A much needed update for families

The Free Application for Federal Student Aid (FAFSA) Simplification Act of 2021 was passed by Congress for many reasons. For starters, the calculation was originally defined over four decades ago in 1972 and is in some need of updating. According to the National College Attainment Network (NCAN), only 61% of seniors applied for aid in 2017 and 54% in 2021.

Some consider COVID to be the main culprit for this sudden drop, but the complexity of the form is the other main issue. Currently, students are required to answer 100+ questions depending on their family's income level. As of now the new FAFSA form changes are set to be released in December 2023 and students and parents alike need to be aware of the specific aspects that will apply in the 2024-2025 academic year that may impact aid eligibility depending on their family situation.

What’s changing and why it matters

1. EFC (Expected Family Contribution) replaced with Student Aid Index (SAI)

Short answer: Fairer access to funds for lower-income households.

One of the more obvious changes was renaming the EFC to the SAI. The goal was to not only reduce the confusion around the actual costs of college and what families are responsible for paying but also ensure access to Federal Student Aid programs including Direct Student Loans, Parent PLUS Loans, Work-Study programs, and even Pell Grants for low-income households. This number can be negative with maximum Pell Grants awards giving a student up to -$1,500 in money back. Time will tell but the largest impact will fall on middle to upper income families who will no longer be able to divide the number of college students in the household that are currently in college. For example, a family that could pay $40k/year could split the aid evenly between the number of students in college at the time. They no longer have this luxury and will see a reduction in aid.

2. Custodial parent status changes

Short answer: For non-married couples, the parent who ultimately claims the child as their dependent on their tax return will submit the FAFSA.

Currently, the FAFSA only collects income and asset data from the parent a student lives with. In cases of divorced, separated, or non-married couples who reside together starting in 2024-2025 school year, the SAI calculation factors in the parent who provides the greatest financial support. In cases of divorce and separation starting in 2023 the SAI calculation will only require the parent who provides the majority of “support” to fill out the FAFSA. One household might pay the child support but the other pays for the mortgage, groceries, and sports clubs. The implications of this decision can be significant.

3. Formula changes

Short answer: Students can qualify for more awards.

As with the SAI calculation, the number of students a family has in school is no longer a factor for Pell Grant eligibility. By completing the FAFSA, you are considered for the maximum amount of Pell grants first (based on number of people in your household) and your AGI (Adjusted Gross Income) compared to the FPL (Federal Poverty Line). If not eligible, your maximum Pell Grant amount will be subtracted by the SAI. Finally, you will still be considered for a minimum Pell Grant if no award is given. These other factors in the formula for aid are listed in no order but should be noted for your situation.

The student income protection allowance threshold was raised from $6,800 to $9,400.

• Businesses and farms that employ 100 or more employees will be considered an asset going forward

• Capital Gains from the sale of investments will be considered income on the FAFSA

• Child support received is now reported with assets NOT income

4. Student income from outside sources

Short answer: A student’s financial aid won’t be penalized for withdrawing 529 funds early.

Currently students must report gifts or distributions from a 529 owned by a non-parent (e.g. grandparents or other family members) or non-custodial parent if the student's parents are divorced. Due to the FAFSA’s prior income year rules, a student who needed access to those funds before Jan. 1 of their sophomore year of college would be penalized in the formula for the withdrawal. Now they are completely removed from the aid formula calculation.

5. New student allowances for the cost of attendance

Short answer: FAFSA will cover more day to day student expenses.

Although these are smaller changes, college students alike must not overlook these valuable new allowances that the FAFSA will allow students to claim for ancillary items. Not only is there a small allowance for personal expenses if a student works part-time but a personal computer purchase with no enrollment status requirement. You can even have an allowance for transportation between home, work, and school. More details can be found here.

Proactive financial aid resources to guide your family

For a current or future college student, utilize the free Student Aid Estimator.

If these changes make need-based options harder to attain, look for colleges that offer merit scholarships. This does not mean forgoing the FAFSA completely but intentionally seeking out Merit scholarships at specific institutions. This process, known as Early Action, is detailed in this article with a list of colleges that offer Merit Aid. We recommend starting this process early as many colleges recruit students as early as late spring of your child's junior year!

Finally, contact financial aid offices to see if they will be awarding institutional dollars based on the current formula not connected to the EFC/SAI numbers.

We can help with education planning

The FAFSA is changing for better or for worse and will affect how parents and students think about college for years to come. If it would be helpful to consult a team of credentialed advisors with expertise in college planning, schedule a call here.

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What recession?

As prognosticators assessed markets and the economy in the beginning of 2023, the expectation for many was a tumultuous year,  with a substantial likelihood of a recession. Now, nearly two-thirds of the way through the year, the S&P (Standard & Poor) 500 has surged by 18.73% through the end of August. Real GDP (Gross domestic product) has maintained steady growth, with quarterly increases of at least 2% since Q3 2022. Inflation, which began the year at a daunting 6.4%, has receded to 3.18%, still above The Fed's 2% long-term target but showing a marked improvement.

What changed given the gloomy expectations for 2023 at the start of the year? The biggest unknown was the impact of The Fed’s decision to continue raising interest rates. The expectation was that The Fed raising interest rates to cool inflation would cause an economic recession. We’ve even seen rising rates play a role in multiple banks failing earlier in 2023, but those events haven’t triggered any distress.

We’ll break down the top themes for why we’re seeing the markets and economy continue to power through.

Theme #1: Strong job market

Inflation has gone down, but GDP growth remains positive, and unemployment remains low. There are still 3 million more job openings than job seekers, and few were expecting The Fed to get this far on inflation without dipping the economy into a recession. Even experts have a difficult time accurately predicting where the markets and the economy are going.

Theme #2: ‘Soft landing’ of interest rate hikes

In contrast to the substantial interest rate hikes witnessed in 2022, the changes in 2023 have been modest. A significant contributor to the slowdown in interest rate hikes was the decline in inflation during the latter part of 2022, which has persisted into 2023. Consequently, The Fed didn’t need to enact as many rate increases, or do so as rapidly as they did in 2022.

Theme #3: Surprising growth from S&P 500 companies

The S&P 500’s rise has a couple of factors going for it. While 2022 saw a decline in earnings per share for S&P 500 companies, 2023 has witnessed earnings growth, with expectations that growth will continue. Analysts are feeling increasingly optimistic that companies will find a way to bolster earnings amidst a higher interest rate environment.

The other piece of the puzzle is the exceptional performance of the largest stocks within the S&P 500 this year. The S&P 500 is a market cap weighted index, meaning that each stock is weighted based on how large the company is. This means AAPL has a bigger weight than Home Depot, and AAPL being up 10% would increase the S&P 500 performance more than HD (Home Depot) being up 10%.

In 2023, returns have been concentrated in a few high-performing stocks. Put differently, only 28% of stocks in the S&P 500 have outperformed the index. This highlights the dominance of a handful of top performers in 2023. It’s worth noting 61% of stocks in the S&P 500 have achieved positive returns for the year, indicating favorable performance across the stock market.

Source: Data for this paragraph is based on using IVV (iShares Core S&P 500 ETF) holdings. Positions were all verified to be held 12/30/2022 and 8/24/2023 to ensure consistency of constituents. Average returns assumes equal weighting of the positions. Top 10 holdings are based on 8/24/2023 weighting: AAPL, MSFT, AMZN, NVDA, GOOGL, GOOG, META, BRK.B, TSLA, UNH. Jan-Aug performance data courtesy of YCharts as of 8/31/2023 market close.

Theme #4: Mid and small sized companies are not far behind

Many talk about the S&P 500 as though it represents the entire stock market. However the S&P 500 represents the largest companies in the US (typically $14.5 billion and greater), leaving out companies considered mid-sized and small.  The mid and small parts of the US markets have been lagging, still positive returns but not as high.

Source: All data courtesy of YCharts. Assumes S&P 500 for US Large, S&P 400 for Mid, S&P 600 for Small, and S&P 1500 for Total Market (blend for all). Uses Value & Growth versions of benchmarks respectively.

Predicting short-term MARKET outcomes continues to be difficult

Short-term value oriented investors may be frustrated to see their performance lagging the broad market. Alternatively, longer-term investors recall seeing a significant benefit in 2022 by experiencing less negative returns than the broad market or growth stocks. You are still positive from the start of 2022 to the end of August 2023. Growth and blend investors are still waiting to recover from the downturn. Trying to time when value or growth will outperform is not recommended. Find an investment style that suits your risk tolerance and financial plan, and be prepared to stick with it for the long haul despite periods of under or over performance.

The year 2023 so far serves as a compelling illustration of how stocks can still generate positive returns even in the face of grim expectations. It is also a great reminder of how difficult accurately predicting the economy or the markets is. The outlook for the equities market is rarely all sunshine and rainbows. Stock market volatility means that short-term corrections are always on the table. There are and always will be valid concerns that could lead to a downturn. If you are choosing a particular tilt in your investments, be prepared to stick with it over time. Long term, equities remain the best way to grow your savings. It is valuable to remember and reflect on the times when you anticipated poor returns but were pleasantly surprised by positive performance.

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Earnings season is coming

With the recent struggles of Nike stock over the past couple of years, many Nike employees are wondering what to do with their stock. Whether it is to diversify into another investment or to fund expenses like vacation, remodels, or tuition for their kids, the current price has made those decisions more difficult. A common question we hear is “Should I sell my NKE now or wait?”

NKE has recently experienced declines. From Sep 2022 to August 2023, NKE fell -4.49% while the S&P 500 has risen 15.58%. Nike had a great run of outperforming the S&P 500 for 10 out of 12 years prior to 2021 but has been on a losing streak since.

Is Nike poised to make a comeback? Predicting the future of any stock, or the market overall, is a difficult task. Nike is the industry leader in athletic apparel, particularly in footwear. If Nike can maintain their brand and industry leadership, they are poised to be successful. Achieving outperformance relative to the S&P 500 is not guaranteed.

Let’s look at a few different ways to approach valuing a stock to get a sense of if NKE appears over or undervalued.

🍰 Price / Earnings (P/E) ratio - how much are you paying for each dollar of earnings:

• Pros: Earnings are the profits of the company, and those profits are ultimately what is available for shareholders as dividends

• Cons: Easily manipulated or adjusted by many line items on the income statement, can vary greatly year to year

• Current P/E: 29.84

• 3 year median P/E: 36.26

• Implied Valuation based on $3.23 Earnings Per Share = $117.12

• Verdict: Undervalued, hold your NKE for now

💰 Price / Sales (P/S) ratio – how much are you paying for each dollar of revenue:

• Pros: Less subject to manipulation or fluctuation

• Cons: Doesn’t consider efficiency (i.e. costs necessary to generate the revenues)

• Current P/S: 2.95

• 3 year median P/S: 4.62

• Implied Valued based on $32.63 revenue per share = $150.70

• Verdict: Undervalued, hold your NKE for now

🔄 Price / Free Cash Flow (P/FCF) ratio - How much are you paying for each dollar of operating cash:

• Pros: Shows cash actually available to investors for dividends or stock buybacks, ignores non-cash expenses (i.e. depreciation)

• Cons: Still subject to manipulation based on accounting practices, can vary greatly year to year

• Currentl P/FCF: 31.06

• 3 year median P/FCF: 43.98

• Implied value based on $3.10 free cash flow per share = $136.50

• Verdict: Undervalued, hold your NKE for now

🥣 Average of all ratios:

• Take the average of the implied values for P/E, P/S, and P/FCF

• Implied Value = $134.77

• Verdict: Undervalued, hold your NKE for now

🚀 Price / Earnings Growth (PEG) ratio = P/E ratio / Earning Growth – measure P/E in context of company’s growth rate

• PEG < 1 implies undervalued, PEG > 1 implies overvalued.

• Currently: 29.89 / -16.46 = -1.81

• Decrease in EPS results in negative value.

• Forward 1 year: 1.775

• Verdict: Overvalued (sell your NKE now).

Based on historical averages, NKE currently appears undervalued

You can also take different time periods for the median of these valuations, to see what Nike’s valuation has been like over a longer period of time.

Note: All data courtesy of YCharts as of:  9/15/2023

While Nike may appear severely undervalued on a 3-year basis, the difference is smaller over 5-year and 10-year medians. If you’re thinking about selling, these valuations may give you some guideline thresholds to re-evaluate at.

Based on historical averages for NKE, the stock currently appears undervalued. The decline in NKE’s price in recent years is a big reason for that. Whether the decline will continue, or NKE will return to its historical valuation norms nobody knows. Looking at the basic fundamentals, NKE appears healthy overall. 

• Earnings & revenue have continued to grow.

• NKE has consistently sold its products above the cost of those goods.

• NKE can cover both its current and longer-term debt needs based on existing cash and future expected earnings.

• NKE has not missed a dividend in the past 10 years.

These metrics are by no means the only way to approach whether now is a good time to sell your NKE stock. Other factors to consider:

• The amount of time you think you will work at Nike.

• How much of your Net Worth is tied to NKE?

• When do your Stock Options expire (if applicable)?

• Your comfort level with the ups and downs over time.

• Do you have any major expenses coming up? i.e. house purchase, funding college, etc.

We’re here to help

Beyond these factors and metrics, it is important to integrate your Nike stock decisions within the context of a comprehensive financial plan. If you have questions or would like to discuss whether to hold or sell your NKE stock, please reach out to us at nike@humaninvesting.com.

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The window is open from August 8-25, 2023

It’s that time of year again where Nike leaders will need to make their annual Nike Stock Choice and select between 100% Stock Options, 100% RSUs or 50/50. 

When comparing Nike Stock Options and Nike RSUs, RSUs are the safer option.  RSUs offer a more secure value and a more moderate level of upside and downside.  Stock Options are more volatile but can also provide significantly more upside over time.

At first glance the decision can feel simple since there are only 3 roads to take, and when in doubt picking the middle road of 50/50 is the easy compromise.  While this can be the right selection for many individuals, it is not always the optimal choice.   While working alongside Nike leaders over many years, we have found that there are 11 crucial questions to answer and consider so that you arrive at that optimal selection for you.

Timing questions: Is it a sprint or a marathon?

Understanding your timeline is one of the most important factors in your choice.  Stock Options do not have any value until the stock price increases, but they do grow at a faster pace than RSUs.  So given enough time, Stock Options can surpass RSUs in value.  This is why timing considerations can be crucial to your decision and you should consider questions like:    

1. What is the purpose of Nike stock for you and your family? 

Does it contribute to longer-term goals like retirement, building wealth, and creating a legacy? Stock Options are more appropriate here. Or is it for shorter-term needs like a second home, more vacations, or education for your kids?  RSUs typically make more sense for these scenarios.

2. How much longer do you think you will work at Nike?

To the best of your ability, you should consider how long you think you will remain at Nike.  Your timeline could be short if you are seriously considering offers from recruiters or think your position could be eliminated.  In those types of considerations, RSUs could make more sense.  Conversely, if you plan to stay at Nike long-term and feel like your position is secure, you have a better chance to participate in the long-term growth of Nike stock.  In this case, Stock Options may be a better fit.   

3. How often do you typically sell Nike Stock to fund purchasing needs?

If you frequently sell your Nike stock grants to fund lifestyle needs, you likely need a more consistent funding source like RSUs since there is not adequate time for the stock to grow and realize the value.  

Behavioral questions: It goes beyond the numbers

As human beings, behavioral and emotional factors often affect our financial decisions.  These types of questions include:

4. What did you select last year, and do you feel like that was a good decision? 

Do you have buyer’s remorse, or do you feel good about that decision regardless of which selection is better at this point-in-time?  It is important to remember that the Stock Choice selection is a long-term decision that should not be overly influenced by recent, short-term results.

5. How much regret would you have if your peers made a more financially successful choice? 

If your peers are all celebrating the success of their selection and yours is different, how much would this affect you?  Everyone has a different level of response in these situations and setting yourself up well to be at peace with your decisions is important to your well-being.

6. How do you currently feel about the long-term growth potential of Nike stock?

Your long-term feelings toward Nike stock potential should be considered since it will better match your expectations and satisfaction regardless of what actually happens with stock performance.    

Risk questions: How much turbulence are you okay with?

7. If stock price dropped by 20%, how would you feel?

It is normal for any stock, including Nike, to experience ups and downs and a 20% drop at some point should be expected.  During these moments, would you be concerned to the point of wanting to sell immediately, not concerned at all, or a little concerned?  If this type of drop would be too difficult to stomach, you may want to lean towards RSUs.  If it is not a concern at all, you may be well-suited for Stock Options.

8. How do you feel about your total exposure to Nike stock?

Does having the bulk of your financial assets tied up in Nike already cause you concern and anxiety, or are you hoping to build up more Nike holdings?  If you are already concerned about your exposure, you will likely be diversifying out of Nike stock.  In this case, it could make more sense to lean towards RSUs.

Quantitative questions: The numbers do matter

9. How is the price of Nike stock valued currently based on its earnings and other factors? 

Is it overvalued or undervalued?  You may want to examine the metrics to see how it currently stacks compared to its historical valuation.  If it is undervalued that could make you lean more towards Stock Options, or if it is overvalued it could make sense to lean more RSUs.

10. What is this year’s Stock Option Ratio?

Each year there is a calculation of how many Stock Options you will receive if you make that choice.  It is a ratio based on the value of the RSU choice.  For the first 4 years, it was a 5:1 ratio (5 stock options for 1 RSU).  Last year (2022) it shifted to a 4:1 ratio.  We cannot say for sure the reason for this shift, but it would be reasonable to assume it was affected by interest rate changes and stock market volatility as those factors can change the valuation of a stock option.

The 4:1 ratio for Stock Options means that you would receive less Stocks Options and Nike stock price would require additional growth to become more valuable than RSUs.  A lower ratio could mean that you need more time for Stock Options to grow to have a chance to exceed the value of RSUs. 

The overriding ‘special’ question

11. Do you qualify for the Stock Option Special Retirement Vesting?

If you are age 55+ and have worked for Nike for at least 5 years, you qualify for the Special Retirement Vesting of any Stock Options. This is the most important factor in the entire equation to consider. 

When you terminate from employment at Nike, you will lose any unvested RSUs and Stock Options.  Additionally, any unvested Stock Options must be exercised within 90 days unless you qualify for the Special Retirement Vesting.  This Special vesting will allow you to keep your unvested Stock Options (held for at least one year).  These will continue to vest over the next 4 years or vest immediately if you are Age 60+.  You will also have more time to exercise your Stock Options instead of being forced to do so within 90 days after termination.    

Since this special vesting is so valuable, anyone that qualifies or will be qualifying for this vesting soon, should strongly consider Stock Options as part of their decision. 

Do you want help putting it all together?

As you can gather from the 11 questions above, there are many different factors that should be considered.  Determining which ones are the most important can be challenging. 

Based on your answers to these questions, you may already feel confident and comfortable with one of the three options.

For those who are still unsure or want to obtain detailed information while deliberating, our team at Human Investing created our own, proprietary scoring tool.  The scoring tool takes the answers to these questions, assigns different weights depending on the importance of each question, and generates a unique score report.    

GET YOUR OWN COMPLEMENTARY SCORE

If you or anyone you know is interested in receiving their own Stock Choice score sign up below. 

Get your score

Lastly, we believe it is important to consider how your Nike stock compensation fits within your overall financial situation.  The questions above and the scoring tool can be helpful, but this Stock Choice decision is best done in coordination with a personalized financial plan.

If you have questions or want to learn more about the Stock Choice, Stock Options or RSUs, please feel free to contact us at nike@humaninvesting.com

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Corporate retirement plans (401(k), 403(b), 401(a), 457(b), etc.) made up a total of $9.3 Trillion as of December 31, 2022. It goes without saying that these types of accounts make up a significant portion of how Americans save for retirement. In this series we want to help equip and educate investors on how to successfully navigate selecting their investments, sticking to a game plan, and ultimately growing their account in the most efficient way possible.

What matters the most

Asset Allocation

Luckily, studies have been done and papers have been written about the number one determinant of portfolio success. As the pie chart below shows, allocating funds appropriately across asset classes is BY FAR the number one factor that determines portfolio success.

Put differently, ensuring that an investor selects a fund (or funds) that diversifies their investments will outperform the investor who spends time on trying to time the market or ensure that the security they selected is superior to other investments in the same peer group. This can be accomplished using a Target Date Fund, Target Risk Fund, Model Portfolio, or by creating a custom asset allocation.

Expense Ratio (or Fund Cost)

The next variable that we would say matters most is ensuring that the fund or funds you select has a low expense ratio. What’s low? In 2022, the average expense ratio for a index fund was 0.05%. In our opinion, if the index fund you select has an expense ratio of less than 0.15% we think you are checking the box on selecting a low-cost option.

What matters less

Historical Performance

Talking about historical performance is no easy task. The point here is that when you are on your retirement plan website and looking to learn about the investment options, the majority of the information is about the performance of the funds. And while that information might stand out the most, it’s actually not the most helpful. We think about fund performance track records in this framework:

1. Asset class performance is more important than actual fund performance. More specifically, owning the Large Cap asset class is more important than trying to select a specific large cap manager.

2. So much can go into why a specific fund performed well or did not perform well over the last 1 year, 3 year, 5 year, or 10 year performance period. Only looking at these variables has not been a good indicator of if a fund is going to perform well on a go forward basis. A majority of the top-half performing funds fall out of the top half after 5 years.

3. Our recommendation, if you are going to look at funds in a more in depth way look at variables like risk-adjusted return or the specific track record of the management team. Another option is to simply select a low-cost index fund. 

A visual guide on what to look for

We created this table to help provide a road map for selecting investments. This sample fund menu contains; investment options, historical performance, cost, and if the fund should be used on a stand-alone basis (provides ample asset allocation) or should be held alongside other investment options.

What to talk about your company’s retirement plan?

Schedule time to meet with an advisor below or e-mail Andrew at andrew@humaninvesting.com.

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A growing complexity

As a Nike leader, you are provided a comprehensive range of benefits that help achieve financial and retirement goals. The downside is that these benefits often create confusing tax implications. Multiple measures over the last few years have passed to increase taxes on high-income earners, including the Metro and Multnomah County taxes. These tax measures in addition to regular Federal and Oregon taxes are becoming an increasing burden for Nike executives. 

A clear understanding of the tax implications with these benefits is crucial. Employing appropriate strategies can both reduce your tax burden and also prevent any surprises during tax season in April.

Let’s examine the three biggest reasons you could get hit with a tax bill and review a recommended solution.

The 3 leading causes to tax surprises

1. Wrong tax withholding on supplemental pay

Many compensation sources at Nike beyond salary (such as PSP, LTIP/PSU vests, RSU vests, and stock option exercises) are taxed as “supplemental pay,” which come with a set percentage of tax withholding (22% Federal + 8% Oregon) regardless of your tax bracket or tax withholding elections on your salary. The reality is most Nike executives are in a much higher income tax bracket, sometimes as much as 17% higher than the amount withheld. This discrepancy leaves a significant gap in the amount taxes that should have been withheld versus the actual amount.

For example, Kate Executive has $100K of RSUs that vested on September 1st. With all her income sources (salary, PSP, LTIP/PSU, RSUs) her taxable income is $700K. The taxes automatically withheld on the $100K RSU vests would be about $30K (22% Federal + 8% State).  However, based on her tax bracket, Kate will owe another $17,000 on that RSU vest.

2. No tax withholding for Multnomah County’s “Preschool for All” tax

For those who live in Multnomah County, you are likely subject to the “Preschool for All” tax that started in 2021. Unfortunately, Nike does not withhold taxes from payroll to cover this tax, so you will be responsible to fully cover this on your own. Multnomah County expects these payments to be received quarterly to avoid interest and penalties.

The Preschool for All tax is 1.5% on taxable income over $125,000 for individuals and $200,000 for joint filers, with an additional 1.5% on taxable income over $250,000 for individuals and $400,000 for joint filers. The rate will increase by 0.8% in 2026.

3. No coordination of Portland Metro tax payments for 2 working spouses

Since Nike headquarters is located within the Portland Metro, they do withhold taxes for the Metro Supportive Housing tax (a.k.a. Homeless tax) that also started in 2021. The Metro Supportive Housing Tax is a 1% tax that is applied on income over $125,000 single filer or $200,000 joint filer. 

A common issue arises when you have two working spouses at different companies, since the income threshold for this tax is based on household income and the two different employers obviously do not communicate with each other.   

For example, once a Nike executive’s income reaches $200K, Nike will start to withhold the Metro tax on any income above that amount. However, the other spouse’s employer does not know about the income at Nike and assumes that the spouse’s income is the household income. So, if that spouse earns $90K, no Metro tax is withheld on that amount even though all of it is subject to the Metro tax.

The 3 tax payment issues identified above often lead to a frustrating situation, where you either end up with a significant tax bill in April or you have been paying in the wrong quarterly estimated tax payment amounts given to you by your CPA.

Our recommended solution: The pay as you receive strategy

For many Nike executives, setting aside additional tax payments into your monthly household cash flow can become stressful, since the amounts can be so inconsistent.   

The “Pay as You Receive” strategy is calculating the estimated amount of taxes due from each type of “Bonus Compensation” as you receive it and making those tax payments at that time, while you have the funds to do it. This will leave your monthly cash flow separate and unaffected.

If this sounds like a lot of work, you can make it simpler by applying this method during 2 key time periods. 

• Time Period #1: August – PSP, LTIP/PSU bonus’

• Time Period #2: Early September: September 1st RSU vests

A more thorough approach is the also include any February retention RSU vests and stock option exercises as they occur.

These supplemental estimated tax payments, when combined with the withholding, should be equal to your anticipated tax bracket for the calendar year. This approach helps ensure that your total payment to the IRS, Oregon, Multnomah County, and Metro aligns with your tax obligations.

Additional strategies for minimizing your tax liabilities

If you’re looking for more tax savings or want to use your stock benefits to take care of tax payments, we highly recommend proactive tax planning. This involves looking beyond the past year and anticipating opportunities to reduce taxes in the future.

Proactive tax planning common solutions include:

1. Maxing out your Nike 401(k) with pre-tax contributions

This is a simple strategy, yet it is often missed.  With the maximum contribution amount increasing periodically with inflation and with opportunities for additional catch-up contributions at age 50, forgetting to review your contribution percentage each year is common.  We recommend reviewing your 401k contribution amount after your PSP bonus is paid, since it is a variable amount that is part of the equation.

2. Selling the right type of Nike stock

If you ever need funds from Nike stock, find the most optimal type of Nike stock to sell to minimize your taxes. Typically, RSUs are preferred over ESPP from a tax standpoint, but this can depend on when it was purchased/vested, how long it has been held, and what the stock price is at the time.

3. Utilizing the Nike deferred compensation plan to defer your taxable income to a later date 

Nike’s deferred compensation plan is generally the most powerful tax savings tool available for Nike leaders.  There are specific IRS rules and many important considerations to plan around when using this strategy.  To learn more click here.

4. Charitable giving

Most people assume that all donations to charities are tax-deductible.  They can be tax-deductible but are not always, depending on your individual tax situation. To receive a charitable deduction, you need to exceed a certain threshold each year, and it may make sense to “bunch” donations (make multiple years-worth of contributions in a year) to cross that threshold and capture tax benefits. Coordinating your charitable strategy with the Nike charitable match can be an effective way to lower your taxes and benefit your desired charities at the same time. To find out more click here.

5. Residence planning

If you currently live in Multnomah County, you might consider moving to another county, such as Clackamas or Washington Counties, to avoid the Preschool for All tax. This solution should consider the estimated tax savings compared to the cost of selling your home, the tax implications of selling your home, the purchase price of a new home, and the difference in a new mortgage payment (especially because mortgage rates have increased significantly).

6. Planning around the Oregon state kicker

Oregon law has a provision known as the “kicker” credit. This is a surplus credit that is returned to you on your tax return when tax revenue is larger than predicted.  By accounting for this, you can strategically recognize more income in “kicker” qualifying years so that your potential kicker credit is increased.  The last kicker payment was 17.34% of the Oregon taxes you paid in 2020 and the next one is estimated to be even larger. 

Bring in experienced experts

By implementing a proactive forward-looking tax strategy and payment plan, Nike leaders have a significant opportunity to improve their financial situation and relieve stress related to taxes. It is important to note that any tax payment and mitigation strategies should be part of a comprehensive financial plan that is tailored to your specific financial situation.

If you have questions about how to set up a proactive forward-looking tax strategy, please contact our team to learn more.

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Two ways to approach low-risk investments

When considering safe investment options, two popular choices that often come to mind are FDIC-insured CDs (Certificates of Deposit) and US Treasuries. While both offer relatively low-risk investment opportunities, there are some critical differences between the two that investors should be aware of.

FDIC-insured CDs are certificates issued by banks and credit unions that offer a guaranteed rate of return for a specified period. The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000 per depositor per bank, protecting against bank failure. In contrast, US Treasuries are debt securities issued by the US government to finance its operations. They are generally considered one of the safest investments available because the full faith and credit of the US government back them.

One key difference between the two is their liquidity. CDs have fixed terms ranging from a few months to several years, and if you need to withdraw funds before the maturity date, you may be subject to penalties. On the other hand, US Treasuries can be bought and sold in the secondary market and can be liquidated easily, making them a more flexible option.

Another difference is the level of risk. While both investments are considered safe, FDIC-insured CDs carry some risk due to the possibility of bank failure. While the FDIC provides insurance protection, there is always a small chance that a bank may fail, and investors may not receive their full investment amount. On the other hand, US Treasuries are backed by the US government and are considered virtually risk-free.

When it comes to returns, FDIC-insured CDs offer fixed interest rates that are lower than the returns available through US Treasuries. US Treasuries offer a range of maturities and yields determined by market demand, with longer-term securities offering higher yields.

In terms of taxes, both FDIC-insured CDs and US Treasuries are subject to federal income tax, but US Treasuries are exempt from state and local taxes. Additionally, you may be subject to capital gains tax if you sell US Treasuries for more than their purchase price.

Risks of Return on Investment: CDs

It's important to note that the FDIC receives no funding from taxpayers. Instead, it is funded by insurance premiums paid by banks and thrift institutions participating in the program. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. In case of bank failure, the FDIC uses these funds to reimburse depositors for their insured deposits up to the $250,000 limit. This funding system helps ensure the banking system's stability and integrity while protecting depositors from loss.

While the FDIC insurance pool can become insolvent, it is highly unlikely. The FDIC has many safeguards to prevent insolvency, and its record of accomplishment in managing bank failures has been quite successful.

Firstly, as mentioned earlier, the FDIC collects insurance premiums from participating banks and thrift institutions. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. The FDIC also has the authority to increase premiums to maintain the insurance fund's solvency.

Secondly, the FDIC has the ability to sell the assets and liabilities of a failed bank to another institution, thereby minimizing the cost of the failure of the insurance fund. This process, known as a purchase and assumption transaction, allows the acquiring institution to take over the failed bank’s deposits and assume its liabilities. At the same time, the FDIC pays out the insured deposits.

Finally, if the insurance fund were to become insolvent, the FDIC would have access to a line of credit with the US Treasury to cover any losses. The FDIC can also assess additional premiums on insured institutions to replenish the insurance fund.

It is worth noting that while the FDIC has never become insolvent since its creation in 1933, it has come close to doing so during times of economic stress, such as the savings and loan crisis in the 1980s. However, the FDIC's ability to manage these crises effectively and prevent widespread bank failures has helped to maintain public confidence in the banking system and the FDIC insurance program.

Risk of Return on Investment: Treasuries

If the United States were to become insolvent, it could have profound implications for US Treasuries, as the full faith and credit of the US government backs them. The creditworthiness of the US government is a key factor in determining the value of US Treasuries. Default or insolvency could significantly decrease demand for US Treasuries, resulting in a sharp rise in interest rates.

In addition, if the US were to become insolvent, it could lead to a global financial crisis, as domestic and foreign investors widely hold US Treasuries. A default could lead to a loss of confidence in the US government's ability to manage its finances, which could cause investors to sell off their US Treasury holdings, leading to a domino effect throughout the financial system.

However, it is important to note that the likelihood of the US becoming insolvent is extremely low because the US dollar is the world's reserve currency, and the US government can print its currency. This gives the government greater flexibility to manage its debt than other countries.

Furthermore, the US has a long history of managing its debt and has never defaulted on its sovereign debt. Even during times of economic stress, such as the Great Recession of 2008, the US government has been able to maintain its creditworthiness and continue to issue debt.

Overall, while there are risks associated with US Treasuries in the event of a US government insolvency, the likelihood of this scenario occurring is considered low. US Treasuries are still widely regarded as one of the safest investments in the world.

Implications of Printing Currency: A Double-edged Sword

The implications of the US printing more currency are complex and depend on a range of factors, including the current state of the economy, inflation rates, and global economic conditions.

On the one hand, increasing the money supply can help stimulate economic growth by making more money available for borrowing and spending. This can lead to increased investment and consumption, driving economic activity and creating jobs.

However, printing too much money can also lead to inflation, as the increased money supply can cause prices to rise. Inflation can erode the currency’s purchasing power and decrease consumer confidence and economic stability.

Furthermore, printing more currency can also lead to a depreciation of the currency's value relative to other currencies. This can negatively affect international trade, as a weaker currency can make imports more expensive and exports cheaper, potentially leading to a trade deficit.

Overall, the decision to print more currency should be carefully considered, considering a range of economic factors. While increasing the money supply can help stimulate economic growth, it is essential to strike a balance between promoting growth and maintaining economic stability and confidence in the currency.

What’s Your Timetable?

In conclusion, both FDIC-insured CDs and US Treasuries offer low-risk investment opportunities, but there are some key differences between the two that investors should consider. While CDs offer fixed returns and are insured by the FDIC, they are less liquid and carry some risk due to the possibility of bank failure. US Treasuries, on the other hand, offer higher returns, are virtually risk-free, and are more liquid. Ultimately, the choice between the two will depend on an investor's financial goals, risk tolerance, and investment horizon.

Authors Note: This article was written using prompts in ChatGPT. (2023, May 8). The author has independently verified the accuracy of the responses. The author edited and formatted responses from the prompts for clarity.

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What is the yield curve?

The yield curve refers to the current yields of US treasury bonds based upon time until maturity. It’s frequently depicted as a graph to help summarize the data. Typically, a yield curve is upward sloping. Short-term (ST) rates are lower, and long-term (LT) rates are higher.

Wall Street Journal, Bonds & Rates: Yield Curve, April 25, 2023

Reading the yield curve:

• A “steeper” or “steepening” of the yield curve means short-term (ST) rates are lower, and long-term (LT) rates are higher, resulting in a steeper line when comparing

• A “flatter” or “flattening” of the yield curve is when ST rates and LT rates are equivalent, or are getting closer to parity

• An “inverted” yield curve is when ST rates are higher than LT rates, like the current line in the snapshot above.

What determines the yield curve?

All rates on the yield curve are determined by the market. The Fed only controls the federal funds rate, which is only the rate banks lend to each other overnight. Because the market determines the shape of the yield curve, many look to the yield curve as a summary of overall investor sentiment to draw conclusions about expectations for the future. Some important market factors that influence the yield curve include:

• Liquidity (time horizon): The more time until a bond matures, the longer you have your money tied up. As a result, a longer time to maturity (and lower liquidity) bond tends to have a higher yield. This contributes to an upward sloping yield curve.

• Growth expectations: If there are higher growth expectations, you tend to see a steeper yield curve. This is because higher growth tends to lead to higher inflation, and so rates must be higher to achieve positive real returns.

• Demand: As more investors demand a bond, the price goes up. As bond prices go up, yields go down.

Why is the yield curve inverted, and why does that indicate a recession?

The yield curve is inverted because ST rates are higher than LT rates. This is largely due to The Fed raising interest rates to lower inflation. The Fed appears determined to reign in inflation, and has raised ST interest rates to slow down the economy enough to reduce inflation. This is putting upward pressure on ST rates. Many expect this approach to cause a recession, which would lower growth expectations, reducing LT interest rates. The result is the inverted yield curve we see today.

Why does this inversion indicate a recession?

In theory, the market is pricing treasuries so the returns over a given time period are the same, regardless of what you buy today. Let’s use an example to illustrate this.

Say you want to invest $10,000 in treasuries for 2 years, you can make two choices:

1. Choice #1: Buy a single 2 year treasury

   • Currently a ~4.2% yield, so you earn roughly 4.2% for 2 years.

2. Choice #2: Buy a 1 year treasury today, then a new 1 year treasury in 1 year:

   • Currently a ~4.7% yield, so you earn roughly 4.7% for 1 year.

   • After the first year, your treasury will mature, and you will have to purchase a new treasury at whatever the current rates are. The yield curve today is predicting 1 year rates will be at 3.7% in the following year.

   • Your overall return after averaging those rates for each year is 4.2% — the same as buying a 2 year treasury initially!

A lower rate in the future indicates lower growth expectations at that time. Growth expectations being lower (or negative) does not bode well for the health of the economy. The inverted yield curve also has a solid record of predicting recessions, but that doesn’t mean it’s perfect or guaranteed. The yield curve reflects the average sentiment of the markets, which indicates what expectations are. Sometimes expectations create a self-fulfilling prophecy situation, and sometimes expectations are flat out incorrect because of an unexpected shock, like the COVID-19 pandemic.

What does this mean for me and my portfolio?

Ultimately your portfolio should be allocated for the long term, and that should be positioned accordingly. While the inverted yield curve has been a strong predictor of recessions, the timing of that prediction and how significant it’s going to be are not consistent enough to provide an easy 5 step solution for everyone.

If you are positioned towards the more aggressive end of what you are comfortable with, consider reducing risk with some volatility expected on the horizon. Understand that regardless of the yield curve today, the long run expectation is growth and positive returns for the economy and equity markets.

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The cost of education, especially 4-year accredited university programs, continues to rise. The graphic below shows the average annual cost of college nationwide from 1980-2021 far outpacing the maximum Federal Pell Grants offered over the same time period. 

If there is an ability to pre-fund college, in whole or part, it will have lasting financial implications. Funding college early at the birth of a child or grandchild to a college savings account could reduce the future funding liability by six figures. 

In this article, we will discuss some ways you can start saving for your child’s education.

The most popular option, the 529 Savings Plan

A 529 College Savings Plan is one of the most popular options when saving for college. Not only does the money you contribute to a 529 plan grow tax-free but any distributions used for qualifying education expenses (tuition, room & board, books, computer, etc.), are tax-free as well. In the past, qualified expenses were limited to just tuition and boarding but recently the government has expanded this list. Beneficiaries of a 529 plan can also use the money to pay for trade school, community college, or even a 3-month certificate program.  

Oregon has a state-sponsored 529 Plan that allows residents to receive tax benefits for contributions they make to a plan in the state. This gives you a triple-tax benefit. Contributions to fund the account have a tax benefit, growth is tax-free, and qualified expenses are tax-free. There are also private plans that qualify under Oregon-state law. As of 2023, contributors can receive up to $300 in tax credits depending on their filing status and household income. As of 2023, families can contribute up to $17,000 annually in a 529 account. Anything after that is considered a “taxable gift” and subject to gift tax laws.  

Another feature about 529s starting in 2024 and beyond is that any leftover money up to a lifetime amount of $35,000 can be rolled over into the beneficiary’s Roth IRA.. For example, let’s look at two parents who invested $50,000 into a 529. Their child received a full scholarship to the college of their choice. The child ends up only spending $10,000 to cover other expenses during their time in college. That student can then roll over a lifetime amount of $35,000 into their Roth IRA account, as long as they have earned income and the 529 account has been established for 15 years.  

Coverdell ESAs act very similarly to 529 plans due to the withdrawals being tax-free for qualifying expenses. However, contributions are limited to $2,000 per child annually and are only available to families below certain income thresholds. 

Special accounts: Uniform Gifts TO Minors Acts (UGMA) or Uniform Transfers to Minors Acts (UTMA)

UGMA or UTMA accounts can help you save for college but aren’t just reserved for education. These accounts are savings accounts that are controlled by a parent or guardian, known as a “custodian.” You can gift up to $17,000 per year (as of 2023) in assets that are held in a custodial account until the child turns the age of majority (Age 18 or 21 depending on the state). In Oregon, the dependent cannot take over the account until they are 21.  

The custodian of the account can use this money only for the benefit of the minor to pay for things like food, education, and living situations. 

Pre-pay for college tuition and tuition discounts  

Unfortunately, in Oregon, there is no State-sponsored pre-payment plan for college tuition. There may be some private ones, but they are expensive. Some people do this in other states to pay for the full tuition during the current year rather than wait 17-18 years when prices go up even more. For your reference, here are states that offer pre-payment programs.

There is also a program known as the State and Regional College Tuition Discounts. Oregon has several schools that are members of the Western Interstate Commission for Higher Education.  

For more information about this make sure to research the WICHE site and Oregon’s student aid site.

Alternatives to college that can fast track career development

Despite the rising costs of college, there are other options to consider. College is not for everyone and you may decide not to send your student to college right away if you cannot afford to do so.  

Many high-paying and rewarding career paths do not involve a college degree like: 

• Computer programming and coding 

• Loan officers 

• Pilots 

• Plant operators and managers 

• Graphic designers 

• Trades like plumbers, welders, carpenters, farmers, etc. 

• Sales reps  

• Business owners and managers 

Community colleges, trade schools, and certificate programs are a fraction of the cost of a 4-year college program and in most cases pay well with little to no debt. Plus, 529 Plans cover these types of education programs too (certain restrictions may apply).  

Some 17-year-olds may not know what they want to do yet. They can work a job, apprentice under an expert, or even start their own business and find their passion before committing to a major program in college.  

If you need more advice, financial planners and advisors can assist you with planning for your student’s future. These laws vary from state to state so talking with a team of experts who are knowledgeable in this area is a wise choice.  

If you are looking to hire an advisor, please connect with us.

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A financial plan is a personalized strategy that outlines where someone’s money goes and how to finance their needs and goals. Who needs a financial plan? Everyone should have a financial plan. They do not all have to be complex. Many are simple.  

Basic financial plans may include the following tools: 

• Budgeting 

• Debt management plan 

• Retirement investment strategy 

• Tax Guidance 

Complex, or more comprehensive, financial plans can include the above but also add things like: 

• Real estate investing 

• Business advice 

• Estate Planning 

• Philanthropic pursuits  

Financial Planning is the process of a client working with a financial advisor (like a CPA or a CFP®) to help establish their financial plan. Our firm focuses on developing and implementing comprehensive financial plans for well-rounded advice and coordination with other professionals to help clients accomplish their goals per their distinct values. 

Anyone can create a financial plan

If you have a simple financial situation, you may not necessarily need a professional to help you set up a plan. We do recommend working with a financial advisor to take the complexity out and optimize it for the benefit of the investor and their family.

Here are some steps to help kickstart your financial plan.

STEP 1: Define your Goals

A financial plan is centered on your financial goals. You may categorize your goals into short-term, medium-term, and long-term periods.

Short-term goals can range from a few months to 1 year time. This could be things like going on a trip, buying a car, or paying off debt.

Mid-term goals range from 1-5 years. These goals may include paying off debt, pursuing higher education, saving up for a down payment on a house, planning a wedding, or starting a business.

Long-term goals are goals with periods from 5+ years. Usually, these goals are stretched even further from 10, 20, or 30+ years.  Here are some common long-term examples: investing in college for a dependent, retirement, or paying off your mortgage.  

STEP 2: Create a budget

A solid budget will give you an idea of your monthly cash flow. This means tracking your take-home pay and your expenses every month.

There are many ways to do this like the 50/30/20 budgeting rule, the zero-based method, or the envelop system. The key here is to see where you are overspending and see where you can save more as you work towards your goals.

STEP 3: Build an emergency fund

According to the Federal Reserve, most Americans cannot afford a $400 - $500 emergency bill. As the emergency cost increases, fewer Americans can afford it. As a general rule of thumb, a family should have three to six months of living expenses saved in an emergency fund to protect against the unexpected. We advise that people create a Starter Emergency Fund of $1,000 first.

STEP 4: Pay off consumer debt

This would include credit cards, auto loans, personal loans, and student loans . These debts can often be the most burdensome for Americans and if you find yourself struggling to make ends meet, make an effort to pay these off after you’ve completed the steps above.  

STEP 5: Invest in your retirement

A great place to start is by investing in your company’s 401(k) or 403(b) plan. If they have a match, take advantage of this. Make sure you are getting the match. 

Don’t have access to a 401(k) ? Open a Traditional or Roth Individual Retirement Account (IRA). You have 100% control over where the money goes and how it’s invested. 

Open a Health Savings Account (HSA) for future medical expenses. Contributions, investment growth, and withdrawals are all tax-free (assuming the withdrawals are used for eligible medical expenses). 

Max out contributions to all your accounts if you can. You can have a 401(k) ,IRA, and HSA open at the same time. In 2023, IRA contributions are capped at $6,500.  

If this seems like a lot to handle, it can be. We can assure you, It’s worth the work and the extra effort to have a financial advisor help you and your family throughly address these topics. These are some basic steps to help you get started today. If your life grows more complex, it will be important to monitor your plan on a more consistent basis.

Whom should I hire if I need help with my financial plan?

It is wise to seek counsel from experts in any area of life. Financial advisors can help you choose investments that align with your goals, give you a strategy to pay off debt, lower your tax burden, and so much more. 

Here at Human Investing, we are fiduciaries which means we are legally bound to always act in our client’s best interest. That means no commissions or selling pressure. Professor Kent Smetters of the Wharton School of Business notes fewer than 2% of all financial advisors are fiduciaries.  

Fee structures and fiduciary standards

Before you hire a financial advisor, make sure to ask for their fee structure.

Some advisors charge hourly or a flat rate depending on the service. Many advisors will charge a percentage of all of your assets under management (AUM) and others still will get paid a commission depending on the product you purchase from them. You will want to ensure that the firm you choose to go with is working in your best interest and you are getting the most out of what you are paying them for.  

Financial planners and advisors that abide by a fiduciary standard look out for your best interests first. Financial managers that are not fiduciaries may be highly experienced and skillful, but they can put the interests of their company over the interests of their client. The National Association of Personal Financial Advisors (NAPFA) or Broker Check are great places to start researching Financial Advisors in your area.  

 If you are interested in learning more about Human Investing and our financial planning services, check out our website.  

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As financial planners, we constantly seek opportunities to steward our client’s assets. Protecting your identity is a critical aspect of this responsibility as many of our planning tools and custodian accounts can be accessed on any device at any time. In today’s digital age, identity theft is a growing concern. It has become easier for criminals to steal someone’s identity and wreak havoc on their financial and personal life. Fortunately, you can take steps to protect yourself from identity theft.

Here are 10 ways someone can protect their identity from getting stolen:

1. Create strong and unique passwords: One of the easiest ways to protect your identity is to use strong, unique passwords for all your accounts. A strong password includes a mix of uppercase and lowercase letters, numbers, and symbols. The longer the password, the better. Avoid using the same password for multiple accounts, as this makes it easier for hackers to access all your accounts if they guess one password. Our best advice is to try to come up with a “passphrase” instead of a password. For example, “#Cantwait4theWEEKEND!”  

2. Enable two-factor authentication: Two-factor authentication adds an extra layer of security to your accounts by requiring a code in addition to your password to log in. This code is usually sent to your phone or email, ensuring that only you can access your accounts even if your password is compromised. Do not provide this authentication code to anyone else.

3. Be cautious of phishing scams: Phishing scams are a common tactic used by identity thieves to trick people into giving away their personal information. Be cautious of unsolicited emails or text messages that ask for personal information or contain suspicious links. Always double-check the email sender or phone number to ensure it is legitimate.

4. Regularly monitor your credit report: Review your credit report for errors or fraudulent activity and report any unauthorized accounts or transactions to the credit bureaus and the affected creditors immediately.

5. Freeze your credit if you don’t need to tap into it: A credit freeze restricts access to your credit report, making it difficult for identity thieves to open new credit accounts in your name. Contact each of the three major credit bureaus (Equifax, Experian, and TransUnion) to request a freeze.

• Equifax: Call 800-349-9960 or go online.

• Experian: Go online to initiate, or for information, call 888‑397‑3742.

• TransUnion: Call 888-909-8872 or go online.

6. Shred sensitive documents: To prevent identity thieves from piecing together your personal information, shred sensitive documents such as credit card statements, bank statements, and tax documents.

7. Don’t give out sensitive Information: Don't give out personal, financial, or health-care information over the phone, mail, or the Internet unless you have a trusted relationship with the requestor and initiated the contact. Even with trusted contacts, it’s best to send secure information securely. Using online portals to upload information or password-protected files can be a way to protect your information.

8. Secure your devices: Keep your computer, smartphone, and other devices up-to-date with the latest security updates and anti-virus software to protect against malware and other threats. Require a passcode to access your phone or computer if they are idle for an extended period.

9. Be mindful of public Wi-Fi: Avoid using public Wi-Fi networks for sensitive tasks such as online banking, as these networks are often unsecured and vulnerable to hacking.

10. Limit your social media footprint: Be mindful of the personal information you share online, including on social media platforms. Consider adjusting your privacy settings to limit the amount of personal information visible to others. If you are a parent, be mindful of how much of your child’s personal information you share online. Personal information (birthdays, the street they grew up on, etc.) can make security questions and answers vulnerable to hacking in the future.

In today's digital age, protecting your identity is critical, and as financial planners, we encourage our clients to take proactive steps to safeguard their personal and financial information. If you believe that any of your logins have been compromised, our advisors and partners will work swiftly with you to protect your accounts.

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A newly passed bill known as Secure Act 2.0 will change how retirees withdraw from their retirement nest eggs. This fundamental change increases the age at which investors must take money from their retirement accounts, bringing about some impactful financial planning opportunities.

What is an RMD?

Once an investor reaches a specific age, they must withdraw a required minimum distribution (RMD) from their retirement account, such as an IRA or 401(k). The RMD amount is determined by the account holder's age and account balance at the end of the previous year. The Internal Revenue Service (IRS) requires RMDs to ensure account holders pay taxes on their retirement savings. RMDs, therefore, can be taxed on both federal and state taxes.

After reaching their RMD age, account holders must begin taking withdrawals from retirement accounts by April 1. Each subsequent year, RMDs must be taken by December 31st of that same year. The IRS may levy a sizable penalty for failure to take the mandatory distribution.

Good news, RMDs will be delayed by a year

A notable update from Secure Act 2.0 is the delay of RMDs. RMDs will start at age 73 instead of 72 for those born in 1951-1959. For those born in 1960 or later, RMDs will be delayed even further to age 75.

For those who turn 72 in 2023, you will not need to start your RMDs this year. Your first RMD can either be taken by December 31, 2024 or delayed until April 1, 2025.

There is no impact on a retiree if they have already started taking their RMDs or need their IRA to cover their cost of living. For others, who only take RMDs because they are required to, this significant modification to the RMD age provides additional retirement planning opportunities.

Retirement Planning opportunities

There will be more time for growth.

The new RMD regulation will give retirees a simple yet powerful benefit, more time for compounding growth. As the billionaire investor Charlie Munger states, “The first rule of compounding is to never interrupt it unnecessarily.”

This benefit must be highlighted, especially after a year of market losses.

An 8% return on a million-dollar IRA is $80,000. Additional returns undisturbed by an unnecessary RMD can have a snowball effect, providing an exponential lifetime benefit.

A longer window before RMDs can allow for additional planning and time, the essential ingredients in building wealth.  

QCDs can still be maximized.

Amidst the RMD age adjustment, the age at which account holders can use their IRAs to make Qualified Charitable Contributions (QCDs) was untouched. Thus, preserving one of the most powerful tax-saving strategies available to charitably inclined retirees 70.5 and older.

A QCD is a tax-free transfer of funds from an individual's IRA directly to an IRS-recognized charity. This charitable distribution allows taxpayers to avoid paying taxes on the withdrawn funds.

Retiree “Gap Years” are extended.

"Gap Years" are the years that occur between a person's retirement and the beginning of their RMDs. These Gap Years are often the years with the lowest taxable incomes in a person's adult life. As a result, they frequently serve as ideal years for accelerating income that would otherwise be taxable in a subsequent, higher-income year. The Secure Act 2.0's changes will give additional time for Tax Bracket optimization strategies such as Roth Conversions and Capital Gain Realization to reduce an investor's lifetime tax bill.

You may be pushed into a higher tax bracket in your later years.

Like all financial planning strategies, there is no one-size fits. The unanticipated pitfall of postponing RMDs can lead to more significant withdrawals in subsequent years when RMDs do start. An unexpected boost in income from RMDs might push you into a much higher tax bracket, phase you out of a tax credit, or trigger a surtax. Taking the time to understand the applicable tax implications are crucial when building a tax-sensitive retirement income plan.

This is a great time to reevaluate your retirement plan

The retirement system has undergone numerous changes due to Secure Act 2.0's policy reforms, adding to the difficulty of retirement planning. Recognizing the planning opportunities and risks that relate to you and your financial plan is essential.

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