Are you fearful a recession might be around the corner?

There’s been a lot of chatter about the state of the economy and whether we’re in a recession, or if one’s already passed. Whatever the situation, we wanted to help put things into perspective and remind you of the things you can (and cannot) control if uncertainty is on the horizon.

The widespread definition of a recession is two consecutive quarters of a decline in real GDP (Gross Domestic Product). However, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months." No matter which yardstick we use to measure a recession, here is what you need to know:

• Recessions are a natural part of the business cycle. There have been 34 recessions since 1857, ranging from more than five years to the pandemic-driven contraction of 2020 that lasted two months.

• Recessions do not necessarily coincide with a decrease in the stock markets.

• No two recessions are alike in cause, length, or intensity.

• Recessions are marked as a time of heavy uncertainty and an increase in job insecurity.

Planning for a recession is difficult.

Using the general definition, we won't know we are in a recession until six months after it starts. Rather than worrying about a recession (which is out of our control), investors should focus on things that they can control. When future economic uncertainties arise, here is a list of things that you can do to prepare yourself better:

1. Re-evaluate the size of your emergency fund.

The amount someone should keep on hand should correspond with their living expenses, income instability, stage of life, risk tolerance, etc. This amount is typically 3 to 12 months of living expenses. An unforeseen medical bill or a temporary lapse in employment can happen anytime. Arming yourself with a cash safety net is your first defense against debt or selling your investments during a market downturn. For more information, read our blog about understanding the role of cash in a financial plan.

2. Analyze your spending.

Watching how much you spend builds awareness of your current spending habits. Understanding essential vs. nonessential expenses will make it easier to navigate your budget if your income disappears. Bonus: a better understanding of your spending can help you spend less and thus help you save more.

3. Bolster your professional network and skills.

Prioritize efforts to develop strong long-term relationships with essential connections. You may also invest in yourself with job-related skills and by polishing your résumé to ensure you are prepared for an unanticipated lapse in your employment.

4. Assess your investment portfolio.

Recessions don't always coincide with a stock market selloff. However, ensuring your investments are aligned with your goals is essential. Before a downturn in the market is the best time to position your portfolio based on your risk tolerance, time horizon, and financial goals. If you are unsure of your investment strategy, get in touch with a financial advisor to ensure you have the formula for successful investing.

5. Review your insurance coverage.

Start with the basics. Review what you have vs. what you need.

• What kind do you have? Is your protection tied to your job?

• Do you have enough dollar-amount coverage?

• Do you need to adjust, more or less?

Remember the things you can and cannot control. Take your time to examine what you want to prioritize. While we can't predict precisely when a recession will occur, we can plan, prepare, and adjust appropriately to survive any economic storm. If you want to talk with one of our advisors, please call Jill at 503-905-3100.

---

---

Related Articles

Taking a distribution from a tax-qualified retirement plan, like a 401(k) before age 59.5, is generally subject to a 10% penalty for early withdrawal. The exceptions to paying this 10% penalty are:

• Hardship distributions

• Rule of 55

Are you familiar with how the Rule of 55 works? If you want to retire early, this blog post is significant for you.

What is the Rule of 55?

The Rule of 55 is an IRS provision that allows employees who leave their job on or after age 55 to take penalty-free distributions from their retirement accounts. It’s a life hack! Typically, individuals would face a 10% early-withdrawal penalty if they access their retirement account before age 59.5. The 10% penalty and account accessibility are two of the reasons why people plan to work until at least age 59.5. 

If you are someone who is thinking about retiring early, the following Rule of 55 requirements are necessary:

1. You leave your job (voluntarily or involuntarily) in or after the year you turn 55 years old.

2. Your plan must allow for withdrawals before age 59.5.

3. Your dollars must be kept in your employer’s retirement plan. If you roll them over to an IRA, you lose the Rule of 55 protection.

4. You will likely want your plan to allow partial distributions when you are terminated.

Access to your retirement account at age 55 is available for all employees with an employer-sponsored retirement account. However, if you are considering retiring after age 55 and using funds from this retirement account, you must check whether your plan allows partial distributions. This feature is an opt-in feature for employers to select. We recommend that you work closely with your recordkeeper to ensure you can take advantage of the Rule of 55 in a way that benefits you.

3 Examples of the Rule of 55

Look at a few examples of employees with partial distributions compared to employees without partial distributions allowed in their plan.

Example 1: Partial Distributions Allowed

Danielle can take any amount from her PDX 401(k) account. For example, in October 2022, she can request $30,000. She doesn’t have to take anything out in 2023. She could take another $65,000 out in January 2024.

EXAMPLE 2: Partial Distributions Disallowed

Martin’s employer-sponsored retirement plan does not permit partial distributions. If he wants to access his retirement account at age 57 without incurring a 10% early-withdrawal penalty, he would have to withdraw the entire $450,000. This would result in reporting $450,000 of taxable income for the year of his distribution. Given the tax bracket optimization strategies that exist during retirement years, this may not be Martin’s best solution for accessing dollars before age 59.5.

A couple of alternative solutions for Martin are:

1. Ideally, Martin would have a cash-flow plan to support his expenses until he reaches age 59.5.

2. Initiate a direct rollover of his $450,000 retirement account into a IRA account. Then take distributions as needed but expect to pay a 10% penalty on these dollars. Before paying a 10% penalty on an early-distribution from a IRA, we would recommend that Martin review other cashflow options he may have.

Example 3: Partial Distributions Disallowed

Rebecca, age 56, has $67,000 saved in her most recent 401(k) account with ABC Company. She also has $700,000 saved in her previous 401(k) account with XYZ Company. Neither of these retirement plans allow for partial distributions.

Rebecca retired at age 56 from ABC Company, so she can take the entire $67,000 balance out in one lump sum distribution. She will not owe a 10% penalty on these dollars due to the Rule of 55.

If she were to access any of her $700,000 saved in her previous 401(k) account with XYZ Company before age 59.5, then she would incur a 10% penalty. Not to mention the $700,000 is sitting in a plan that disallows partial distributions so that would be significant taxable income to report in the same tax year. Similar to the example above, Rebecca may consider initiating a direct rollover of her $700,000 into a IRA account for more flexible distribution choices.

What About Other 401(k) Accounts from Previous Jobs?

To qualify for the Rule of 55, you must be terminated as an employee on or after age 55. Therefore, if you have multiple retirement accounts, the only ones that will qualify for a penalty-free distribution between ages 55 and 59.5 are accounts with your termination date reflecting that age range.

One consideration is to roll over a previous retirement account into your current account before you retire. We recommend speaking with your recordkeeper to confirm that your retirement plan features are designed so rollover sources can be accessible by partial distributions.

For example, if Danielle from above had another 401(k) account, she could have rolled that into her PDX 401(k) account before retiring. All the dollars in the account would be eligible for Rule of 55 distributions.

What if I Decide to go Back to Work but have Taken Distributions Already?

Going back to work after you have taken a Rule of 55 distribution should not result in a 10% penalty. If you go back to work for the same company, then you may lose the ability to access funds as an active employee. However, your distributions will not be impacted if you go back to work at another organization.

How are Rule of 55 Distributions Tracked for Tax Reasons?

Custodians and recordkeepers are responsible for providing a Form 1099-R. This tax form reports any distributions from a retirement account. If you take a distribution under the Rule of 55, you would expect to see code 2 in box 7 of your 1099-R form. Code 2 specifies the following:

2 - Early distribution, exception applies (under age 59.5)

If your 1099-R form includes Code 2 in box 7, you will not owe a 10% penalty. Before you initiate a withdrawal between ages 55-59.5, we recommend confirming your record keeper will issue the 1099 in this format.

What Other Resources do you Have?

Retirement is a transition that only happens once in life. You probably haven’t retired before, and you likely won’t retire again. Retirement transitions involve several financial planning considerations and we wanted to conclude this article with additional resources that may be helpful to you:

Your Pre-Retirement Checklist

The 3 Questions to Ask to Build a Solid Retirement Income Plan

Why an IRA Makes More Sense in Retirement than your 401(k)

While the articles are supplemental information, we believe the best way to prepare for your upcoming retirement is to collaborate with our team at Human Investing. Please use this scheduling link to meet with our team to review your unique financial landscape before you start planning your retirement celebration(s): Schedule here.

---

Related Articles

As I write this in May 2022, most major asset classes are down for the year. Stocks, bonds, foreign or domestic, it’s hard to find an investment producing positive returns right now. Since no investor likes to see the balance in their account drop, we have received an uptick in client inquiries about whether it’s worth staying invested. The short answer is yes; we still recommend staying invested. Markets have historically recovered, and grown to new highs. Panicking and selling your investments when they’ve gone down in price is unhelpful for achieving your long-term investment goals. Staying invested when the markets are roiling is easy to say, hard to do.

If you’re interested in a longer, more data driven response about why you should stay invested, keep reading. A lot of client’s concerns boil down to “How long is it going to take for me to make my money back?”. Let’s call this amount of time it takes to hit a new all-time high for a portfolio the “payback period”.

For the returns, I pulled the Ibbotson SBBI US Large-Cap Stocks for equity, and the Ibbotson SBBI US Intermediate-term (5-year) Government Bonds for fixed income. This data compiles the monthly returns from January 1926 to March 2022. I took a 100% equity portfolio (100/0) and added 10% bonds to compare different allocations (i.e. 60/40 is 60% equity 40% fixed income). I assumed monthly rebalancing.

Source: CFA Institute

As the graph shows, the more conservative your allocation, the shorter the time-frame necessary to make your money back. The most aggressive allocations (100/0 and 90/10) can take about 15 years to make your money back. A more balanced investor (40/60 to 80/20) would expect around 7 years as the worst case to make their money back.

I want to emphasize these numbers reflect the absolute worst scenarios over nearly a century of investing. We could always see a new worst case. Typical experiences are usually not as extreme. Even just looking at the 2nd longest time-frame to make your money back, and the longest payback is just over 6 years.

Source: CFA Institute

In most cases, you will make money in a relatively short amount of time if you remain invested. The final graph shows how long your investment horizon needs to be to have made money 95% of the time. As you can see, a majority of the time markets reward investors who stay invested for at least 9 months. That 5% of times where you haven’t made money in 9 months, we have seen some major draw-downs that took years to recover from. Make sure you have positioned yourself in a way where you are comfortable with all possible outcomes.

Source: CFA Institute

So, what do we do with this information? Some perspective for us all:

Understand the Time-frame you’re Investing For

If you’re not accessing funds for 15+ years, you shouldn’t worry about how long it takes to make the money back.

• If you are investing in a retirement account, keep doing that.

• If you move money monthly into a brokerage account, keep doing that.

If you are planning on accessing the funds in 10 years or less, consider incorporating bonds in your allocation to reduce risk, and shorten the time frame to recover a loss in value for your portfolio.

If you’re currently accessing your funds, have a financial plan to understand how you handle downturns in the markets and still achieve your financial goals

• Strategies for this include having a certain amount of cash on hand to cover market downturns, adjusting your budget as needed, etc.

Stay Invested

When you see your account balance down, know that remaining invested is the best way to recover lost value. Most of the time, you won’t have to wait for years to see your balance recover.

Plan in a way that Helps you Sleep at Night

If you can’t handle the thought of waiting seven years to make your money back, a 70/30 allocation may not be right for you. Have a financial plan in place that accounts for the worst-case scenarios, so you know you’ll be able to ride out any volatility in the markets.

Understand History can Only Tell us so Much

The markets could always find a new worst-case scenario. Use history as a guide for setting expectations, not absolute certainty of what is to come.

---

---

Related Articles

There has been a lot of news on high inflation coming and its looming effects on everything from investment portfolios to the price of milk.

As people are searching for ways to combat high inflation and preserve how far their money can go, we’ve been receiving many questions on an investment option called I Bonds. Questions about what they are and why they haven’t heard of them before.

Our hope is to shed some light on Series I Savings Bonds (I Bonds), available here, and outline how the investment works before offering our recommendations.

How risky is an I Bond?

I Bonds are US treasury bonds, meaning they are backed by the full faith and credit of the US government, making them one of the safest, lowest risk investments possible.

What is the interest rate on an I Bond?

There are two parts to the interest rate on an I Bond.

• A nominal (fixed) rate — currently 0% as of November 2, 2021.

• An inflation (floating or adjustable) rate that changes every 6 months — currently 3.56% as of November 1, 2021.

These two rates are added together to determine the interest rate on an I Bond, so the current rate on the I Bonds for 6 months is 0% (nominal) + 3.56% (inflation) = 3.56% total (which is 7.12% annually). This interest rate cannot drop below 0% even if there is ever a negative inflation adjustment. See here for historical I Bond interest rates.

The floating rate on I Bonds will adjust as inflation adjusts. Today, inflation rates are high, but as the historical rates table in the link above shows, inflation rates can be lower.

When can I access my money?

An important factor to consider is that I Bonds only pay interest upon maturity, so you will not receive cash flows from the I Bond as you hold it.

I bonds have no secondary market, so you cannot resell your I Bond, you can only redeem it. I Bonds have no liquidity for the first year after purchase, so it’s important that you will not need to access the funds for at least one year. For years 1-5 after purchase, you may redeem your I Bond early by forfeiting the last 3 months of interest. After 5 years, you may redeem the bond early without penalty. I Bonds will mature 30 years after purchase.

How do the taxes work?

I Bonds only pay interest upon maturity. You can claim (pay) the taxes on the earned interest every year on your I Bonds, or you can pay taxes on all interest upon maturity of the I Bond. I Bond interest is not subject to state or local taxes. See here for more information.

How do I purchase I Bonds?

You have to purchase I Bonds directly through treasurydirect.gov, or with your federal income tax refund. See here for more information.

You are limited to $10,000 of I Bonds through electronic purchase, and $5,000 of I Bonds through paper purchase via your tax refund, for a total limit of $15,000 of I Bonds in a calendar year.

The pros and cons of waiting to get paid out

If you’re still wondering if these bonds are right for you and your financial plan, weigh the pros and cons below against your goals.

Pros:

• The inflation adjustment makes I Bonds a great inflation hedge

Cons:

• Interest is only paid out upon maturity, so don’t utilize I Bonds as a source of cash flows over time

• Funds are locked up for 1 year, so don’t use I Bonds for any funds you might need before then

Other considerations:

• I Bonds must be purchased on your own, so they’re for a more DIY inclined investor

• The inflation adjustment rate will change adjust over time, so the precise amount of interest an I Bond will earn is uncertain

• Consider the potential taxes of having all interest hitting upon maturity of the I Bond, or having to pay taxes each year on interest you have not yet received

• You are limited on how much you can purchase in a year

I Bonds are typically best for medium term (i.e. around 5 year) savings goals.

The inflation adjustment reduces your risk of losing purchasing power due to inflation. The low nominal rates on I Bonds today means your funds will not grow faster than inflation.

For longer term savings goals (i.e. retirement in 10+ years), equities are a great long-term inflation hedge, because companies can adjust their prices (and therefore dividends & earnings) based on inflation. Treasury Inflation Protected Securities (TIPS) are another, lower risk than equities, investment that adjust for inflation.

If you have more questions about I Bonds, or would like to speak to a financial professional about other investments, please reach out to us at hi@humaninvesting.com or 503-905-3100.

---

---

Related Articles

Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

---

---

Related Articles

Given the combination of low interest rates, soaring housing prices, and saving habits during the global pandemic, we have noticed more people are needing a strategy for their excess savings. Contributing to a Roth IRA account is strategic for individuals who have already funded their emergency account and have some extra savings. We are helping people plan for scenarios like these three examples below:

Michaela, age 29: “I have $15,000 of extra cash savings. I started to build this savings account with the intention of buying a home sometime in the next five years.”

Martin & Angela, age 40: “We are a dual-income house with two young children. We manage to pay our monthly bills, live within our means, and we need a plan for our extra money. We looked at high-yield savings accounts but are underwhelmed with the current return. Our main concern is wanting access to the dollars in case we need it in the coming years.”

Samuel, age 35: “I am currently leasing my car. The lease is up in 3 years, and I might be interested in buying the car at the end of the lease.”

All three of these examples include an element of uncertainty or unpredictability. Michaela hasn’t engaged with a realtor and isn’t certain if/when she will buy a home, Martin & Angela don’t have an immediate need for their excess savings, and Samuel may change his mind about buying his car in a few years. These three situations share these things in common:

• There is no specific timeline for the savings to be spent.

• These people are all seeking a way to grow their dollars.

• These people want distribution flexibility in the future.

Roth IRA Eligibility

In the year 2022, the maximum annual Roth IRA contribution is $6,000 per person. The annual contribution increases to $7,000 for people ages 50 and older. This $6,000 contribution amount is different than making Roth contributions inside a 401(k) account. All employees with a Roth contribution type available inside their 401(k) account are eligible to save Roth that way regardless of their income. Due to the tax-advantages of Roth IRA accounts the IRS has set the following income limits for Roth IRA eligibility:

View fullsize

If your income is above these limits, then you are not eligible to make a Roth IRA contribution this year.

Roth Distribution

If you’re eligible, let’s review why this account has both tax advantages and distribution flexibility. Because Roth IRA’s are funded with after tax dollars, you are allowed to take out your contributions without taxes and penalties. Here is an example:

View fullsize

In this scenario you can take up to $6,000 out of your account without penalties and taxes because you are withdrawing what you originally deposited into the account. If you take out the $800 of growth, then it will be taxed and subject to a 10% penalty for non-qualified distributions.

In this example, the account value increased overtime. Like any investment account, there is no guarantee that the account value will have appreciated at the time of the withdrawal. Be mindful that a Roth IRA account value could decrease below its initial contribution amount. 

better savings Compared to What?

In order to give Roth IRA’s credibility, let’s compare them to other accounts for excess savings. Here are some examples of common comparisons:

Roth IRA vs. 401(k) Accounts: Most 401(k) accounts have stricter rules on accessing your money before retirement age. The quick and easy distribution of principal contribution is not guaranteed in Roth 401(k) accounts.

Roth IRA vs. Traditional IRA: Unless the distribution is for one of these reasons, early distributions from IRA accounts result in a 10% penalty and income tax payable on the amount distributed. For example, if Samuel from above (age 35), wanted to take out $5,000 from his Traditional IRA account he would owe a 10% penalty and income taxes on the $5,000 in the year of distribution. Not ideal!

Roth IRA vs. High-Yield Savings Accounts: High-yield savings accounts do offer principal production, but not an inflation-protected return. As an example, most high-yield savings are currently paying .5% APY and the average inflation rate is approximately 2.84%. This is not an ideal investment strategy if you are saving up for future purchases. The current interest rate environment means that high-yield savings accounts are not optimal for growing your savings. As an example, the current high-yield savings account is paying .5% APY meaning someone would only earn $30 a year on an account with $6,000.

Roth IRA vs. Brokerage Account: Brokerage accounts are Roth IRA’s fiercest competitor. To start, brokerage accounts are accessible by all savers because there are no income eligibility limitations for brokerage accounts. Brokerage accounts aren’t tax-sheltered. Let’s compare the same $5,000 distribution as above, but this time in a brokerage account instead of a Roth IRA.

View fullsize

Ideally, Roth IRA’s are setup with long-term investment strategies and the dollars stay invested for a long period of time to serve you later on. However, the distribution flexibility outlined above is why Roth IRA’s can be a reasonable savings account for extra money that does not have predetermined utility in the coming years.

We hope that this article provides some clarity if you need a place to invest your excess savings. If you have any questions, please get in touch with our team at Human Investing.

---

Related Articles

Full transparency: I am a Roth enthusiast.  

If you are reading this article, it’s likely that we have already spent some time reviewing the benefits of Roth together and you have sensed some of my fervor. While the excitement is real, the concept of saving dollars in tax-sheltered accounts like an IRA, 401(k), HSA, or 529 account is complicated to grasp. With that said, I am offering some written advice about Roth accounts for my fellow visual learners.

Before you read on, here is an outline of the two different ways to save Roth.

Roth IRA

• Contribution limit: $6,000 per year ($7,000 if you are ages 50 and older)

• Eligibility: Single tax filer with 2022 income less than $144,000 or Married filed jointly with 2021 household income less than $214,000

Roth 401k

• Contribution limit: $20,500 per year ($27,000 if you are ages 50 and older)

• Eligibility: All employees can contribute up to $20,500 regardless of your income and salary.

• Employer match: Employer contributions are always pre-tax. If you contribute Roth inside your 401(k) plan you will still receive your pre-tax employer contributions. This is important! People are commonly surprised to learn that 401(k) accounts have Roth inside them.

401(k) Account – two savings types under the same umbrella

In summation, if your annual income is less than $125,000 (single filer) or $198,000 (married filed jointly) then you could save up to $26,500 in Roth accounts for the year 2022. The math is here:

Hierarchy of Roth

What should you do if you have access to save Roth inside your 401(k) account but are also eligible to make Roth IRA contributions? Which account should you actively contribute to this year?

First, we recommend that you contribute enough to your Roth 401(k) account to receive your employer match (if applicable). For example, if your employer match is designed so that if you save 5% your employer will contribute 4%, then we recommend you meet the 5% savings rate to take advantage of the free money.

If you can still save additional dollars, use the Venn Diagram and these two examples to help formulate your decision.

Meet Michaela, age 29, single tax filer

Michaela, like many 29 year-olds, just started a job at her fourth employer in 8 years. Let’s imagine that she just enrolled in her current 401(k) plan which has a save 4%, get 4% employer match structure. She has also noticed her total savings and checking account balances have grown over the past year. As a result, she wants to set aside additional dollars to invest for the future, but also has some concerns about possibly needing access to the dollars in the coming years. Michaela could easily increase her 401(k) contributions to above 4%, but she decides to open a Roth IRA instead because of the flexible distributions. For Michaela, the hierarchy of her Roth savings is as follows:

Meet Martin, age 40, married, joint tax filer

Martin is busy juggling their full-time job, building a deck in their backyard, and spending time with their energetic family. They are currently saving 8% Roth into their 401(k) plan which equates to $7,500 annually. Martin is a great candidate for increasing their Roth 401(k) contributions since they still have $12,000 of potential savings into this account to reach the $20,500 maximum this year. Given their busy lifestyle, Martin will benefit by leaning into the automation of a 401(k) account.

Increasing your contribution rate is easier than opening a Roth IRA, making contributions throughout the year, and creating an investment strategy for that account. For Martin, the hierarchy of their Roth savings is as follows:

Since Michaela and Martin’s examples don’t speak to all situations, here is a Venn Diagram with additional considerations for you:

---

Related Articles

There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, an important change for 2022 is that 401(k) elective deferrals increased from $19,500 to $20,500. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2022!

---

---

Related Articles

We talk to a lot of different people about investing. A common request is something along the lines of: “I don’t want to lose anything, and I want my money to grow.” This is a challenging, if not impossible mission. The investment world is full of opportunities to grow your money. However, there is an inherent risk when you put your money in any investment.

Finance has a lot of ways of measuring risk. Standard deviation is used to try to show a range of the possible returns. Max drawdown displays your worst-case scenario. Sharpe ratio provides a risk-adjusted measure of performance. However, very few investors ask about standard deviation, max drawdown, and Sharpe ratios. The people we talk to are most likely to ask “What are the odds of losing money” because they don’t want to see their current savings drop in value.

How strong is your purchasing power?

An important consideration when talking about losing money is purchasing power: the ability to buy goods with your money. Inflation has consistently pushed prices up over time, reducing the purchasing power of a single dollar. Wanting to avoid losing money is completely understandable. The danger of keeping your money under your mattress or sitting in cash is that inflation is constantly reducing your purchasing power.

When concerned with losing money, many investors are focused on nominal returns. Nominal returns are the raw return values, unadjusted for inflation, and are simple to calculate and digest. I would argue that most investors should be focused on real returns: returns adjusted for inflation. Real returns are a more accurate measure of your change in purchasing power. Ultimately, very few outside of Scrooge McDuck want a giant pile of money. Most people want to spend that money on goods, like food, travel, or a home, therefore purchasing power is likely what investors really care about.

Real return = (1+Nominal Return) ÷ (1+inflation rate)

Historically, stocks deliver positive returns, and those returns are in your favor. However, stocks are down (i.e. lose money) more frequently than bonds. The safety bonds offer also means they provide lower returns. What blend of stocks and bonds is most likely to protect your purchasing power (i.e. produce a positive real return)?

inflation is dwindling BOND power

To try and answer this question, I looked at the Stocks, Bonds, Bills, and Inflation (SBBI) data from the CFA Institute from 1926-2020. This data included monthly and annual returns; the annual data is for each calendar year. For stocks, I used the Ibbotson SBBI US Large-Cap Stocks total return.

For Bonds, I used the Ibbotson US intermediate-term (5 year) Government Bonds total return. I looked at several different portfolios which include a variety of stocks and bonds. Specifically, I blended the stocks and bonds in 10% increments, from 100% stocks, to 90% stocks 10% bonds, to 80% stocks 20% bonds, and so on to 0% stocks 100% bonds. I also assumed the portfolios were rebalanced at the start of each return period (i.e. the weights were reset at the start of each month for monthly data, and the start of each calendar year for annual data).

I took these different stock/bond portfolio mixes, and I calculated the nominal and real returns from 1926-2020 for both monthly and annual (calendar year) returns. I then calculated what percentage of returns were positive to measure the chance of losing money (nominal returns) or purchasing power (real returns). I’ve graphed the nominal vs real returns for monthly and annual returns below.

You’ll notice the nominal monthly returns paint a clear picture. If you want positive nominal returns more often, you want to own more bonds, hence the steady upward trend to the graph. If you look at the annual nominal returns and want to maximize your chances of a positive nominal return, you actually want a 10/90 portfolio (10% stocks, 90% bonds). As risky as stocks seem, having at least a sliver of stocks actually increases the chances of a positive nominal return

The real returns tell a slightly different story. For the monthly real returns, the stock/bond mix is almost irrelevant for producing a positive return, and hovers right around 60%. There is a drop off after 10/90 (10% stocks, 90% bonds), indicating owning even just 10% stocks in your portfolio helps increase your chances of positive real returns better than owning 100% bonds.

For the annual real returns, you can see that your odds of a positive real return are better with at least some bonds in the portfolio. Interestingly, the 70/30 portfolio and the 20/80 portfolios produce the highest chance of a positive real return. The all bond portfolio, 0/100, has the worst chance of maintaining your purchasing power (i.e. producing a positive real return).

Stocks can seem risky, and the loss of value can make many investors shy away. Even just a small amount of stocks can protect your purchasing power better than owning only bonds. There are still many considerations for how you should invest including your risk tolerance, time horizon, and holistic financial plan. If you’re interested in talking to an advisor, please reach out to us at hi@humaninvesting.com or 503-905-3100.

---

---

Related articles

Transitioning into retirement can be an exciting time. For many it can also be a daunting reality. We hope the following Pre-Retirement Checklist is a helpful tool as you intentionally prepare for your retirement years.

5-10 years out 

• Create a plan to pay down debt.   

• Maintain Emergency Fund – Emergencies still happen in retirement.  

• Familiarize yourself with Social Security, Pension, and/or Defined Benefit options.  

• Consider Long Term Care (LTC) options – LTC Insurance vs Self-insuring using other assets.  

• Maximize all tax-advantaged savings accounts – 2021 Contribution Limits.  

• Review your investment strategy to make sure your retirement accounts are in line with your risk tolerance and timeline.   

• Strategize how to divest from company stock.  

2-4 years out 

• Devise a retirement spending plan:   

  • Identify your retirement spending goals – basic needs, travel, one-time needs, etc.  

  • Take inventory of assets and consolidate as needed.

  • Retrieve Social Security estimates and create a strategy for taking your social security.

  • Determine and clarify your retirement paycheck replacement strategy.  

  • If you are retiring early, figure out how you will bridge spending needs prior to Social Security income, Medicare coverage, and accessing retirement accounts at age 59.5. 

  • Review deferred compensation distribution strategies.  

• Begin developing a plan for a fulfilling retirement (goals, purpose, health).  

• Practice being retired – take a long vacation in the location you plan to retire and live within your retirement budget. 

• Retirement Living Plan:  

  • Evaluate downsizing a home or relocation and the associated tax implications.  

  • If a mortgage is required, relocate while you still have the income to qualify for the mortgage preapproval process. 

• Formulate a plan to exercise your stock options. 

• Review insurance needs – potentially to cancel or lower life/disability insurance.  

< 1 Year out 

• Formulate a health care plan:   

  • Investigate Medicare, Medigap, and Medicare Advantage plans.  

  • Compare Individual Insurance policy or COBRA if you are younger than age 65.  

  • Enroll in Medicare 3 months before age 65.  

• Apply for Social Security benefits 3-4 months before you want benefits to start.  

• Determine how much monthly income you need from your portfolio to cover your expenses.   

• Analyze your retirement income plan.

• Consider a HELOC while you still have the income to qualify.  

• Update estate plan documents with retirement changes.  

• Take advantage of employer medical plans.   

Download this as a printable one-sheeter.

Planning for retirement should be exciting. Please reach out if our team of credentialed experts can help you navigate the road to retirement.

---

---

Related Articles

Social Security is something we contribute to all our working years, so why don’t we know much about it? What sets it apart from other retirement benefits? I want to briefly share some of the characteristics that make Social Security unique and helpful for retirement planning purposes.

Social Security Includes Spousal Benefits

Social Security spousal income is a benefit provided to married couples. If you have a working income that is less than 50% of your spouse’s normal retirement age benefit, a spousal benefit will be added to your Social Security income to make it equal to 50% of your spouse’s income. Even with no working income (homemaker), 50% of the spouse’s normal retirement age income will be received.

To receive this increase in income, the higher-earning spouse must start their benefits before the spousal payments begin. Check your eligibility for spousal benefits here.

Two more things to note:

• There is no benefit to delaying spousal income after normal retirement age as it does not continue to grow.

• If the spouse with the higher income predeceases the spouse with the lower income, the surviving spouse will receive the higher of the two incomes for the rest of their life. For example, let’s say Joe has a social security benefit of $2,800 per month, and his wife, Shirley, has a benefit of $1,400 monthly. At Joe’s death, Shirley will receive $2,800 per month rather than $1,400 per month.

Social Security income is not fully taxable

If you are Married Filing Jointly and have a combined income below $25,000 in 2021, you will not owe taxes on social security benefits. If your income is between $25,000 and $34,000 in 2021, 50% of benefits will be subject to taxation. With income over $44,000 in 2021, a maximum of 85% of benefits will be taxable. Social security income is not subject to Oregon state income tax.

Social Security Income varies based on retirement age

You can start taking social security retirement benefits at the age of 62, but if you are able, it is best to delay taking benefits until normal retirement age (typically age 66). Furthermore, delaying benefits until the age of 70 is even more advantageous, as your income will continue to increase by a certain percentage (based on birth year) until then.

Remember: If benefits are claimed before normal retirement age, half of the benefits will be withheld if income is over $18,960. Benefits will be recalculated at normal retirement age, but it is more beneficial to delay taking social security if someone is planning to work. After reaching normal retirement age, unlimited earned income will not reduce your social security income.

Social Security Income is protected from inflation

Each January the IRS/SSA increases benefits by the amount of inflation experienced over the previous year. These cost-of-living adjustments (COLA’s) are credited even when delaying benefits to a later age. The most recent cost of living adjustment was 1.3% in January 2021. The average estimates over a long period of time are 2.6% annually.

Things to note when applying for benefits:

• Ensure you have Federal withholdings taken from your benefits, often at 12%.

• Remember, your Medicare Part B premiums ($148.50 per check) will be deducted from your benefit if you are over age 65.

• Apply online at www.socialsecurity.gov, by phone at (800) 772-1213, or in person at a Social Security office using the office locator. If you have any questions about social security benefits, please schedule a time to chat.

References:

www.ssa.gov

The Baby Boomer’s Guide to Social Security, Elaine Floyd, CFP®

---

Related Articles

With each presidential election comes a slew of new tax proposals and changes that are sometimes difficult to decode. News outlets mix proposed and enacted laws, furthering the stress that comes with determining how they will affect your taxes.

The biggest takeaway from Biden's new tax law proposals is that those who earn under $400,000 of income per year should not expect to face an increase in taxes. In fact, they are likely to see more tax credits that will help reduce their tax liability. However, those who make above $400,000 could be significantly affected by several of the proposed tax law changes.

Below is an outline of the administration’s current proposals that may become laws in the coming tax seasons based on your yearly income.

for THOSE WHO MAKE BELOW $400,000

What’s been enacted: The Dependent Care Tax Credit.

Eligible childcare expenses increased from $3,000 to $8,000 ($6,000 to $16,000 for multiple dependents) and the maximum reimbursement rate has increased from 35% to 50% for a maximum credit of $8,000. It is refundable for the 2021 tax year. If you pay for childcare services in 2021 for children 12 and under, you can claim those expenses in tax credits up to $16,000.

The Child Tax Credit has temporarily increased from $2,000 to $3,000 per child ages 6-17, and $3,600 per child aged 0-5 for the 2021 tax year. There will also be monthly payments made from July to December 2021. Half the total credit amount will be paid in advance with the monthly payments, while the other half will be claimed on the tax return that you will file next year. For example, if a single filer with an AGI of $60,000 had one 13-year-old child, they would receive $250 per month from July to December and $1,500 as a credit on their 2021 tax return.

The increase (i.e., the extra $1,000 or $1,600) is gradually phased-out for joint filers with an AGI of $150,000 or more, head-of-household filers with an AGI of $112,500 or more, and all other taxpayers with an AGI of $75,000 or more. At $440,000, couples will phase out of the tax credit entirely.

What’s been proposed: First-Time Homebuyer’s Tax Credit reinstated for up to $15,000 in refundable credits.

You may not have owned a home within the last 3 years to qualify for this credit. You must make no more than 160% of the area median income, and the home’s purchase price must be no more than 110% of the area median purchase price. You could claim this credit for primary residences purchased after Dec. 31, 2020.

for Those Who Make Above $400,000

What’s been proposed: Increased income tax

Currently, the top individual income tax rate is set at 37% on earnings above $622,050 ($518,400 for those filing single). The new proposed rate is 39.6% for earnings above $400,000.

What’s been proposed: The 6.2% Social Security payroll tax on income above $400,000.

For 2021, the maximum limit on earnings for withholding of Social Security tax is $142,800. This proposed tax law would result in the 6.2% tax continuing on earned income over $400,000 in addition to the 6.2% tax on earned income up to $142,800. The income between $142,800 and $400,000 would not be subject to this tax. For example, if $450,000 is earned, $50,000 will be taxed at 6.2% resulting in $3,100 paid in SS tax on top of original cap of $8,853.60.

What’s been proposed: Long-term capital gains and qualified dividends be taxed at a rate of 43.4% on income above $1,000,000.

Long-term capital gains above $501,600 ($445,850 for those filing single) is currently taxed at 20%. In addition, they are proposing the elimination of the step-up in basis for transferred assets.

What’s been proposed: Restoration of the limitation on itemized deductions (ie. mortgage interest, charitable contributions, property taxes, etc.) for taxable income above $400,000.

This means your itemized deduction amount would be reduced by the lesser of 3% of AGI in excess of $400,000 or 80% of your itemized deductions. The state and local tax deduction limit of $10,000 could also be removed, allowing for additional deductions in state and local taxes paid above $10k. For example, a person has $750,000 of taxable income, and their itemized deductions total $75,000. 3% of their taxable income above $400,000 = $10,500, 80% of itemized deductions = 60,000. Since the 3% calculation is the lesser of the two, their itemized deduction amount of $75,000 is then reduced/lowered by $10,500, resulting in $64,500 of itemized deductions.

What’s been proposed: Pass-through deductions removed for taxpayers earning more than $400,000.

For business owners of a Sole Proprietorship, Partnership, S-Corporation, and certain trusts and estates, the Section 199A pass-through deduction for qualified businesses could be up to 20%. The maximum deduction is the lesser of 20% of an owner’s QBI, or 20% of taxable income, excluding any net capital gains. If it were to pass, this deduction would no longer be available if the taxpayers net income were above $400k.

What’s been proposed: Estate and Gift Tax exemption rates for assets may be brought back to 2009 rates.

For 2021, the unified federal gift and estate tax exemption is $11.7 million per individual. The tax rate on cumulative lifetime gifts in excess of the exemption is a flat 40% (applicable to taxable amounts above $1 million made while still alive). The estate tax exemption for Married Filing Jointly (2009): $7,000,000. For those filing Single (2009): $3,500,000. The maximum gift tax rate (2009): 45%

BUSINESS AND CORPORATE TAXATION

What’s been proposed: Increased corporate income tax from 21% to 25-28%.

While this may not directly affect your taxes, it may affect any assets you have in company stocks or potential dividends depending on how the corporation decides to deal with the increase in tax.

What’s been proposed: Minimum tax on corporations with $100 million or more in book income.

Corporations would be taxed on the greater of their regular corporate income tax rate or have a 15% minimum tax imposed on them.

It is important to remember that all proposed tax law changes would need to be reviewed and enacted by Congress in order to become official tax law. All proposed law could potentially be revised or eliminated.

---