Webinar in Review: Year-End Tax and Planning Strategies

Contributed by: Robert Ingram, CFP®

With 2019 winding down and the holidays right around the corner, it’s understandable when our personal finances don’t always get our full attention this time of year. However, you should keep several important and timely tax and financial planning strategies top of mind before the year ends. During this 60-minute discussion, we will cover the following topics and more:

•       Tax planning strategies to consider for your investments and retirement accounts

•       Charitable giving in light of the recent tax law changes

•       Retirement planning tips and updates on 2020 contribution limits

If you weren’t able to attend the webinar live, we’d encourage you to check out the recording below.

There are time stamps provided so you can fast-forward to the topics you are most interested in.

• 3:00- Medicare Overview

• 6:30- Required Minimum Distributions (RMD)

• 12:00- Tax Reform Refresher & Income Tax Brackets

• 22:00- Long Term Capital Gains Rates

• 23:30- Efficient Charitable Giving & Donating Appreciated Securities

• 34:00- Roth IRA Conversions

• 41:00- Tax Efficient Investing & Tax Loss Harvesting

• 46:00- Employer Retirement Plans

• 49:00- Health Savings Accounts (HSA)

• 54:00- Gifting Ideas

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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Changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While familiar with the tax provisions of the issues to be discussed, Raymond James and its advisors do not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional.

Trade War Winners and Losers

Contributed by: Jaclyn Jackson

Emboldened by NAFTA trade deal renegotiations with Mexico and Canada, car import taxation, and the U.S.-China trade war, protectionism is at the forefront of U.S. economic policy. As the world spotlight focuses on the U.S.-China trade war, many are watching to see how the battle between two of the largest world economies will play out, and how it will affect global economic interdependence.

For those keeping score, trade war winners and losers are as follows:

Winners

• Cheap Exporters (Vietnam, Taiwan, South Korea, Japan) - Companies have opted to move distribution from China to Vietnam in attempt to bypass U.S. tariffs. As of August 2019, the U.S. imports 40% more from Vietnam than it did in 2018. Cheap exporters win with more opportunities to improve their gross domestic product (GDP). In the case of Vietnam, exports to the U.S. are 26% of their 2019 GDP.

• Brazil - China imports 60% of soybeans traded worldwide. After Beijing issued a retaliatory 25% duty on U.S. imports, Brazil exported two million additional metric tons of soybeans to China between October and November of 2018.

• Manufacturing Sector - Fabricated metals, machinery, and electronic instrument industries doubled jobs from 15,000 to 30,000 between May 2018 and May 2019. Not to mention, of the 2.6 million new jobs added since tariff announcements, 204,000 of them were in the manufacturing sector.

Losers

• Consumers - Americans may feel the pain in their wallets, with increased prices of products impacted by the trade war.

• European Union - Opposite cheap exporters, the European Union (EU) is at risk of worsened gross domestic product. Currently, exports create 40% of GDP. Twelve percent of that GDP is generated from the United States. As the EU’s largest exporter and economy, Germany is at risk of being hit hardest.

Perspective Matters

Keep in mind that viewing the trade war through the lens of winners and losers is an oversimplification. The economic interconnectedness of globalization is quite complex. It’s no wonder many are scratching their heads when considering whether protectionist policies are helpful or harmful.

Also, the data tells conflicting stories. Case in point: the manufacturing industry. As explained above, the industry is experiencing domestic job growth, which would point to a benefit of protectionism. For balance, according to the Bureau of Labor Statistics, only six of the 20 major manufacturing categories have grown faster since tariff threats began. The other 14 have been either consistent or done worse. Notably, textile, paper, and chemical industries slumped, because of steel or softwood lumber tariff retaliation. Vehicle, technology, heavy equipment, and agriculture companies have suffered a similar fate. What’s more, some industries have cut jobs because of rising production costs from tariffs. General Motors, for example, lost $1 billion in 2018 and projects additional costs of the same amount this year. As a result, they’ve closed plants, subsequently fueling a strike by 46,000 employees. The pain doesn’t stop there; GM’s major suppliers have also lost vital business.

Opportunity Knocks

No doubt, international equities have taken one on the chin, and protectionist policies have not helped. In fact, international markets have underperformed the S&P 500 over the last seven years. However, if we zoom out a bit, historically low international valuations may indicate an entry point for long-term investors. The diagram below reflects less than average valuations for developed markets, Europe, Japan, and emerging markets. While trade war headlines impact emerging markets most, valuations urge investors to review these spaces further for investing potential.

Source: FactSet, MSCI, Standard & Poor’s, Thomson Reubers, J.P. Morgan Asset Management.

Additionally, looking at when international stocks have outperformed U.S. stocks between 1975 and 2015, we see a pattern; international and U.S. equity performance is generally cyclical. The data indicates that as the cyclical nature between U.S. stocks and international stocks shifts in favor of international stocks, long-term investors have a chance to recover the difference between current valuations and 25-year historical averages. It also punctuates the importance of portfolio diversification.

Chart: MSCI EAFE Index vs. S&P 500 Total Return Index. Source: FactSet, as of 12/31/15.

While it is unclear how protectionist policies will play out, and who will win or lose as a result, long-term trends must be considered. More importantly, investors must ask themselves whether protectionism will indefinitely deter international markets, or just force them to adapt and reimagine how world markets interact.

Jaclyn Jackson is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss.
Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Reducing Your Medicare Premium Surcharges

Contributed by: Robert Ingram, CFP®

For many clients with incomes above a certain level, Medicare premiums may be higher for Part B and Part D. As a Medicare recipient’s income exceeds specific thresholds, they may pay adjusted amounts in addition to the baseline Part B and/or Part D premiums.

Now, what if you have been paying these Medicare surcharges, but you experience a drop in your income? Can you also get your Medicare surcharge reduced? The answer is, possibly yes.

If you experience a change to your income because of certain life events, you can request that the Social Security Administration (SSA) review your situation and use your more recent income to determine what premium adjustment (if any) should apply. Examples of these life-changing events include:

• Work stoppage or work reduction

• Death of a spouse

• Marriage

• Loss of pension income

• Divorce or Annulment

• Loss of income-producing property

You might be asking yourself, “Why do I have to request this? Aren’t Medicare premiums automatically adjusted according to my income?”. A big reason for making the change request when you experience a qualifying change in income has to do with how and when the SSA measures your income.

Income-Related Monthly Adjustment Amount (IRMAA)

To determine whether your income makes you subject to an Income-Related Monthly Adjustment Amount (IRMAA) to the regular Medicare Part B or Part D premiums for the current year, the SSA looks at the income you reported to the IRS for the previous two years. This means that your Modified Adjusted Gross Income (Adjusted Gross Income with tax-exempt income added back) reported for 2017 determines your Medicare premiums for 2019. 

For individuals paying Part B premiums, for example, the standard premium in 2019 is $135.50 per month. However, the following table illustrates what you would pay in 2019 for Part B depending on your 2017 income.

For a couple who filed a joint return with income above $170,000 and up to $214,000 in 2017, each spouse paying for Medicare Part B may pay an additional $54.10 per month above the standard premium (a total of $189.60 monthly) in 2019. A couple with income that falls between $320,000 and $750,000 (or an individual filing single with income between $160,000 and $500,000) in 2017 could each pay an additional $297.90 above the standard premium, for a total of $433.40 per month in 2019.

If an individual (or couple) experienced a drop in income for 2019, it might normally take until 2021 for the Medicare premiums to reflect any reduction based on the 2019 income. Let’s say the couple who had reported income between $320,000 and $750,000 retires in 2019 and sees their income drop to an expected $165,000. The expected income falling within the $170,000 threshold could mean a difference of $297.90 per month (each!) in Medicare Part B premiums (from $433.40 to $135.50).

If a qualifying life event caused the drop in expected income, then filing a request with the SSA could mean a more immediate change in Medicare premiums, rather than waiting for the savings until 2021.

How do you request the premium surcharge reduction? 

If you think you have experienced a reduction in income due to one or more of the qualifying events, make your request to the Social Security Administration by submitting the Medicare Income-Related Monthly Adjustment Amount –Life-Changing Event form (form SSA-44).

Along with this form, you will also provide supporting documentation for your Modified Adjusted Gross Income and your life-changing event (see form SSA-44 instructions). Examples of supporting documentation may include items such as:

• Federal income tax return

• Signed statements from employers, pay stubs

• Certified documents for transfers of a business

• Marriage certificate

• Certified death certificates

• Letter or statement from pension administrator explaining a reduction/termination

For other disagreements with an IRMAA determination, you have the right to appeal. You can file an appeal online (socialsecurity.gov/disability/appeal) and select “Request Non-Medical Reconsideration”, file a Request for Reconsideration form, or contact your local Social Security office.

If you disagree with an IRMAA determination because your reported Modified Adjusted Gross Income is incorrect, you need to address the correction first with the IRS.

Because these Medicare surcharges are determined each year, you have opportunities to do more proactive income and tax planning leading up to and after Medicare enrollment. Employing different strategies that help control your Adjusted Gross Income could also help control potential Medicare premiums in future years. If you have questions about your particular situation, feel free to reach out to us!

• Want more information about Medicare? Check out The Center’s Medicare FAQ

• Looking for financial strategies and tax tips for year-end? Check out this webinar.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

What You Need to Know Before You Dip Into Retirement Accounts

Contributed by: Timothy Wyman, CFP®, JD

In general, a 10% penalty applies when you access your IRA, 401(k), and other retirement accounts before age 59. The word “penalty” seems harsh, so the Internal Revenue Code classifies it as an excise tax on early distributions. Moreover, the 10% excise tax is in addition to the ordinary income taxes owed on distributions from pretax accounts. Therefore, the general rule of keeping your hands off these funds until at least age 59.5 is a good one. 

However, what if you really need the money?

Fortunately, there are exceptions to the 10% penalty rule. A complete list may be found here.

For example, “first-time” homebuyers may take out up to $10,000 to help buy or build their primary residence. A similar exception applies to higher education costs for you, your spouse, or children. These two apply for IRAs, but not 401(k) accounts.

Another exemption for medical expenses paid on behalf of yourself, your spouse, or a dependent applies only on the amount that exceeds 10% of your adjusted gross income. Let’s assume Bob and Mary are facing significant ($170,000) medical expenses for their son, Bob Jr. The expenses are not covered by their regular health insurance plan, so the couple withdraws $170,000 from Bob’s IRA. In addition to pension and social security, this distribution increases their Adjusted Gross Income to $250,000, so Bob and Mary will pay about $2,500, the 10% excise tax on approximately $25,000. 

It is best to avoid early distributions from your IRA and 401(k) accounts; after all, the money is meant for your retirement years.

However, in the event there are no other alternatives, you may be able to avoid the 10% penalty….er, excise tax.

Timothy Wyman, CFP®, JD, is the Managing Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® For the second consecutive year, in 2019 Forbes included Tim in its Best-In-State Wealth Advisors List in Michigan¹. He was also named a 2018 Financial Times 400 Top Financial Advisor²

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¹ The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research is based on an algorithm of qualitative criteria and quantitative data. Those advisors that are considered have a minimum of 7 years of experience, and the algorithm weighs factors like revenue trends, AUM, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of 29,334 advisors nominated by their firms, 3,477 received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Any opinions are those of Center for Financial Planning, Inc.® and not necessarily those of Raymond James.

² The FT 400 was developed in collaboration with Ignites Research, a subsidiary of the FT that provides special-ized content on asset management. To qualify for the list, advisers had to have 10 years of experience and at least $300 million in assets under management (AUM) and no more than 60% of the AUM with institutional clients. The FT reaches out to some of the largest brokerages in the U.S. and asks them to provide a list of advisors who meet the minimum criteria outlined above. These advisors are then invited to apply for the ranking. Only advisors who submit an online application can be considered for the ranking. In 2018, roughly 880 applications were re-ceived and 400 were selected to the final list (45.5%). The 400 qualified advisers were then scored on six attrib-utes: AUM, AUM growth rate, compliance record, years of experience, industry certifications, and online accessibil-ity. AUM is the top factor, accounting for roughly 60-70 percent of the applicant's score. Additionally, to provide a diversity of advisors, the FT placed a cap on the number of advisors from any one state that's roughly correlated to the distribution of millionaires across the U.S. The ranking may not be representative of any one client's experi-ence, is not an endorsement, and is not indicative of advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award/rating. The FT is not affiliated with Raymond James.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James

Social Security Cost of Living Adjustment for 2020

Contributed by: Kali Hassinger, CFP®

The Social Security Administration recently announced that monthly benefits for nearly 69 million Americans will increase by 1.6% beginning in January 2020. The adjustment is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, through the third quarter. This cost of living adjustment (COLA, for short) is slightly less than the raises received in 2018 and 2019, which were 2% and 2.8%, respectively.

For many, Social Security is one of the only forms of guaranteed, fixed income that will rise over the course of retirement. The Senior Citizens League estimates, however, that Social Security benefits have lost approximately 33% of their buying power since 2000. This is why, when running retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

So far, no changes to the Medicare premium and Social Security wage base tax have been announced, but they are expected by year end. Medicare trustees estimate Part B premiums will increase by about $9 per month for those not subject to the income-related surcharge. Unfortunately, the Social Security COLA adjustment is often partially or completely wiped out by the increase in Medicare premiums.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

A HOUSE DIVIDED: Handling the Marital Home in Divorce

Contributed by: Jacki Roessler, CDFA®

As we head away from the lazy days of summer in Michigan and families are securely back in their school-time routines, many divorcing clients turn their focus to questions about how to handle the marital home. In fact, lately, it’s a question I hear at least once a week. Read on for important factors to consider and some often overlooked tips.

There are three general ways to treat the marital home in a divorce.

1. With Option A, one party keeps the home and pays the other party their equitable interest, either from home equity or from their share of another asset. Let’s assume a couple has a home with an appraised value of $300,000 and an outstanding mortgage of $200,000. If the wife retains the home, she owes the husband $50,000 for his share of the equity. To pay him, she can re-finance the mortgage for $250,000 and give him $50,000 in cash, or the husband can take his $50,000 from the wife’s share of a bank or investment account or a pre-tax equivalent amount from a retirement asset.

2. Option B is to list the home for sale and split the net proceeds. Using the same example as above, let’s assume the home is sold for $300,000. After paying off the mortgage lien and deducting 8% in closing costs and sales commission ($24,000), the remaining equity is $76,000. In this scenario, both parties would net $38,000 in cash.

3. Lastly, with Option C, the parties jointly retain the home (as Tenants in Common) for an agreed upon number of years, at which point the house would be sold and the proceeds split. At the time of sale, whoever was paying down the mortgage would receive credit for any portion of the principal paid in the intervening years. This type of arrangement often allows one party the option to buy out the other’s interest at a future date, and at an agreed upon value.

Many couples find the most difficulty in separating the financial and emotional aspects of the house.

For many, the house comes with a mortgage payment and with property tax obligations, insurance, maintenance and upkeep costs. The financial burden may not be worth the comfort of keeping it. For others, staying put may be the most cost-effective option. The best tip I can give my clients is to carefully itemize all the potential, realistic costs associated with the home before making an emotion-based decision about who should keep it. Take stock of needed repairs, appliances reaching the end of their life, and what it costs to keep the house warm in the winter and cool in the summer. 

Another important financial consideration is to make sure the home is properly valued.

I’ve had many clients use a quick, free, internet-generated estimate rather than spend money on a qualified appraisal. If the house will be jointly retained and sold in the future, or sold at the time of the divorce, an appraisal isn’t necessary. As a financial planner, I never want clients to needlessly spend money. However, if one party is buying out the other’s interest in the home, it’s imperative to get a reasonable (and hopefully neutral) appraisal by a qualified appraiser. If the house needs a new roof or just had a sprinkler system installed, the internet estimate won’t include that. Realtor appraisals generally aren’t acceptable for this purpose.

As always, each couple’s situation is unique, and their circumstances should receive a critical analysis. Seek advice from an experienced financial advisor.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Opinions expressed in the attached article are those of Center for Financial Planning, Inc and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The scenarios described are hypothetical examples for illustration purposes only. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Webinar in Review: Important to Know Medicare Coverage and Options

Contributed by: Kali Hassinger, CFP®

We’re joined by Joel Nogueria of Health Plan One, a Medicare consultant, to learn the basics of:

• How Medicare coverage works

• What you need to consider before selecting a coverage

Are you aware that a significant part of the retirement planning process involves making the transition from an individual or group health insurance plan to Medicare? The choices are numerous and are driven by many factors – personal health, choice of doctor, financial considerations, and even your zip code.

If you missed the webinar, here’s a recording:

• 1:30 HPOne Overview

• 2:30 Medicare Part A-- Hospital Insurance

• 3:30 Medicare Part B-- Medical Insurance

• 5:30 Part B- High Income Premium Surcharge

• 7:30 Medicare Coverage Options

• 12:00 Medicare Part D-- Prescription Drug Coverage & the Donut Hole

• 15:30 Closing the Coverage Gaps- Medicare Supplement

• 16:00 Medigap-- Standardized Benefits but Varying Costs

• 19:00 Closing the Coverage Gaps-- Medicare Advantage

• 20:30 Part C-- Medicare Advantage

• 21:30 Enrollment Periods, Eligibility, and Penalties

• 28:15 Core Capabilities

• 30:00 What Makes HPOne Different

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Time to Fill Out the 2020-2021 FAFSA Application

Contributed by: Kali Hassinger, CFP®

Just as parents and students are getting back into the groove of another school year, it’s already time to start thinking ahead! The Free Application for Federal Student Aid, better known as the FAFSA, opened for the 2020-2021 school year on October 1. The form helps determine financial aid eligibility for both current and prospective students. Although this is a federal application, it may also be used to apply for many state loan, grant, and scholarship programs.

The sooner the better!

A large portion of available funds are distributed on a first-come, first-served basis, so the earlier you file the FAFSA, the more money is available for loans and grants. While you have until June 30, 2021 to file the FAFSA for the 2020-2021 school year, most state and school deadlines differ. It doesn’t matter whether a student has been accepted by a school at the time of filing. You’ll need to elect at least one college to receive the application information, but you can add multiple schools in which you may be interested.

What information do I use?

For the 2020-2021 school year, the FAFSA will use 2018 tax return information. Regardless of your household income level, however, it’s important to file the application. Some schools will only consider students for scholarships if they have filed the FAFSA.

Visit https://studentaid.ed.gov/sa/fafsa to start the process.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

As we enjoy fall, and the kids are excited for Halloween, the end of the year is right around the corner! Here is a summary of what occurred in markets over the past quarter, and what we think may come before year-end.

Executive Summary

1. It has been a strong quarter for U.S. equities, and the odds seem to be in our favor for this to continue, but a slowing economy and the trade war could, at any moment, derail growth.

2. Bond markets have offered a haven to the increased market volatility, and they have experienced above-average returns as the Federal Reserve (the Fed) has begun lowering rates this year. As markets have marched on, we have rebalanced and increased duration within bonds to more strongly offset market volatility (this area tends to zig when the markets zag).

3. Investors have been overly punitive to international markets.

4. Economic indicators continue to soften.

5. With impeachment possible, headlines will contribute to volatility, but conviction/removal of President Trump remains unlikely as this requires a two-thirds vote in the Senate.

6. At these historically low-interest rates, federal debt is now far more affordable to service than it was 20 years ago.

7. Remember that our portal offers a current view of your asset allocation and returns, and offers a vault to securely transfer documents to us! Also, search for us in the App Store under “Center for Financial Planning” for smartphone access to the portal.

U.S. Equity Markets

Historically, the third quarter of the year is the most difficult for the S&P 500. This is where the old saying, “Sell in May and Go Away” comes from.  Despite the increased volatility, the S&P 500 managed to make it through on a positive note, with the S&P 500 up 1.7%. For the year so far, the S&P 500 has been up a whopping 20.55%, far exceeding what most experts were calling for this year. With the markets up so much already this year, you may wonder, “Will they run out of steam?”.  A slowing economy and the trade war with China hold the potential to derail or boost returns on any given day, depending on how negotiations are going.

Interest rates

The clear winner for the quarter was bonds, as the increased volatility in U.S. equities sent investors into a more secure investment strategy, boosting the Bloomberg Barclays US Aggregate Bond Index 2.27%. So far for the year, this index is up 8.52% as the Federal Reserve has completely reversed course from tightening monetary policy (raising interest rates) to loosening monetary policy (lowering interest rates).

Interest rate activity was at the forefront of the headlines for the quarter, especially in September. During the month, eight of the top 10 developed market central banks met to discuss interest rates. The ECB (European Central Bank) and the Federal Reserve here in the U.S. were the only two to reduce target policy rates, but several others are discussing rate cuts in the months ahead. Meanwhile, here in the U.S., policymakers are projecting a third rate cut this year. We believe this will be very dependent on developments in trade talks with China, market returns, as well as the growth outlook globally and here in the U.S.

Meanwhile, a large portion of the world’s sovereign debt has negative yields making our treasury rates still very attractive to buyers overseas. This also is pressuring rates downward. As markets have continued to climb, we have been rebalancing here and increasing duration within bonds to offset market volatility more strongly (higher duration bonds tend to perform more positively than short duration bonds during a stock market retreat).

International Equities

International markets have lagged U.S. markets again during this quarter. The MSCI EAFE Index was down 1.07% while year to date is up 12.8%. So, the disparity between international and U.S. returns continued to grow during the quarter. Much of this is due to stronger economic growth in the U.S. versus overseas. Brexit, trade wars, and a strong U.S. dollar also continue to plague international returns.

Indicators

Our economic indicators continue to soften. While slightly above half are still looking positive, a few are flashing red, and positive indicators continue to become less positive or grow at a slower rate. The manufacturing index is one area teetering on the brink of contraction, giving the lowest reading in 10 years, but technically still giving a positive signal. Here are some others:

Impeachment

The House of Representatives is once again gearing up to attempt impeachment proceedings. Impeachment is the process whereby the House of Representatives, through a simple majority vote, brings charges against a government official. After the government official is impeached, the process then moves to the Senate to try the accused. The Senate must pass its vote by a two-thirds majority. (Note: Republicans hold 53 seats, while Democrats hold 47.) If this happened, President Trump would be removed from the office, and the Vice President would take his place.

There is little in recent history to help us understand how markets would react here in the U.S. if this were to happen. Bill Clinton was impeached in 1998, and Richard Nixon resigned during his Impeachment proceedings, but was never actually impeached. Several unsuccessful attempts have been made to impeach Donald Trump, George W. Bush, and, yes, even Barack Obama. When Bill Clinton was impeached, markets were down in bear market territory (over 20% peak to trough on the S&P 500) for a short time before they rallied back. The Russian Ruble Crisis also occurred at the same time, so it is hard to say whether the impact to markets was solely due to the impeachment process.

While removal of the President seems unlikely, short-term volatility would probably occur during any period of uncertainty. This is one of the many reasons we maintain a diversified portfolio. If stocks retreat, our bond portfolios would likely perform well, and international investments may strengthen in the face of a weaker dollar. A diversified portfolio, with cash or cash equivalents set aside for short-term needs, is the most effective solution to an extremely rare event like this.

Federal Debt

We are often asked about this topic; it seems to be an ever-present concern. While attending a conference in late September, I listened to Blackstone’s Byron Wien, a 60-year veteran of the markets. He put some very long-term perspective around the Federal debt levels and interest rates. He has been hearing “we can’t pass this along to our grandchildren” for the entire 60 years he has been in the business. He won’t go so far as to say the ratio of debt to GDP doesn’t matter, but believes we must put it into perspective.

According to Byron, today, the combined debt of the U.S is $22 trillion, up almost four times from 20 years ago, when it stood at about $6 trillion. However, the blended interest rate the government pays to service this debt is only up about 25% over what the government paid 20 years ago. It now costs $430 billion annually to service debt at current interest rates. This blends out to be just a bit over 2%; whereas, 20 years ago, it cost about $360 billion to service debt at a blended interest rate of a little over 6%. In summary, it is only 25% more costly to service our debt than it was 20 years ago, even though the amount of debt has quadrupled. Wien said these low-interest rates are “an economic gift from God.”

Are you curious about how your asset allocation looks? Are you using our new client portal? Did you know this is a secure way to move documents back and forth and that our contact information is at your fingertips? If you are already using the portal and want a primer on how to navigate or a link to login, check out the new instructional video on our website’s Client Login page. If you aren’t using the login, and you are interested, please reach out so we can send you the link to activate it!

On behalf of everyone here at The Center, we hope you enjoy the end of the year and the many holidays to come!

Angela Palacios CFP®, AIF®
Partner
Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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Source of return data: Morningstar Direct The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Using the Bucket Strategy to Meet Retirement Cash Needs

Contributed by: Josh Bitel, CFP®

If you are in or close to retirement, you are probably concerned about the recent market uncertainty. You may be wondering how your investment portfolio can be structured to provide the income you need, without putting the portfolio in a vulnerable position. 

The Bucket Strategy (not to be confused with the “Bucket List”) describes a cash distribution method to provide you with income from your portfolio during any kind of market cycle. 

Consider that we have four buckets, and that every investment within your portfolio fits into one of these buckets. This strategy can provide cash needed in retirement, even if equity markets drop or stay low for extended periods of time. 

Bucket 1:

The first bucket is designated for cash needs of one year or less. This bucket contains cash and short-term securities that mature in less than one year to support your needs for the next 12 months. 

Bucket 2:

The second bucket starts generating cash flow in the 13-36 month range, or years two and three. This bucket contains short-term bonds and fixed-income type securities that have a small amount of volatility, but are primarily designed for preservation of capital. The holdings in this bucket will pass on interest income that ultimately flows into the first bucket. 

Bucket 3:

The third bucket is structured to generate cash flow needs in years four and five, and primarily contains strategic income and higher yielding bonds (lower quality, longer maturing and international type bonds). However, they do pass on interest income that flows into the first bucket, much like bucket #2. 

Bucket 4:

The fourth, and last, bucket is made up of equities (stock investments) and other assets that have higher volatility like gold, real estate, commodities, etc. Many of these assets will produce dividends to help replenish the first bucket, if the dividends are set to pay in cash and not reinvest. Ideally, when the market is volatile, as we’ve been seeing lately, this bucket is left alone to ride out the market cycle and replenish as we recover.

The Bucket Strategy is designed to provide enough cash flow to get through roughly a 6- or 7-year period without needing to liquidate the stock portion of the portfolio. This should provide you with the confidence (and more importantly, cash) needed to enjoy your retirement and start working on your Bucket List! 

Talk to your financial planner to see how the Bucket Strategy might work for you.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.