Reaching certain ages can be meaningful for financial planning. Age can affect contributions and withdrawal rules from retirement accounts, social security and pension options, and even taxes as many aspects of the tax code are linked to age.
Here are a few significant ages and planning considerations.
50: Eligible to make catch-up contributions to retirement accounts
55: Eligible for penalty exceptions for certain withdrawals from employer retirement accounts
59 ½: Eligible for retirement account withdrawals without early distribution penalty; Potentially eligible to move money from an employer plan to an IRA while still working
60: Beginning in 2025, additional catch-up contributions allowed
62: Earliest age to claim social security (at a reduced benefit amount)
65: Eligible for Medicare coverage (pay attention to enrollment period, which opens prior to 65th birthday); Increase in standard deduction
67: Full retirement age for social security for most people (depends on birth year)
70: Maximum social security benefit is reached
70 ½: Eligible to make Qualified Charitable Distributions
73 or 75: Required minimum distribution age from retirement accounts (depends on birth year)
Integras Partners provides financial planning and investment management to our clients. We have a deep relationship with our clients and understand their needs and goals. The planning process is integral to investment allocation decisions.
Changes to the FAFSA form and the formula for determining a family’s need for aid are changing, effective for the 2024-2025 school year. While all the changes are beyond the scope of this post, here we highlight two from a financial planning perspective.
Parent Income:
Contributions (pre-tax salary deferrals) to employer retirement accounts are no longer added back to parent income. This could be an additional incentive for parents with employer plans to max out contributions in years that the FAFSA looks at income. The FAFSA looks at the year two years prior to the beginning of the school year. For example, the 2024-2025 school year looks at 2022 income. Note that this change only applies to contributions that come straight from a salary reduction. Contributions to IRAs that are deductible on the tax return are still added back to parent income.
Grandparent Contributions: Up until now, while grandparent (or other non-parent) owned 529 accounts did not count towards a parent or student’s assets, withdrawals from said account counted as income to the student which had to be reported on the FAFSA. This could reduce the student’s aid eligibility. With the changes, withdrawals from a third-party owned 529 account will no longer count as student income. Grandparents can now maintain a 529 account for their grandchildren and distribute funds without impacting aid eligibility.
Because of these changes, the 2024-2025 form will not be available until December this year. You can stay up to date on announcements at https://studentaid.gov/, or through college financial aid office websites.
Call us to review your investment approach (404) 941-2800.
This inflation cycle has played out much differently than past cycles.
The primary challenge in tackling stubborn inflation today is that the ultra-low rates of the past several years allowed companies to assume long-term debt very cheaply. The Fed’s Open Market Committee (FOMC) can only change the shortest-term interest rates, primarily impacting revolving and floating debt like credit cards and bank loans. The anticipated increase in corporate demand for financing at higher rates never materialized and delinquencies have been well-managed. So, the financial system has remained resilient and provided consumers with the confidence needed to continue spending.
Entering this cycle, consumers were also flush with spending power due to government stimulus, low fixed-rate mortgages, and lower-than-average debt service costs. So, Fed rate hikes haven’t impacted consumer behavior as much as in past cycles. Equally important, companies took advantage of robust demand by raising prices – further feeding inflation – and allowing them to protect or even increase profit margins while retaining their workforce. This self-reinforcing loop has allowed the economy to avoid recession and the stock market to recover faster than virtually every economic indicator – and our own fears – otherwise suggested.
Today we are in a momentum-led rally with the market assuming interest rate cuts later this year and a renaissance of capital spending on Artificial Intelligence over the next many years.
Momentum can carry a market a long way and we have enjoyed a period of market stability without suffering any meaningful pullback. This is rather surprising with 3 of the “Magnificent 7” having underperformed YTD, the Fed lowering projected rate cuts by half, and the past two months of inflation coming in higher than projected. The stock market has defied all but the rosiest of scenarios, with equity issuance (including IPO’s) at the highest level since 2021. This too shall change, but when it does it shouldn’t derail the bull market we are in. Volatility will return to test the conviction of investors. There will be some rougher sledding for us all at some point (it could be sooner rather than later).
Integras Partners strategies allow our clients’ stock exposure to be insulated by time. We don’t take meaningful market risk with money that our clients need soon. We don’t want them to change their spending decisions due to financial markets. Our objective has always been for our clients to enjoy life and leave the worrying to us.
2024 started with concern over stock prices, focused on the widening gulf between the price moves of the “Magnificent Seven” tech stocks and the rest of the market. Expectations for this gulf to close were rooted in the Fed’s actions – when they would begin cutting interest rates and how many cuts would occur in 2024.
At the end of 2023, the bond market had priced in nearly a 100% chance that rate cuts would begin in March.
Our expectation has been that cuts were not likely to begin until this summer. Given the most recent inflation data, and conceivably similar readings to come, it would now not be surprising to see no cuts until even deeper into the year, if at all.
The 1st quarter saw the S&P 500 rally 10% while almost totally discounting Fed rate cuts this year. This could be the market seeing lower rates and slowing inflation ahead, however, inflation is proving to be more difficult to tame towards the Fed’s 2% target. Sticky inflation may prove to be the Achilles heel of the current advance.
We also wrote in our Q4 2023 commentary that the focus of the market would soon turn from interest rates to the market fundamentals of earnings and valuation. This has started coming to fruition, but complicating this calculus is the momentum of any company involved with artificial intelligence, and market expectations for revenues and earnings of all companies due to AI’s influence. While in early days, “AI” has overtaken the narrative of the Fed needing to lower interest rates, and the speculative nature of investors has re-emerged. Today we are in a momentum-led rally with the market assuming rate cuts later this year and a renaissance of capital spending on AI over the next many years.
While the advance has its roots firmly embedded in the AI excitement, other green shoots are becoming visible as well.
Valuations are very attractive in small caps and international stocks, and mutual fund flows are reflecting an increased appetite for value vs. momentum. These are signs of a healthy market – ones that should be embraced, although they will likely be tested.
While not our base case, there is a chance that with financial conditions having eased so much already, a renewed upswing in inflationary forces are taking root. Should the economy remain strong, coupled with government stimulus funds (JOBS Act, Infrastructure, Inflation Reduction Act, etc.) flowing into the economy and consumers continuing to spend, inflation may not recede to the Fed’s 2% goal. Perhaps worse, the Fed may start easing only to have to pivot and raise rates again. These are risks we are mindful of and recognize that regardless of how rosy a set of projections may look now, there are several catalysts that could change investor sentiment in a meaningful way.
We continue monitoring all these factors, watching developments, and adjusting our strategies and client portfolios as necessary. Where there is disruption and change, there is often opportunity.
An IRA (Individual Retirement Account) is a great opportunity for younger investors to save for retirement. IRAs come in two flavors, Traditional and Roth, the main difference being when taxes apply.
While traditional IRA contributions may provide a current year tax deduction, Roth IRAs contributions are not deductible, but the investments grow tax free forever. Traditional IRA distributions will always be taxed as ordinary income.
You must have earned income to contribute to any IRA (compensation received from working), and there is a maximum contribution amount set by the IRS each year ($7,000 for 2024).
Considerations when choosing between IRA types:
Age: The younger you are, the more sense it makes to contribute to a Roth IRA. The compounding tax-free growth is likely to outweigh the value of the up-front tax deduction.
Income: At higher income levels the ability to contribute to any IRAs phase out. However, your employer 401(k) plan may include a Roth option.
Deductibility: If you are covered by an employer retirement plan, you’re likely not eligible to make deductible IRA contributions. However, you may still be able to contribute to a Roth IRA.
Flexibility: With limited exceptions, withdrawals from an IRA before age 59 ½ are subject to a 10% penalty. Roth IRAs offer more flexibility, allowing for penalty-free withdrawals of contributions (but not earnings) after the account is at least 5 years old.
Laser-focus on inflation was the key driver of both interest rates and market performance over the past two years.
Inflation continues retreating towards the targeted 2% range, which should largely be achieved around mid-year. We expect the Fed will begin lowering rates during the summer. While the bond market has priced-in 6 rate cuts for the year, beginning as early as March, we believe it will be a more modest and later cutting cycle. From there, the narrative should shift from inflation and interest rates back to the fundamentals of economic growth and earnings. There is still a risk that the economy could pick up steam and inflation return to haunt us once again, a la 1980. Nor are we out of the woods of potential economic weakness. But we see light at the end of the tunnel.
We remain optimistic about the long-awaited resurgence of small-cap, value, and international stocks closing the performance gap versus U.S. large-cap growth over the ensuing economic cycle.
The old maxim of ‘no tree grows to the sky’ will ultimately prevail. We find it unlikely that valuations of the “Magnificent 7” can continue to rise unabated. Valuation is a fundamental driver of long-term performance, and small caps and international markets remain undervalued relative to history.
As we expect a return to economic fundamentals over 2024, much depends on the economic growth and labor productivity needed for earnings to meet or exceed expectations. Should the economy slow, stock markets will have a hard time producing meaningful gains. While not our base case, we will remain mindful of the many economic indicators still flashing red.
We understand it is an election year. As November approaches, we typically see markets stagnate or slightly decline as the uncertainty and anticipation mounts. However, history tells us that regardless of who wins, there is negligible impact on financial markets in aggregate. In the end, regardless of whether your favored party wins or loses, there is no advantage in changing investment policy.
The normalization of interest rates is an uncertain path and forecasting economic growth is even more difficult. As investment themes change throughout the year, we will be looking for areas where valuation and earnings potential appear strongest – a disciplined approach that has served us well long-term.
What remains paramount is our desire to always take care of our clients’ current investment needs, while working towards achieving long-term investment goals.
With our time horizon investment process, we have successfully sheltered near-term spending needs from market disruptions, giving the longer-term assets the time needed to allow these disruptions to play out. Our long-held mantra of “go live life, we’ve got your back” has worked throughout this period of upheaval and we will be making sure that continues.
So, enjoy today and tomorrow, and let us do the worrying!
