributions is suspended for 2020. This means you could donate up to 100% of your income for the year. This is a great opportunity to establish a Donor Advised Fund, if significant charitable giving is a goal.

Above the $300 amount, most people don’t have enough itemized deductions to get a tax benefit from their donations. Do a QCD. The QCD lets you make donations with pre-tax money. Of course, you could do zero charitable donations in 2020 and then resume in 2021 when the QCD will count towards your next RMD. But I’m sure your charities have great needs for 2020 and are hoping you don’t skip this year.

The Government was willing to forgo RMDs this year to help investors who are suffering large drops in their accounts. To have to sell now and take a distribution is painful. However, if you already took a distribution, you are not required to spend it. You can invest that money right back into a taxable account. In a taxable account, the future growth could receive long-term capital gains status versus ordinary income in an IRA. I’ll be reaching out to my clients this week to explain the 2020 CARES Act RMD rules. Feel free to email me if you’d like our help.

Coronavirus Stock Market

Coronavirus Stock Market Damage

Welcome to the Coronavirus Stock Market. After setting an all-time high on February 19, the market plummeted last week, and is down nearly 15% from its highs. As the virus spreads, the economic impact is growing. Companies are sending employees home, shuttering manufacturing, leading to less travel, less restaurant meals, and lower consumer spending.

As an investor, what should you do, given that we don’t know how much worse the contagion will grow? I don’t know. No one knows. No one has a crystal ball to know how the disease will spread or how the economies or markets will be impacted. Recognizing that this is unknowable information is the key to understanding what to do.

A history lesson may help. Big drops of 3.5% in a day are somewhat rare and they are felt as being quite shocking. We had a couple of days like that this week. Over the past 33 years, there have been 55 days of a 3.5%+ drop. In 45 of those instances, the market was higher 12 months later. Much higher, on average 20% higher. In only 10 of 55 drops was the market lower a year later. (Source: Barrons) Those aren’t bad odds, and the reward for staying invested could be worthwhile.

What I did this week

If it helps, let me share what I did in my own portfolio this week. I did not sell anything. However, I did have a couple of bonds which were called. With the new cash in my account, I revisited my asset allocation. Since equities are down, I was presently underweight to my target percentage of stocks. So, I purchased more shares of stock Exchange Traded Funds (ETFs) that I own.

Sure, it’s possible that the purchases I made this week will be even lower next week. But I’m not trying to time the market. No one can tell you when the Coronavirus stock market carnage will cease and it will be safe to invest again. We are stuck with uncertainty no matter when we make a decision. So the optimal decision, I think, is to stick to a disciplined process. Create a diversified target asset allocation and hold that portfolio regardless of epidemics, elections, wars, or any other human events. Rebalance your portfolio periodically, when you have cash to add, or when your allocation has shifted.

If you made any recent purchases in taxable accounts, consider harvesting your losses. Immediately repurchase another fund to maintain your target allocation. This is solely to lock in a capital loss for tax purposes, so be careful to not change your asset allocation.

The Pain of Losses

There’s an old saying on Wall Street that stocks take the stairs up but the elevator down. Gains are slow and plodding, but losses are straight down. That’s definitely what happened this week. From a psychological perspective, the pain of a 10% loss is more acute than the thrill of a 10% gain. This increases likelihood of making investment errors.

Everyone agrees that we shouldn’t try to time the market when the market is rising. But when the market is down, we have to really resist the urge to go to cash, when our amygdala is screaming Run! Hide! Get out of the market before you lose everything! That biological mechanism may have helped our ancestors avoid being eaten by a saber-toothed tiger, but is a detriment to long-term investing.

Bonds and Alternatives

While stocks have been falling, investors seem to be buying bonds no matter how low the yield. As money floods into bonds, prices go up and yields go down. The 10-Year Treasury reached an all-time low yield on Friday of 1.09%. Unbelievable, and yet this didn’t even make any headlines this week. With low rates, expect virtually all of your callable corporate and municipal bonds to get called. And then good luck finding a replacement – I’m seeing 2% yields at 10+ years. That’s terrible for a BBB-rated credit.

This is a good time to refinance your mortgage. If you can save 1 percent or more, it is probably going to be worth the change. That’s just about the only benefit of the low interest rates.

Today’s yields make bonds quite unappealing and dividend stocks more attractive. Some good companies are down significantly (why is Chevron down 25% this year?). We were buying stocks at higher prices last month, and if you like those companies, you should like them even better when they are on sale. Bonds won’t even keep up with inflation and the low interest rates will push more investors into stocks.

Stocks have much higher risks than bonds, and it is simply unacceptable for most investors to be 100% in stocks. Fixed, multi-year guaranteed annuities have better yields than treasury, corporate, and municipal bonds and are also guaranteed. We can get over 3% on a 5-year annuity, versus 0.87% for a 5Y Treasury or 1.6% on a 5Y CD. Annuities remain very unpopular, but I think they are a better fixed income investment than bonds if you do not need liquidity. I suggest laddering fixed annuities over a 5-year maturity, 20% into five sleeves.

Our Alternative Investment in Preferred Stocks were down a couple of percent this week, but nothing like the bloodbath in stocks. Some preferreds that were trading near $26 are now trading near $25. With a $25 par price, this is an excellent entry point for investors.

The Coronavirus stock market impact has been shocking. Investors are not going to be happy when they open their February statements. Realizing that we cannot predict the future, we need to avoid the “flight” response. The challenge for an investor remains to keep the discipline to stick to their plan of a diversified allocation. Rebalance and hold.