August, September, and October are historically the worst three months for market performance and 2023 was no different. Everything but cash, oil and short-term treasuries had negative 3rd quarter returns. The S&P 500 lost 3.25%, small caps fell 5%, international markets dropped 3.5%, and long-term treasuries lost an astounding 8%.
The culprit was interest rates. Not just the shortest-term rate that the Federal Reserve controls but also long-term rates, which are determined by bond traders. There were two main reasons that long-term rates went up sharply. First, the Fed made it clear that it intends to hold interest rates high far longer than the bond market expected. Second, with the US fiscal deficit climbing, the Treasury must issue and sell more bonds. Simple supply/demand dynamics resulted in lower bond prices, which pushes interest rates higher. The 10-year US Treasury note began the quarter with a rate of 3.85%. At the end of September, it had risen to 4.8%. Rising rates are bad enough but when they rise at such a fast pace, long-term assets with a yield – dividend stocks, bonds, real estate, etc. – lose value quickly. For example, defensive stocks such as utilities lost almost 10% during the quarter. And since the beginning of 2021, the 20-year US Treasury bond has lost a staggering 50% of its value. All due to interest rates.
Today we are at an interesting crossroads. The Fed may be done (or close to being done) raising short-term rates as inflation is cooling off. But we are not out of the woods yet. We have outlined the signs of potential recession in several past commentaries, and they continue to become more apparent. What’s sustaining our economy is the robust consumer and very low unemployment. Consumers are showing some signs of slowing down, and employers are less eager to hire than just a few months ago. It’s natural that the economy will continue slowing as rate increases keep working through the economy. It will be a close call as to whether inflation can slow to the Fed’s stated goal of 2% before economic growth becomes economic slowdown. It may be several more months before the answers play out.
However, we see some opportunities today. Entering the 4th quarter we updated our positioning into areas where we see that opportunity. Read More . . .
Call us to review your investment approach (404) 941-2800.
Long-time employees face this non-revocable and permanent choice upon retirement. While the security of lifetime income can be comforting, several trade-offs exist.
Do I want to rely on the company’s future financial strength? How long will I live? What will inflation do to my pension income over time? What happens if I die? Should I take a lower amount to protect my spouse? What happens if they die? Do I have a choice to take a lump sum and control how and when I spend the money?
Pension distributions are limited to lifetime income options without future inflation adjustments. Additionally, If the income beneficiaries die early, there is often no remainder. Many companies offer a “lump-sum distribution” to effectively buy the retiree out of their pension obligation. This amount can be transferred to a traditional IRA tax-free.
There are several advantages to taking the cash.
Freedom to invest the money, timing and adjusting your income, and protecting your heirs. Lump-sum buyouts are calculated using a specified interest rate, so the lump-sum payout value increases in low-rate environments; it increases the lump-sum payout value.
Once you start a pension, you’re locked in. From an IRA, you might take an increased amount until you start Social Security, allowing you to defer and increase your Social Security payment for both you and your spouse. If you have a life event, you can adjust IRA distributions. You cannot adjust a pension. You may downsize your home, get an inheritance, or need to spend a chunk of cash on a new car or family need. A lump sum allows flexibility a pension cannot. Plus, when you die, there is likely an inheritance, which a pension does not offer.
Integras Partners separates lump sum funds into different IRAs, keeping money for short-term needs conservative while allowing assets needed later to grow. Having more time for the remainder to stay invested reduces market risks. Having control of the funds also protects your heirs. Employing good strategies should increase both lifetime income and protect your family.
Most importantly, a “lump-sum rollover” gives you the peace of mind to enjoy what you’ve worked so long to earn truly.
If you’re interested in learning more, give us a call at (404) 941-2800, or reach out to us about your situation.
Here is a summary of your four options for this money:
1. Leave the money in the old employer’s plan.
401(k)s [and 403(b) plans for nonprofits] almost always have limited investment choices and often both investment and advisor expenses. You can access the fee disclosures, but most never do. If your old plan is under an insurance company, those fees are likely to be higher, as employers typically don’t subsidize fees under these providers.
If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties. Consider leaving an amount you might need to withdraw before age 59 ½, which is the penalty-free age for IRA’s.
2. Move the balance to a current employer plan.
This is usually not the most beneficial move, as you are likely to still have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. If this is something that you want to consider, ask your employer for the details.
3. Take a taxable distribution.
This option may only net you about 55% after taxes and penalties. Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year. Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and the ability to take distributions gradually over years.
4. “Rollover” the money to an Individual Retirement Account (IRA)
This is usually your best option. It’s not a taxable event; you’re likely to have much broader investment flexibility, and you could have lower overall fees. Like most discount brokerage firms, look for IRA account “custodians” without annual fees or trading commissions. Plus, if you have multiple former employer plans, you can consolidate them into one or more Rollover IRAs.
Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.
Required Minimum Distributions (RMDs) take effect the year an IRA owner turns 73, so the government can start collecting taxes. This is payback for making tax-deductible retirement contributions while working. A few years ago, Congress enabled retirees to give any portion of RMDs tax-free charitably!
The Qualified Charitable Distribution option allows for gifting to recognized charities, which counts towards satisfying the RMD. This avoids income tax regardless of whether you are eligible to itemize.
For example, if you typically give $10,000 a year to your favorite charities, you’re probably paying taxes on this money first. So, it costs you $12,200 or more, including taxes. If you make gifts straight from your IRA, you keep more than $2,000 (plus any state tax) in your bank account!
The recipient must be a recognized 501(c)(3) charity (which is typical of religious, education, or community service organizations). Your IRA custodian may have a minimum amount per gift and will have their own paperwork to complete. You can gift as much or to as many charities as you wish, up to the total amount of your RMD.
This is just one of the tax management strategies we employ at Integras Partners. For ideas on how we might help you invest intelligently, nurture your communities, and enjoy financial peace, schedule a call with us!
So, enjoy today and tomorrow, and let us do the worrying!
In an ongoing University of Michigan survey, older Americans recently expressed less confidence about having a comfortable retirement.[1]
Inflation is the likely driver of this worry (both inflation itself and the affect it has had on the stock market). To top it off, the inflation that retirees actually experience is typically higher than the headline numbers. This is because retirees spend more on services, such as healthcare and housing, which tend to have a higher inflation rate than goods.
Integras Partners developed investment strategies with retirees in mind. Investment risks needed for growth are limited to longer timeframes. So, money for short-term needs is shielded from market risk. Each client’s unique portfolio allocation is driven by our financial planning process, which accounts for anticipated spending and ongoing inflation.
The big question for investors now is where to be invested going forward. With the overall market trading at 20x earnings and first half gains concentrated into only a select few stocks, most of the market has been left behind. With the valuations of the high-fliers now in excessive territory, the rest of the market looks much more attractive. Value stocks and cyclicals such as financials, energy, materials and consumer staples are a relative bargain and beginning to see some traction. We have maintained value exposure in all of our strategies, seeing better risk/reward near-term than in large growth. Yet the best longer-term risk/reward is in areas not much investor attention has been paid to in several years.
We see potential in sectors and industries left behind in this tech-centric advance. The relative weaker performance of small cap companies to large caps appears to have begun unwinding. We have meaningfully added to small caps in recent months. Today, foreign markets are most attractive as they are generally at lower P/E ratios, and with virtually all regions (except Europe and Japan) growing faster, they offer better value. Plus, when the Fed stops hiking rates, the U.S. Dollar should weaken relative to foreign currencies, which enhances foreign markets’ performance in dollar terms.
We stay focused on what we can control and seek the best longer-term opportunities for growth. The impact and mistakes made during and after the pandemic continue working themselves out. This is a perfect example of the cyclical dangers we work to avoid with our time-appropriate strategies. For our clients with current income needs, we maintain a sufficient level of conservative assets to withstand periods of market weakness until the tide ultimately turns higher. With shorter-term needs funded, longer-term capital can remain invested for growth, and fund future goals. This is part of each client’s personalized investment structure. We like to tell our clients to go live and enjoy life, because we’ve got their backs!
