Social Security benefits will increase 1.6 percent in 2020. The 1.6 percent cost-of-living adjustment (COLA) will begin with benefits payable in January 2020. However, the Medicare Part B monthly premiums are also higher than the 2019 amounts. The standard monthly premium for Medicare Part B enrollees will be $144.60 for 2020, an increase of $9.10 or 6.72%; up from $135.50 in 2019.
The year 2019 served up many examples of the unpredictability of markets.
Interest rates that US policy makers expected to rise fell instead. American consumers’ confidence weakened as the year began1, and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the gains in the US stock market. As of the end of October, the S&P 500 was up more than 20% for the year on a total-return basis. That puts it on course for the best showing since 2013 should that gain hold through December.
Outside the US, Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost more than a third of its value last year—has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.
Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.
Up or Down?
A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.
In the market for US Treasuries—where market participants set interest rates—the yield curve that tracks Treasuries inverted for the first time in more than 10 years, as seen in Exhibit 1. Some long-term yields fell below some short-term yields over the summer. What’s more, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October. Investors who made moves based on the expectation yields would rise in 2019 may have been disappointed in how events ultimately transpired.
Yields on US Treasuries of various maturities since the end of 2018
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.
Among the 23 developed market countries,2 only one country was a Top 5 performer for 2018 and 2019: the US. Last year’s strongest performing market— Finland—ranked 22nd this year through the end of October. Among emerging markets, Greece swung from a 37% decline last year to a 37% advance this year through the end of October.
Changes in the Ranks
Performance of equity markets in 23 developed and 24 emerging economies
History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor the hindsight of recent strong performance predicted outcomes in 2019.
Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy may be to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified across asset classes and around the globe were in a position to potentially enjoy the returns that the markets delivered thus far in 2019. Last year, this year, next year—that approach is a timeless one.
1Based on readings from the Conference Board Consumer Confidence Survey and the University of Michigan Index of Consumer Sentiment.
2Markets designated as developed or emerging by MSCI.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Investing risks include loss of principal and fluctuating value.
Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
That is a counterintuitive headline. Isn’t it supposed to be buy low, sell high?
Through the three years ended this November 29th, the S&P 500 Index has registered 115 new highs, including 26 this year. The last one occurred on the Wednesday before Thanksgiving. Some 53 closing highs were recorded in 2014, 10 in 2015, and 18 in 2016.
New highs tend to elicit two reactions:
As I’ve cautioned during volatile periods, your financial plan is a financial roadmap toward your personal financial goals. In part, it removes the emotional component that whispers (or screams) "Sell!!," when stocks are declining. Conversely, it helps prevent undue optimism when shares are hitting new highs.
Selling when the major indexes are closing at a new high simply means that you’ll get a better price today than yesterday. That’s it. In a bull market, we’d expect a series of new highs. Driven by favorable fundamentals, that’s exactly what we have seen.
We are reluctant to forecast where stocks might be next month or next year. There are too many unpredictable variables that can influence short-term action.
However, over a much longer term, stocks have had an upward bias. As 1950 came to a close, the Dow Jones Industrial Average topped 235. By the end of 1975, the Dow closed above 850. At the turn of the century, the Dow had surged to 10,786.
Since 2000, we’ve experience two difficult bear markets. Yet, the U.S. economy and the stock market have proved to be quite resilient. As November came to a close, the Dow topped 28,000 for the first time.
A well-diversified portfolio is akin to an equity stake in the U.S. economy. We don’t know if the economy will be larger next year than it is this year. But 200+ years of history tell us that the economy has expanded over the longer period, and action in the stock market has reflected what’s happened in the economy
Though not all-encompassing, I hope you’ve found this review to be educational and helpful. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.
Let me also once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call.
For my clients, I’m honored and grateful that you have given me the opportunity to serve as your investment advisor and financial planner.
1. Review your income or portfolio strategy
Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? While market sell offs this year have been modest by historical standards, did you take volatility in stride, or did you feel any uneasiness? If so, this may be the right time to evaluate your approach.
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring or one that prods us to sell when volatility surfaces.
2. Rebalance your portfolio
Market performance has been good this year. While U.S. equities have provided a nice lift to your portfolio, you may have too much exposure to stocks. Simply put, you may be taking on too much risk. If that’s the case, we may need to trim back on equity exposure. Given this year’s run-up in stocks, we may want to wait until January in non-retirement accounts so that any gains are booked in tax year 2020.
3. Take stock of changes in your life
Review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
4. Mind your RMDs
Required minimum distributions, or RMDs, are the minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year that he or she reaches 70 ½ years of age. Some plans may provide exceptions if you are still working.
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.
While delaying the RMD until April 1 can cut your tax bite this year, please be aware that you’ll have two RMDs in 2020, which could bump you into a higher tax bracket.
The RMD rules applies to traditional IRAs, SEP IRAs. Simple IRAs, 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plan. They do not apply to ROTH IRAs.
Don’t miss the deadline or you could be subject to a steep penalty.
One other matter, the IRS issued a draft of new life expectancy tables for RMDs that will lower the annual required distribution. The tables are simply a proposal, but if finalized, they could take effect in 2021.
5. Contribute to a Roth or traditional IRA
A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met.
You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your income and circumstances. Total contributions for both accounts cannot exceed the prescribed limit.
There are income limits, but if you qualify, you may contribute $6,000, or $7,000 if you are 50 or older. This is up $500, respectively, from 2018.
You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. You can contribute at any age to a Roth if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts.
You can make 2019 IRA contributions until April 15, 2020 (Note: State holidays can impact final date).
6. Contribute to college saving
A limited option called the Coverdell Savings account did not get axed by the new tax law.
Currently, total contributions for a beneficiary cannot exceed $2,000 in any year and must be made before the beneficiary turns 18.
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For those filing joint returns, the amount is $220,000.
The $2,000 limit is gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers).
You have until April 15, 2020 to contribute for tax year 2019.
A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary.
Contributions to both accounts are not tax deductible.
7. Do your charitable giving
Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.
Did you know that you may qualify for what’s called a “qualified charitable distribution," or QCD if you are over 70 ½ years old? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity.
A QCD may be counted toward your RMD, up to $100,000. This becomes even more valuable in light of the recent tax reform, as more taxpayers will no longer be able to itemize.
Given the increase in the standard deduction and limits on state income and property taxes, annual year-end gifts to your favorite charity may not exceed the higher thresholds. Therefore, you may consider giving an annual gift in early January. When coupled with an annual gift next December, you might reap the tax advantages from itemizing in 2020.
You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but then it is up to the donor when distributions to a qualified charity will be made.
I trust you’ve found these planning tips to be helpful. Again, please let me know if you have any questions, thoughts, or concerns
Late last year, the IRS announced the tax year 2019 annual inflation adjustments for more than 60 tax provisions, including those for tax brackets that determine the rate we pay on taxable income. Revenue Procedure 2018-57 provides details about these annual adjustments.
1. Tax brackets and tax rates have changed. Table 1 and table 2 compare the tax tables for 2019 versus 2018. For example, if you are single and your taxable income on line 11b of the Form 1040 is $84,000, your top marginal rate is 22%.
Source: Tax Foundation 2019 Federal Tax Rates, IRS US Tax Center 2018 Federal Tax Rates
*or Qualifying widow/widower
Source: IRS provides tax inflation adjustments for tax year 2019
2. The personal exemption has been eliminated with tax reform; child tax credit increased. The $4,050 personal exemption was eliminated starting 2018. However, the child tax credit doubled to $2,000 per qualifying child, subject to income limitations.
It is available to parents of children 16 or younger. It begins to phase out at $200,000 of modified adjusted gross income for single filers. This amount is $400,000 for married couples filing jointly.
3. The increase in the standard deduction will simplify filing for some folks. The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year.
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200. For heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
4. Some itemized deductions have been reduced or eliminated. If you itemize, state and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above cannot be written off against income.
All miscellaneous itemized deductions are eliminated, including deductions for unreimbursed employee expenses, tax preparation fees, the deduction for theft, and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.
For charitable contribution, you may generally deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases.
In 2019, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 10% of adjusted gross income. That’s up from 7.5% of AGI in 2017 and 2018.
5. Penalties have been eliminated for not maintaining minimum essential insurance coverage. This is per the Tax Cuts and Jobs Act; for 2018 the penalty was $695.
6. Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018. The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
7. Changes to the AMT – the alternative minimum tax. Tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.
For tax year 2019 the AMT exemption amount is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600).
The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
Yes, it’s confusing, but most tax software programs run both calculations for you.
8. There is a 20% deduction for business owners. The new law gives “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.
This is a very valuable benefit to business owners who aren’t classified as C-corps and wouldn’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%.
REITs and MLPs are also eligible for the deduction.
The deduction is generally available to eligible taxpayers whose 2019 taxable incomes fall below $321,400 for joint returns and $160,700 for single and married filing separately.
The deduction does not reduce earnings subject to the self-employment tax.
There are limitations to the new deduction and some aspects are complex. Feel free to check with your tax advisor to see how you may qualify.
The points above are simply summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation.
You’ve heard it and I’ve heard it—never discuss religion and politics. It’s easy to understand why. Some people have very strong opinions, and it’s easy to get swept up an emotional argument.
Interestingly enough, though, politics and religion aren’t even considered the most difficult subjects to talk about anymore, according to a 2014 study by Wells Fargo.
Notably, the study found that personal finances (44%) ranked ahead of both politics (35%) and religion (32%).
In case you were curious, death came in at 38%, taxes at 21%, and personal health at 20%.
Not surprisingly, the study shows that 71% of adults learned the importance of saving from their parents. Yet, barely more than one-third of today’s parents report discussing the importance of saving money with their children.
Also, it's sad to say that about a third have a hard time discussing money with their spouse or partner, and 25% often end up in heated discussions.
But it doesn’t have to be that way. This month, I’ve put together an outline you may use as a guide for getting through these conversations cooperatively.
Money talk with your spouse
When discussing financial matters with your spouse, it’s important that you find shared ground. Otherwise, you’ll be working toward different goals, and the risk of failure and frustration is high.
In a roundabout way, let me provide you with an example. I know a couple that’s been married almost 10 years. Each year, they come up with a word or an area of focus.
In their first year, they came up with two goals— ‘fun’ and ‘debt reduction.’ Dave said their first year of marriage was a blast. He and his wife created lasting memories. They never turned down invitations with friends.
On the money front, they squashed over $20,000 in debt. Way to go Dave!
As their life together has progressed, goals have changed. Today, they have two young kids, and they continue to keep the lines of communication open.
What might be the best way to talk about money with your spouse? Go on a date—a money date. Get out of the house, get away from distractions, and leave the kids with a babysitter. Here’s where you’ll discuss goals and craft a plan. Nothing is off limits. You may discuss retirement savings, large purchases, debt reduction, a down payment on a new home, or bolstering your savings.
Yet, don’t overindulge. It’s one step at a time. Retirement savings may be the first topic. Or getting out from under credit card debt may be your first challenge.
Come up with realistic goals together and check in on a regular basis. When you’ve accomplished various goals, reward yourself.
Talking with aging parents
Many parents rarely discuss their finances with their children. Their parents didn’t share details, and they don’t feel obliged to break with family tradition.
Surveys bear this out. According to GoBankingRates, 73% of Americans haven’t had this discussion with Mom and Dad. The survey found that respondents ages 45-54 were the most likely to say that they haven’t broached the subject because they are not comfortable with the topic.
That’s understandable. Besides, many don’t know how to begin the conversation.
So, here are some tips to help you get the conversation started with your parents:
1. Express genuine concern. You care about what’s going on with your parents, and it extends beyond their financial situation. While money matters may seem difficult to explore, let them know you are having the discussion because you love them and want to be sure they are being taken care of as they age.
They may be open to talking or they may take time to process your invitation.
2. Tell parents “My financial advisor made me do it.” This one's my favorite. You can always blame me. It's okay, I can take it. You could say, “I was talking to my financial advisor the other day, and he said we should have a talk.” Or, “I was reading my newsletter from my advisor, and she emphasized the importance of having a conversation about finances with you.”
3. Elder fraud may be on their minds. Not comfortable jumping in? Scams that target the elderly (and for that matter, all of us) have exploded. None of us want our parents to become victims because there is little we can do to undo the damage. Money lost will never be money recovered. Expressing genuine concern by sharing articles on elder fraud is a good way to ease into the subject.
4. Give an example. If you believe the situation is appropriate, you may talk about a friend or acquaintance whose lack of planning negatively impacted the family. Piggybacking on the point above, you might bring up how elder fraud affected a friend or neighbor.
Or, you may have read about someone who was an unfortunate victim. Such scams hit home because we see ourselves or close family members as potential victims.
5. Discuss your own experiences. Open up to Mom and Dad about your retirement planning, 401k decisions, debt payoffs, or student loans. Or, casually mention the new life insurance policy you have taken out. You know, just in case something happens.
Your spouse knows about the policy. However, if you are single and the proceeds will help pay for your funeral and assist your kids, it’s important that your folks know you have insurance.
When you share something that is personal to you, your parents may become more willing to open up about themselves.
6. Focus estate planning on their priorities. Stay away from who gets what. Make this about them, not you. The goal is setting up the will or trust. Emphasize they can do what they want with their assets. If it’s something they haven’t done, checking the ‘estate-planning’ box will lift a burden that’s likely been simmering in the back of their minds.
7. Make things easier. Have you thought about helping your parents with a budget, paying the bills, online banking, or helping with credit? Simply getting your parents to tidy up loose ends can pay huge dividends for them.
Remember, I'm here to assist. Meeting in a neutral territory, such as my office, can help keep the lines between personal matters and finances from blurring. We know these conversations can be difficult and awkward. If I can help, please don't hesitate to let me know. I'm simply an email or phone call away.