Proactive Approaches to Navigate Market Volatility

Contributed by: Nick Defenthaler, CFP®, RICP®

2022 has been like a Michigan highway this year for financial markets – lots of potholes and certainly not a smooth ride to your destination. What makes this year's market volatility so frustrating is that we have seen the bond market struggle alongside equity markets. In most market corrections, bonds have a negative correlation with stocks, which is just a fancy way of saying stocks Zig when bonds Zag – they move in different directions when things get ugly. While this is a general rule of thumb, as we have seen this year, there are periods where stocks and bonds can be down at the same time (click here to learn more and read our latest quarterly Investment Commentary).

A reasonable question that many of our clients have either asked us directly or are likely thinking to themselves is, "what moves should we be making given the current state of the economy and market?". Our firm does not believe in market timing or abandoning an evidence-based investment strategy because of market volatility that we believe comes with being a long-term investor. However, this certainly does not mean that we sit around doing nothing! In addition to making strategic adjustments within your portfolio that align with our current view and outlook for fixed income and equity markets, there are several financial planning concepts we review and consider that have been proven to add value to a client's financial plan over time. Let's dig into what some of those strategies are:

Tax Loss Harvesting 

Intentionally selling positions at a loss within an after-tax investment account (trust account, joint, individual account, etc.) to help offset capital gains generated in the future, or even a portion of your ordinary income, is something we act on frequently for clients during times of market volatility. When loss harvesting is completed, we invest the sale proceeds in a similar fund for 31 days, so you are not "out of the market" and, in many cases, re-purchase the exact positions we sold one month prior. Click here to learn more about this strategy and why it can help improve the most important return for any investor – your AFTER-TAX rate of return! 

Roth IRA Conversions 

Given our historically low tax environment and a strong likelihood that these low rates expire at the end of 2025 (2017 Tax Cuts & Jobs Act), moving funds from Traditional IRAs to Roth IRAs through income acceleration has been a popular strategy over the past five years. Roth IRA conversions become an even more compelling strategy during times of market volatility because you can convert more shares of an investment at the same target dollar amount for the conversion. 

For example, if Joe Client (age 62) plans to convert $30,000 to his Roth IRA in 2022 to maximize the 12% marginal tax bracket, we might consider converting funds of his ABC stock mutual fund. With being currently valued at $10/share, we would be converting 3,000 shares. However, because of recent market volatility, ABC mutual fund's share price has dropped to $8.50/share – down 15%. This means we can still target the same $30,000 conversion to maximize the appropriate tax bracket; however, we can now convert nearly 3,530 shares – 530 more than before the decline in share price. When the market recovers, the "snap back growth" with additional shares will occur completely tax-free within the Roth IRA!

Portfolio Rebalancing 

Buying low and selling high – the cornerstone of almost every investment strategy! At its core, that is really what portfolio rebalancing is all about. When we proactively manage your investments and allocation, your planner and our dedicated in-house investment department are working in tandem, reviewing your plan to ensure your target allocation is always in balance. Thinking back to late March 2020 in the depths of the COVID bear market, a client who had a target portfolio mix of 60% stock, 40% bond was now sitting at roughly 54% stock, 46% bonds because equity markets were down 30+% and many bond funds were up 3-5% for the year. When we hit certain thresholds that made sense for each client's customized financial plan, we sold bonds in positive territory and bought stocks funds that were trading at a deep discount to get the client back to their target allocation of 60% stock, 40% bond. Let's be honest – rebalancing when markets are up where we are trimming profits (which we did a lot of last year, especially in Q4 2021) is a lot easier than selling our safe, more conservative bonds and buying stock when there is fear and uncertainty in markets. That said, in our opinion, a disciplined and intentional rebalancing strategy under EVERY market condition is key to helping you achieve the rate of return necessary to attain your short and long-term financial goals. 

Cash Reserves  

While working, especially in our younger years, it is always a great idea to have at least three months of living expenses set aside as an emergency fund. Having even more in cash (6-24 months) might be advisable, depending on one's career. However, as you enter the wonderful world of retirement, you no longer have to protect against a sudden loss of employment income. If that was a concern, chances are you would not be in a position to retire in the first place! Having adequate cash reserves when you are in "distribution mode" is key. In most years, the S&P 500 will fall 5% or more on three to four separate occasions, and on average, it is common to see a pullback of 14% or more at least once a year. Check out the chart below that JP Morgan updates annually – it is a favorite of mine for a self-proclaimed "financial planning nerd." However, despite those intra-year disruptions, markets typically end the year in positive territory about 75% of the time. 

Think of having adequate cash in your investment accounts to support your monthly or periodic portfolio distributions as your umbrella to keep you dry during a brief rain shower. So how do we do this? What's the strategy? Concepts that we have seen work well for the hundreds of retired clients we have the pleasure of serving are simple yet incredibly effective:

• Having dividends, interest, and capital gain distributions pay to cash instead of being re-invested – we consider this our "dry powder."

• Portfolio rebalancing – as noted above, trimming profits or areas of your investments that have become overweight are naturally good ways to rebuild your cash bucket to help support your retirement income needs.

Helping to construct and navigate your financial plan is truly our passion. Thank you for your continued trust and confidence in our team. We are grateful to be part of your financial team!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Why Everybody Is Talking About ESG Investing

Contributed by: Jaclyn Jackson, CAP®

*This blog was originally published on April 8, 2021. For more information on matching your values to your investments, check out The Center Social Strategy.

According to CNBC, almost 1 in 4 dollars is going into Environmental, Social, and Governance (ESG) funds this year.  Even before 2021, the combination of ethical provisions and competitive performance turned many heads towards ESG investments.  I aim to explain what the big fuss is about and why ESG investments are gaining traction.

Investors Are Talking About It

To be clear, the March 2020 downturn was no picnic (for anyone).  However, investors who had stake in environmental, social, and governance (ESG) investments managed the economic downturn with greater resilience.  Leading research firm, Morningstar, reported that during March 2020, “sustainable funds dominated the top quartiles and top halves of their peer groups.  Sixty-six percent of sustainable equity funds ranked in the top halves of their respective categories and more than a third (39%) ranked in their category's best quartile.”  Compared to peers, ESG funds pulled top rankings.

Not only did peer to peer comparisons look good, but index comparisons proved more robust too.  In the same study, Morningstar compared 12 passive ESG funds in the large-blend category to a traditionally passive fund. They reported, “For the year through March 12, all 12 ESG index funds outperformed”. What’s more is that fees were included in this study.  While the ESG passive funds compared were more expensive than the traditional passive fund, they still managed to outperform.  Impressively, the trend held with international and emerging market index comparisons…and everybody is talking about it! 

Including the world’s largest investor/asset manager, BlackRock, who’s CEO challenged corporations to consider the impact of climate change on business models.  In 2020, CEO Larry Fink announced BlackRock would incorporate ESG metrics into 100% of their portfolios.  The asset manager also pledged to produce data and analytics to punctuate why considering climate change should be an investment value. 

Yellen And Powell Are Talking About It

Investors are not the only people concerned.  In wake of recent natural disasters, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are working to assess the risks climate change poses to the health and resilience of the financial system.  Their consensus implied a concentrated effort to monitor financial institutions and their exposure to extreme weather events.  Leading the charge, Fed Governor Lael Brainard, recently announced the Financial Supervision Climate Committee (FSCC).  Brainard is a proponent of using scenario testing to understand banks’ ability to survive hypothetical climate catastrophes.  The FSCC will focus on developing evaluation processes for climate risks to the financial system.

Why Everybody Is Talking About It

While many people acknowledge the ethical appeal of ESG methodologies, they may not fully appreciate the businesses appeal that underpins stock performance.  Business litigation risk provides a clear example.  The Financial Analyst Journal featured a study that explored the relationship between ESG performance and company litigation risks.  Analyzing US class action lawsuits, researchers found, “a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%”.  The study also asserted that companies with low ESG performance experienced market value losses ($1.14 billion) twice the size of companies with high ESG performance.  Further, the study integrated their findings with a trading strategy and concluded investors benefitted from lower litigation risk.

It doesn’t stop with litigation risk.  There are also links between healthy corporate governance and market returns.  As You Sow, a nonprofit promoting corporate responsibility, has been tracking S&P 500 companies with excessively compensated CEOs since 2015.  They collaborated with R. Paul Herman, CEO of HIP Investor Inc., to do performance analysis based on their tracking. Herman determined, “…shareholders could have avoided lagging returns by excluding companies that keep making the list for excessive CEO pay”.  Companies without excessively paid CEOs significantly outperformed companies with excessively paid CEOs.  The former generated 5.6% in annualized returns compared to the latter at 1.5%.  What’s astonishing is that the report noted, “The performance gap due to excessive compensation equates to approximately $223 billion in shareholder value lost.”  How are companies without overpaid CEOs edging out competitors?  Instead of overpaying CEOs, more resources can be dedicated to research and development projects, dividends to shareholders, or equitable pay for employees; things that advantage company profits and support positive investor outcomes.

Are You Talking About It?

There is definitely a case for the merits of ESG investing.  It is no wonder folks are talking about it.  Are you interested in the conversation?  If you’ve followed trends in ESG investing and are considering adapting ESG strategies into your portfolio, The Center is here to help.  Ask your advisor about the Center Social Strategy; they would be happy to talk about it with you.

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

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that the 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. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

The Secure Act 2.0 and Possible Changes Coming to Your Retirement Plan!

Contributed by: Kali Hassinger, CFP®, CSRIC™

The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, passed in late 2019. This legislation was designed to encourage retirement savings and make significant changes to how inherited retirement assets are distributed. We have written about the Secure Act a bit over the last two years or so (you can read some of our posts here, here, or here), and now, it seems Congress is considering some additional ways to encourage Americans to save for retirement. 

It is, of course, important to note that this is still being debated and reviewed by Congress. The House passed a version of The Secure Act 2.0 on March 29th, but the version that the Senate could pass is expected to differ and be revised before ultimately hitting President Biden’s desk. Some of the key changes that the House and Senate versions of the Bill include are highlighted below:

Automatic Retirement Plan Enrollment

• The new Secure Act would require employers with more than ten employees who establish retirement plans to automatically enroll new employees in the plan with a pre-tax contribution level of 3% of the employee’s compensation. A 1% increase in contributions would be required each year until reaching at least 10% (but not more than 15%) of the employee’s pay. Employees can still override this automatic system and elect their own contribution rate.

Boosting Roth Contributions

Roth Catch-up Contributions

• Catch-up contributions are available at age 50 and, as of now, can be either pre-tax or Roth, depending on what the employee elects. The Secure Act 2.0 could require that all catch-up contributions to retirement plans would be subject to Roth tax treatment. 

• In addition to the current $6,500 catch-up contribution amount at age 50, they could also allow an extra $10,000 catch-up contribution for participants aged 62 to 64.  

Roth Matching Contributions

•  There could be an option to elect that a portion (or all) of an employer’s matching contribution would be treated as a Roth contribution. These additional matches could be included as income to the employee.

Student Loan Matching

• An additional area of employer matching flexibility is associated with employees paying off student loans. While employer matches have traditionally only been provided in conjunction with the employees’ plan contributions, this would allow employers to match retirement plan contributions based on employees’ student loan payments. This would give some relief to those missing retirement plan contributions because of the burden of student loan repayment schedules.

Further Delaying Required Minimum Distributions

•  The original Secure Act pushed the Required Minimum Distribution age from 70 ½ to 72. The Secure Act 2.0 could continue to push that timeline back as far as age 75. The House’s version of the Secure Act would slowly increase the age in a graded schedule. In 2022, the new Required Minimum Distribution age could be 73, with the age increasing to 74 in 2029, and finally up to age 75 by 2032.

Another item on our watch list is related to the original Secure Act from 2019. The Secure Act limited those who could stretch an inherited IRA over their lifetime, and many became subject to a 10-year distribution ruling. The IRS is working to provide more specific guidance on the rules surrounding inherited IRA distribution schedules. Based on the proposed regulation, non-spouse beneficiaries who inherit a retirement account on or after the period when the original account owner was subject to Required Minimum Distributions would be subject to both annual Required Minimum Distributions and required to adhere to the 10-year distribution timeline.

If or when the Secure Act 2.0 is passed into law, we will be sure to provide additional information and guidance to clients, so be on the lookout for possible upcoming blogs and webinars related to this topic. We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the Secure Act 2.0 could affect you, your family, or your business, we are always here to help! 

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

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 information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion

Q1 2022 Investment Commentary

Contributed by: Center Investment Department

Spring of 2022 feels as though it is bringing in a new wave of hope. There appears to be at least a reprieve (maybe nearing an end?) to the pandemic here in the U.S, and economic re-openings seem only to be limited by the number of staff members businesses can hire. However, the first quarter also brought many other headlines, including a severe escalation of the Russia/Ukraine conflict, increased oil prices and inflation, and higher interest rates.

It has been a rocky start to the year with a diversified portfolio ending -5.34% (40% Bloomberg US Agg Bond TR (Bonds), 40% S&P 500 TR (US Large company stocks), and 20% MSCI EAFE NR (Developed International)). There seemed to be nowhere to hide this quarter as volatility was present worldwide in equities and the fixed income markets.

Source: Morningstar Direct

Is This Market Decline Normal?

This chart shows intra-year stock market declines (red dot and number) and the market’s return for the full year (gray bar). A couple of takeaways from the below chart are important:

• The market is capable of recovering from intra-year drops and finishing the year in positive territory.

• This year’s correction thus far does not stick out as anything other than normally experienced corrections, even though the reasons for it may not feel normal.

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management (Returns based on price index only and do not include dividends.  Intra-year drops refer to the largesrtmarket drops from peak to trough during the year)

Yield Curve Inversion

You may have read that the yield curve briefly inverted toward the end of the quarter after the Federal Reserve raised interest rates for the first time in this newest interest rate cycle. If not, check out our blog.

Historically, an inverted yield curve has been a signal for a coming recession. Imperfect of a signal as it is, we do take notice. This is one of several parameters we utilize at The Center for making portfolio decisions. The good news is, there is usually time before a recession hits if it does. Now that this signal has been triggered, we have a series of other signals we watch for before determining any appropriate action. Next, we seek to follow through on the economy and technical analysis because, as the chart below shows, the S&P 500 can continue to deliver positive returns (over 3, 6, 12, and 24 months) after the yield curve inverts but before recession strikes.

Source: Goldman Sachs Global Investment Research

While we may not be able to control if a recession occurs or not, we certainly can help you prepare. Here is a checklist of potential action items to consider when they happen. Many of which we take care of for you already. Any questions? Don’t hesitate to reach out!

Is Inflation Sticky?

The answer is…it depends. It depends on which contributors to inflation you are looking at. Energy is a good example. The price of a barrel of oil had a large spike (up 30%) and pullback (down 25%) all during the month of March caused by the Russia/Ukraine conflict and sanctions put in place against Russia who is a large exporter of oil (especially to Europe). Before the Russia/Ukraine conflict, energy prices rose steadily with the economic re-opening and supply limitations put in place by OPEC. This volatile component can become a large detractor just as quickly as it became a large contributor. This is why the Federal Reserve prefers to filter this noise out for its decision-making purpose and focus more on Core CPI numbers instead that eliminate food and energy due to their volatile nature. As the year continues, we may see inflation coming from the green, red, and purple areas below start to abate, leaving us with roughly 4-5% inflation (still above the Federal Reserve’s target of 2%).

Source: BLS, J.P. Morgan Asset Management

Russia/Ukraine Conflict

We will speak for everyone in saying that we are saddened by the tragic events taking place overseas in Ukraine. We continue to hope for a quick, peaceful resolution.

Markets have been increasingly volatile as the conflict unfolds, but the U.S. stock market has been shockingly positive since Russia invaded Ukraine. The one-month period from February 24th to March 24th showed the S&P 500 up ~5%. Or maybe that is not shocking when you look at how markets typically react to global conflicts. If you attended our investment event in February, you would have already seen this data. Still, the average time it has taken the market to recover from geopolitical conflict-induced drawdowns is only 47 days.

The conflict between Russia and Ukraine is shaking up stock markets, commodity markets, and providing even more uncertainty to domestic inflation and monetary/fiscal policy. During these times, it is important to remember that financial plans are built to withstand uncertainties. Diversification is more important now than ever. We will continue to monitor these events and keep you informed as we make decisions that may or may not affect investment allocations.

Key Takeaways

To summarize, here is what happened in the first quarter:

• Stocks and bonds struggled because of inflationary pressures.

• Commodity-linked sectors and countries benefitted, but on the other hand, growth assets and commodity importers struggled.

• Lastly, stating the obvious, the war in Ukraine has had a negative impact on Europe.

Now that we understand what happened, we are sure you want to know how we are responding.

1. We are monitoring our parameters to identify (if or) when it is necessary to adjust your bond to equity ratio and add duration back into the portfolio. Speaking of which, our parameters are telling us short bonds are still appropriate for investors. Remember, the higher the duration, the more a bond’s value will fall as interest rates rise. Consequently, we are maintaining a sleeve of your bond position in short-duration investments.

2. We are taking advantage of market volatility by tax-loss harvesting. Tax-loss harvesting helps minimize what you pay in capital gains taxes by offsetting your income.

3. Finally, we routinely review portfolios and rebalance them to capture cheap buying opportunities.

If you would like to gather more insight, we will include links to our most recent investment event and blogs. As always, we are here for you. Don’t hesitate to give us a call!

Explore More…

March FOMC Meeting: Rate Liftoff

Economic and Investment Outlook Webinar 2022

How Do I Prepare my Portfolio for Inflation?

Any opinions are those of the author and not necessarily those of Raymond James. 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. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. 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. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Battle of the Brackets…Portfolio Management Edition: A Center Spin-Off Competition

Contributed by: Nicholas Boguth, CFA®

I believe certain things make our team outstanding here at The Center, and a few of them were in the spotlight this past month amid the March College Basketball Tournament:

• We constantly practice our company values.

• We have a heavy focus on charitable giving.

• And ultimately, we are just a cool place to work.

In the spirit of education, teamwork, and some friendly competition, we ran a bracket competition with an investment focus (we did a normal bracket game too, but mine was busted the first day, so there is no need to talk about that). Every team member chose an asset class to represent their “team” in the tourney. The winner of each round is the asset class that outperformed over the week, and we are repeating for five weeks until we have our champion.

Some team members chose more stable asset classes like short-term U.S Treasuries or investment-grade bonds, while some chose more volatile options like Emerging Market stocks or commodities. Overall, it is fun for the entire team to collaborate and for all of us (not just those in investment roles) to watch how different asset classes move with economic news*.

*We all know there is no shortage of economic news lately from the U.S. and overseas. Markets have been volatile, and times like these stress the importance of having a plan in place. As always, we are here to help answer any questions you may have about your plan. One small but powerful tool in investment management that we have taken advantage of is tax-loss harvesting during volatile markets. Read more about that here.

The cherry on top of this competition is that we are playing for some of our favorite local charities. The Center’s Charitable Committee donated $1,000 to the winning four team members’ charities of choice. Check out the results from last year, as we ran the same competition using individual stocks instead of asset classes. We will continue to find new ways to collaborate, learn, and partner with charities here at The Center. We hope you follow our blog as we update along the way!

Nicholas Boguth, CFA® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of Nicholas Boguth, CFA® and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Strategies for Retirees: Understanding Your Tax Bracket

Contributed by: Michael Brocavich, CFP®, MBA

Over the last few years, most Americans have seen lower taxes due to the Tax Cuts and Jobs Act put into effect in January 2018. With the increase in the standard deduction and lower tax rates, taking income from your retirement accounts has cost you less in taxes than in previous years. This has allowed retirees to do some strategic income and tax planning in the early years of retirement before they have to start taking Required Minimum Distributions ("RMD") from their Qualified Retirement Accounts.

First, it is important to look at some significant tax changes that came with the Tax Cuts and Jobs Act. The standard deduction for 2022 is $12,950 for single filers and $25,900 for married filing jointly. For married couples over the age of 65, there is an additional $1,300 deduction each. Add that all up, and joint filers who are both 65 or older will have a standard deduction of $28,500. That means that your first $28,500 of income will be federal tax-advantaged!

The current tax laws have reduced the 15% tax bracket rate to 12%. For married filing jointly, the top of the 12% tax bracket for 2022 is $83,550. That means that retirees aged 65 and older could potentially have up to $112,050 of adjusted gross income and remain in the lowest tax bracket. Understanding the tax laws and taking money from the proper accounts at the right time could help reduce your future taxes throughout retirement and reduce taxes significantly for your heirs.

Strategies for Retirees

1) Roth Conversions: If you are like most retirees, you do not have substantial assets in your Roth IRA, if you even have one at all. With income limits on Roth contributions and clients preferring to save in tax-deductible accounts first, many older taxpayers never opened Roth IRA's. The early part of retirement allows you to strategically take money from your IRA and convert it to a Roth IRA. There is no income limit or even minimum dollar amount requirements for Roth conversions. Still, you have to be aware that pulling money from your Traditional IRA and moving to your Roth IRA is taxable. By understanding your tax situation in retirement, you can move money into your Roth IRA and pay tax at lower rates than you potentially would later in retirement while building tax-advantaged assets and reducing your future RMDs (Required Minimum Distributions).

Common sense would tell you to try and take income and pay the least amount of taxes possible. This is prudent, but many retirees either forget about or do not truly understand their future RMDs and their impact on taxes in the future. With RMDs on Qualified Retirement Accounts at age 72, many retirees will be forced to withdraw more money from their Qualified Retirement accounts than they need and pay taxes on those distributions. You can take money strategically out of these qualified retirement accounts and convert the funds to Roth IRA accounts that do not have minimum distributions at 72. This, in turn, will reduce the values in your Qualified Retirement Accounts, reduce your future RMDs, and give you more tax-advantaged assets to use in retirement or to pass on to your heirs.

Investor Situation:

(This is a hypothetical example for illustration purposes only)

John and Cindy are now ready to retire at age 65 with a desired retirement income of $100,000. Typically it would be suggested that they take their Social Security at their full retirement age of 66 and use their taxable brokerage account for retirement income, delaying WD's from their IRAs till 70 1/2. In this scenario, their taxes could be as minimal as 85% or less of their Social Security. With a standard deduction of $28,500, their Federal Income Taxes would be only a couple thousand dollars or less depending on the capital gains they realized. What is not being considered is that with just a modest growth rate on their Qualified Retirement Accounts of 6%, when they reach 72, they could have an RMD of $85,000 - $90,000, giving them much more income than they need.

Suppose they were to delay taking Social Security to age 70 and do a Roth Conversion of $60,000 per year to top out their 12% tax bracket from ages 65 through 69. They could reduce their future RMDs to align with their retirement income needs, reduce their future taxes, and build a substantial tax-advantaged Roth IRA. In addition, they would also benefit from the delay in Social Security, giving them their maximum benefit assuming they have good longevity.

Base Scenario, no Roth conversions, SS at 66:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA)

Utilizing Roth Conversion Strategy, $60,000 converted annually, SS at 70:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA. This is a hypothetical example for illustration purposes only and does not represent an actual investment)

So let’s examine what happened here:

• Over their lifetime, they took $533,000 less in required minimum distributions by doing the conversions, much of which would have been taxed at the 22% tax rate vs. 12% rate;

• They are passing on $1,348,960 in Roth IRA assets to their children that can grow and never be taxed, if certain conditions are met;

• They are passing on $761,306 less in IRA assets to their children, which will be taxed over time at whatever rate applies to the children as adults; and

• In total, the heirs are getting an additional $164,000 than they would have had. The assets are also now positioned to be much more tax-efficient going forward.

2) Harvesting Tax Gains: For clients like above that have also been able to save not only in Qualified Retirement Accounts but also brokerage accounts, there may be an opportunity to harvest taxable gains in the first years of retirement as well. Another advantage of the 12% (formally 15%) tax bracket is that capital gains realized up to the top of the 12% bracket are not taxable to the account owner.

Brokerage accounts allow you to sell stocks or mutual funds that you have held for a long time with large gains in them. You can then use these highly appreciated funds for income in retirement or to rebalance your brokerage account to reduce risk and future taxes.

Combining the two strategies would create multiple advantages. Using your assets in your brokerage account for income in the first years while converting IRA assets to Roth IRA can potentially convert more money to a Roth while still staying in the 12% tax bracket. You will have to be aware of the amount of long-term capital gains, as the combination of those gains and your conversions could put some of your taxable income over the 12% tax bracket threshold.

Optimizing withdrawals in retirement is a complex process that requires a firm understanding of tax situations, financial goals, and how accounts are structured. However, the two simple strategies highlighted here could potentially help reduce the amount of tax due in retirement.

It is important to take the time to think about taxes and make a plan to manage withdrawals. Be sure to consult with a tax advisor and your financial planner to determine the course of action that makes sense for you.

Michael Brocavich, CFP®, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

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 Michael Brocavich, CFP®, MBA and not necessarily those of Raymond James.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Examples used are for illustrative purposes only.

Don’t Forget to Plan for Your “Every Day” Retirement

Contributed by: Sandra Adams, CFP®

On a recent podcast focused on Longevity entitled “Nobody Plans for an Inactive Retirement,” Dr. Joe Coughlin from the MIT Age Lab commented that we all plan for our big goals in retirement. This includes the big trips, the projects, the events, and activities we want to check off our bucket list that we have been waiting decades to have the time and resources to achieve. However, he also says, “retirees have to have meaningful engagement, things to do every day that bring value to their lives; they have to be able to plan for what they will do on the most boring Tuesday afternoon, and know that they will feel satisfied with their day.”

We talk to clients about this as one of the pre-retirement planning items that is just as essential as the financial piece of their planning. Once you know you have enough money to be financially secure retiring, it is just as important to plan for what you will spend your time doing once you get there. And, of course, that includes all of the big goals. But that also includes what you will do every day in between; you have to have something meaningful to get up for every day, or your retirement will not be a success.

For many clients, the recent COVID pandemic and lockdowns were a trial run for what they might experience in retirement. Making sure the resources and technology were in place to maintain social connections, get resources when needed, and find meaningful things to do for many days in a row (instead of finding yourself in front of the television for hours on end) was a trial by fire for certain. We recommend that clients start building social networks outside of work, begin getting proficient at hobbies before they retire, dip their toes into volunteer opportunities they might be interested in pursuing later in life, and consider where they might want to live. This gives you the best opportunity to stay active and engaged as you age into your next stage of life. 

As an added layer of planning, taking the opportunity to take some extended vacations or sabbaticals from work pre-retirement to “test drive” retirement is not a bad idea. Take some time to simulate retirement and see what it is like for you. You can often see what you are missing and what you have yet to plan for before jumping into the deep end.

Work with your financial planner to plan for your retirement. Remember that, in addition to making sure that you are financially secure and that your big goals are prepared for, you are planning for all of the normal, average days of your retirement. A good resource is “A Purposeful Retirement” by Hyrum Smith (click here to read the blog I wrote referencing this book). Planning for all facets of your retirement will give you the greatest opportunity to live your best retirement life. If you or anyone you know is planning for retirement and needs guidance, please reach out to us. We are always happy to help.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Sandra D. Adams, CFP® and not necessarily those of Raymond James.

The Center Named 2022 Best Place to Work for Financial Advisers by InvestmentNews

Contributed by: Jaclyn Jackson, CAP®

On February 7th, 2022, Center for Financial Planning. Inc. was named a 2022 Best Places to Work for Financial Advisers by InvestmentNews. The Center was chosen as one of this year’s top 75 based on employer and employee surveys delving into everything from company culture, benefits, career paths, and more. InvestmentNews partnered with Best Companies Group, an independent research firm specializing in identifying great places to work, to compile the survey and recognition program.

Winning Culture

Our mission, core values, service values, and company vision are the foundation of Center culture. The Center team is committed to…

• The Financial Planning Process

• Education and Personal Growth

• Being Nice and Kind

• Teamwork and Collaboration

• Energy and Enthusiasm

• Being Real and Down to Earth

We take our work seriously and are enthusiastic about providing excellent service. Yet, we recognize healthy company culture is also fun. We have brought levity to the office with fantasy football competitions, “soup”er Thursday charity drives, company outings like fowling and curling, and peer training through lunch n’ learns. Additionally, we have started stellar committees including our Social, Health & Wellness, Creativity, and new Diversity & Inclusion Committees. Two parts professionalism and exceptional service with one part fun has proven to be our award-winning mix to make The Center a great workplace.

Winning Culture Promotes Winning Service

As rewarding as it is to receive public recognition, our motivation for applying to InvestmentNews’ award has much more to do with offering incomparable service. We wholeheartedly believe that happy employees happily provide great service.  

The InvestmentNews selection process starts with each employee filling out an anonymous survey, rating everything from wages to company benefits. Fortunately, InvestmentNews provides an aggregate of survey results to award candidates. To us, this is the most valuable part of the process; getting critical feedback collected by an independent research firm. In the years since we began applying, The Center has used employee feedback to…

• Add dental and vision insurance

• Revamp parental leave

• Add flexible holiday leave to accommodate multi-cultural practices

• Expand bereavement eligibility

Improving opportunities for employees supports business sustainability. Compared to peers, The Center has a low team turnover. Not only have we been able to retain staff (even through - dare I say the dreaded word - a pandemic), our team has actually grown. A huge benefit of being a “best place to work” is that we are able to attract top-tier talent to the firm. Take it from partner and CERTIFIED FINANCIAL PLANNER™, Lauren Adams, who found The Center years ago while reviewing best places to work lists,

“Our intentional focus on creating a great workplace has allowed us to maintain high team member engagement, keep turnover low, attract top talent to our firm, and collectively strive to live our mission of “improving lives through financial planning done right.”

We have retained seasoned professionals who provide a level of service that only comes with experience. Our success in attracting, training, developing, and maintaining professionals is a sustainable competitive advantage. We know this advantage helps The Center consistently provide top-quality service to our clients.

Please join us in celebrating this prestigious acknowledgment. We are excited and hopeful that fostering a healthy work environment creates a win-win situation for both employees and clients alike! Want to meet our team? Click HERE.

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

Any opinions are those of Jaclyn Jackson, CAP®, and not necessarily those of Raymond James.

Investment News “2021 Top 75 Best Places to Work for Financial Advisers”. The Best Places to Work for Financial Advisers program is a national program managed by Best Companies Group. The survey and recognition program are dedicated to identifying and recognizing the best employers in the financial advice/wealth management industry. The final list is based on the following criteria: must be a registered investment adviser (RIA), affiliated with an independent broker-dealer (IBD), or a hybrid doing business through an RIA and must be in business for a minimum of one year and must have a minimum of 15 full-time/part-time employees. The assessment process is compiled in a two part process based on the findings of the employer benefits & policies questionnaire and the employee engagement & satisfaction survey. The results are analyzed and categorized according to 8 Core Focus Areas: Leadership and Planning, Corporate Culture and Communications, Role Satisfaction, Work Environment, Relationship with Supervisor, Training, Development and Resources, Pay and Benefits and Overall Engagement. Best Companies Group will survey up to 400 randomly selected employees in a company depending on company size. The two data sets are combined and analyzed to determine the rankings. The award is not representative of any one client's experience, is not an endorsement, and is not indicative of an advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award. Investment News and/or Best Companies Group is not affiliated with Raymond James.

March FOMC Meeting: Rate Liftoff

Contributed by: Angela Palacios, CFP®, AIF®

“The best-laid plans of mice and men often go awry” is a nice way of saying bond market experts had beautifully laid out projections of interest rate increases for the rest of this year, but those projections have quite possibly been turned on their heads now that they are exposed to reality. However, the Federal Reserve (the Fed) began the potential upward march in interest rates with a .25% increase this month. 

Remember from my writing last year, the Fed increases interest rates in an effort to temper inflation. Recent events in Russia put the Fed in a difficult position because they feel pressured to move away from their ultra-accommodative policy. However, the longer the Russia/Ukraine conflict persists, the more unlikely it is that the US economy will be unscathed, as we are seeing with energy prices right now. Raising interest rates will not combat inflation caused by a spike in energy prices nearly as easily (not that it was easy before). It may even risk pushing the economy into a stagflationary environment (a period of low economic growth with high inflation).

The bonds markets have accounted for a large amount of these rate increases already (pricing six 0.25% rate increases in 2022, giving a 50% change of a .5% rate increase occurring at the next meeting in May). However, we are still seeing rates jitter up and down as bond markets try to digest rate liftoff coupled with inflation and the Russia/Ukraine crisis.

So while Chairman Powell is still standing firm that they will utilize increasing interest rates (approximately six more times this year) to combat inflation, plans can often change!

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.

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. 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. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

What’s the Social Security Spousal Benefit?

Contributed by: Lauren Adams, CFA®, CFP®

At The Center, having a Social Security filing strategy is an important part of the retirement planning process. For couples where one of the spouses did not work outside of the home, many are surprised to find out that their projected Social Security benefit is much larger than they would have expected. 

This is usually due to the Social Security Spousal Benefit – a benefit that an individual may be entitled to based on the earnings history of their spouse. Here is the high-level overview of this benefit:

Who: Available to those who have been married at least one year and are 62 years or older.

What: The benefit amount can be up to 50% of the working spouse’s Primary Insurance Amount at Full Retirement Age (FRA). The spousal benefit only kicks in if this benefit is higher than the receiving spouse’s own retirement benefit.

When: That depends! The working spouse needs to have filed for the spouse to claim this benefit. If the receiving spouse claims before their own FRA, then the spousal benefit is permanently reduced (just like the standard benefit). But unlike the standard benefit, there are no delayed retirement credits that increase the spousal benefit after the receiving spouse’s FRA. This complicates claiming decisions for couples and is why working with a financial advisor - who can take all the different factors related to each couple’s situation into account - is especially important.

Where: You can apply for benefits, including spousal benefits, online at https://www.ssa.gov. 

Why: The spousal benefit originated earlier in the 20th century when the typical family structure often saw only one individual working outside the home and aimed to provide some level of financial security for the non-working spouse. 

Note that the rules above are different if the spouse is caring for a qualifying child or has been divorced or widowed. Contact us to see how we can help maximize your retirement benefits based on your individual situation.

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James.