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Have You Heard of the “Mega Backdoor Roth IRA”?

Chances are if you are reading this, you’re already at least somewhat familiar with a Roth IRA. While the contribution limit will vary over time, in 2019 the limit is $6,000, plus an additional $1,000 catch up contribution for individuals over the age of 50. This limit is per individual, allowing married couples to contribute up to a maximum of $12,000-$14,000 depending on their age. Direct contributions to a Roth IRA also have an income phase-out limit that you’ll need to be aware of, which starts at $122,000 for single filers and $193,000 for joint filers.

What if I told you there was a way to contribute to a Roth IRA well beyond these limits, regardless of your income level? At some employers, you can.

The typical “backdoor Roth IRA” is a strategy for individuals to contribute to a Roth IRA that are over the income phase-out limitation for a direct contribution. This can be beneficial for many people, but still caps your contributions at only $6,000 or $7,000 per year. In some cases, your 401(k) may allow the ability to contribute on an “after-tax” basis, which opens up a world of possibilities for additional Roth contributions.

Roth contributions are contributed on an after-tax basis(meaning no current tax deduction), but earnings grow tax-free as long as you meet all the withdrawal eligibility rules set by the IRS. This means you must be at least age 59 ½ and meet the IRS’ “5 year rule” at the time of withdrawal.

An “after-tax” contribution works similar to a Roth contribution, but the taxation differs slightly. A pure after-tax contribution also provides no current tax deduction, but earnings associated with the money grow only tax-deferred and are later taxable at ordinary income rates upon distribution. As you can see, Roth dollars are generally more valuable than pure after-tax dollars.

The good news is, there is a fairly easy way to convert your pure after-tax dollars into Roth dollars so that all earnings grow tax-free. Once you hit the $19,000(plus $6,000 catch up for individuals over the age of 50) annual limit for your pre-tax and/or Roth contributions into your 401(k), you will want to begin contributing on an after-tax basis.

Pure after-tax contributions are not subject to the typical annual contribution limit of $19,000 or $25,000. Instead, they are capped at an overall 401(k) contribution limit of $56,000 or $62,000. This overall limit includes all of your pre-tax, Roth, employer matching, and after-tax contributions combined. In other words, if you make $100,000 per year and are under the age of 50, your pre-tax/Roth contributions are $19,000, your employer match is $6,000, and your maximum after-tax contributions are $31,000. ($56,000 – 19,000 – 6,000 match = $31,000 of remaining after-tax contribution ability). This additional $31,000 could then be rolled into a Roth IRA, allowing for the “mega backdoor Roth” contribution. This means you can potentially get up to $37,000 per year into a Roth IRA!

There is one caveat to this however. When you convert your after-tax contributions to a Roth IRA, any earnings that are associated with the after-tax contributions that enter the Roth IRA will be taxable. If you contributed $10,000 after-tax and that money has since grown to $12,000, you will pay tax on the $2,000 should you put the full $12,000 into the Roth IRA. This can be circumvented by removing only the pure after-tax contributions(basis) and leaving account earnings in the 401(k) account to grow tax-deferred and be withdrawn at a later date. For this reason, the sooner you can get the money from the after-tax 401(k) to the Roth IRA, the sooner your money will be growing for you tax-free. Once the money is in the Roth IRA, you are open to the entire world of investing beyond what is offered in the 401(k) plan. You have the ability to have the money invested in mutual funds, ETFs, stocks, bonds, and with the oversight of professional management should you choose.

This is a great savings strategy for individuals who are looking to increase the amount of their retirement savings and want to do so in a tax-advantaged way. For individuals who have the excess cash flow and budgetary means of doing so, the “mega backdoor Roth” is a no brainer. While this strategy can be complex, once initially set up the ongoing maintenance is minimal. Warren Street Wealth Advisors is here to assist and facilitate after-tax contributions, conversions to Roth accounts, and the underlying investment management. For individuals looking to take advantage of this huge tax savings opportunity, be sure to contact us for help getting this strategy implemented for your situation. Please bear in mind this strategy is only applicable to individuals who are already maximizing their current pre-tax or Roth contributions in the 401(k).

If you have any questions on the strategy or investments and tax planning in general, be sure to reach out and contact us as we are happy to help. As with nearly everything financial planning, specific rules and details will need to be implemented on a case by case basis, so be sure to contact us with the specifics of your case.

Justin D. Rucci, CFP®

Wealth Advisor

Warren Street Wealth Advisors

 

Justin D. Rucci, CFP® is an Investment Advisor Representative, Warren Street Wealth Advisors, a Registered Investment Advisor. Investing involves the risk of loss of principal. Justin D. Rucci, CFP® is not a CPA or accountant and the information contained herein is considered for general educational purposes. Please seek a qualified tax opinion or discuss with your financial advisor as nothing in this publication is considered personal actionable advice.

Market Volatility – “A Few Minutes with Marcia”

Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time. The more dramatic the price swings, the higher the level of volatility.

Learn the basics of market volatility with Marcia Clark, CFA, MBA.

Watch:

For those who prefer to read!

Welcome to A Few Minutes with Marcia. My name is Marcia Clark, Senior Research Analyst at Warren Street Wealth Advisors. Today we’re going to talk about the 4th quarter 2018 stock market dive and 1st quarter 2019 rebound in an attempt to understand more about market volatility.

Prior to 2018, the stock market had experienced 2 years of unusually low volatility, despite a few bumps along the way. After a mixed start to 2018, the Dow Jones Industrial Average looked like it was back to its winning ways, then came the 4th quarter tumble. Investors were caught by surprise by the huge swings in market prices – volatility – and started selling stocks like crazy. To better understand these market dynamics, let’s put the recent activity into context.

You may have heard of a common measure of market volatility called the ‘VIX’ – the Chicago Board Options Exchange volatility index. The VIX measures expected future volatility by evaluating the prices of put and call options traded on the exchange. If you’re looking at the slideshow, you can see how much calmer the VIX index was during the quiet years of the stock market, especially in 2017. As the market swooped up in late 2017, expected future volatility spiked shortly thereafter – remember that volatility can spike when prices go up as well as down.

When the market gave back some of its gains in early 2018, the volatility index fell back as well. Then came the market tumble in late 2018. The VIX index starts jumping around like a Richter scale during an earthquake. As we move into 2019, even with the recent pick up in volatility the graph shows that the VIX is at a pretty normal level compared to prior years. We’re just not used to ‘normal’ volatility anymore.

Where do we go from here? No one knows for sure, and if anyone says they can predict the future they’re kidding themselves and their clients. What we can say is that financial markets react to rumors and headlines, many of which don’t fundamentally change the financial landscape. This ‘knee jerk’ reaction causes market volatility, and this volatility is normal. In fact, active investment managers appreciate market volatility, because market dips based on headlines rather than fundamental changes in the economic landscape give investors with a strong stomach and an evidence-based outlook the ability to buy good assets at cheap prices. If all goes well, those assets will recover their value plus more over time, and patient investors will be rewarded.

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

DISCLOSURES

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications.

Form ADV available upon request 714-876-6200

2019 Started with a Roar!

WSWA Monthly Market Commentary for February 2019

Key Takeaways

    • Commodities took the lead in February with a year-to-date return of 13.14% as oil prices recovered from the supply/demand imbalance during the second half of 2018
    • The S&P 500 index is on pace for its biggest early-year advance in nearly 30 years, due in part to diminished investor fears about the impact of trade tensions and slowing pace of interest rate hikes
    • Forward-looking economic data is mixed: S&P 500 companies expect earnings growth to slow, but the Conference Board’s Leading Economic Indicators remain strong
    • Overseas tensions continue as the U.K. has yet to approve a ‘Brexit’ plan, trade tariffs put pressure on global economic growth, and high levels of public and private debt reduces central bank flexibility
    • Conclusion: Global economies are slowing but unlikely to enter a recession in 2019, providing support for U.S. financial markets. Market performance around the world is likely to be positive though with mixed results across developed and emerging economies.

Energy takes the lead with an impressive year-to-date return over 23%.

2019 started with a roar as commodities streaked off the starting line, gaining 13.14% in January and February (combined). The biggest winner was the Energy sector leaving everything else in the dust with an impressive 23.48% return. The rebound in oil prices was fueled in part by ongoing supply reductions by OPEC and diminishing trade tensions between the U.S. and China. Going forward, U.S. shale oil production capacity should keep a lid on oil prices despite efforts by OPEC countries to keep prices higher.

wti

Source: www.cnbc.com

1. https://us.spindices.com/performance-overview/commodities/sp-gsci
2. Source: Morningstar Energy sector analyst report

Global stocks were not left in the dust.

Despite the recent downturn, the S&P 500 is on pace for its strongest start in recent memory. This impressive performance was felt broadly across market sectors, led by Industrial companies and followed closely by Energy, Technology, and Consumer Discretionary firms.

Global stocks

Thankfully, U.S. stock market volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX) calmed down from the frantic pace of the 4th quarter, perhaps due to investor fatigue as much as anything else. In truth, news has indeed gotten better: the FOMC indicated it would remain patient with the pace of normalizing interest rates; trade negotiations with China are progressing toward a workable conclusion; and corporate earnings for the 4th quarter are coming in better than investors feared.

vix

Source: www.bloomberg.com

3. https://www.wsj.com/articles/history-shows-stock-rally-could-have-more-legs-11550840401

International stocks are also benefiting from economic and political tailwinds, pulling slightly ahead of the U.S. in February with a return of 3.58% versus 3.21% for the S&P 500. The U.S. remains in the lead year-to-date: +11.48% compared to +9.57% for the developed markets equity index (MSCI ACWI.) Emerging Markets stocks are solidly in the middle of the pack at 0.22% in February and 9.01% year-to-date. U.S. bonds lagged the field with a negative return of -0.06% in February and 1.0% year-to-date, despite over $25 billion of inflows from mutual fund investors fleeing the stock market volatility of the 4th quarter 2018.

Asset Class Winners and Losers as of February 2019

Asset Class Winners and Losers as of February 2019

Source: Morningstar Direct

4. Source: Morningstar Direct
5. https://ici.org/research/stats/flows

With such a great start to the year, you might be wondering “where do we go from here?”

As reported in the Wall Street Journal and calculated by Dow Jones Market Data, the U.S. stock market continues in the same direction it started 64% of the time. Whether this relationship will apply in 2019 depends to some degree on the cause of the strong start. Given the sharp sell-off in the 4th quarter of 2018, some of the rally in early 2019 is likely attributed to stock prices finding a more rational foundation after being oversold, with the remainder based on fundamental factors outlined above. These aren’t powerful reasons for the rally to continue the rest of the year, but no reason to decline either.

It is encouraging to see Industrials leading the way rather than Technology, as the returns of industrial companies tend to be more closely tied to longer term economic trends. The breadth of the rally is also hopeful, as the number of stocks rising versus falling each day hit new highs in February.

Another bright spot is the Conference Board’s ‘Leading Economic Indicators’ index which remains strong despite declining a bit in January.

conference board

6. Source: Dow Jones Market Data

What could go wrong?

On the less optimistic side of the equation, most S&P 500 companies are forecasting earnings growth to slow in 2019. Overseas, economic tensions persist as the U.K. has yet to come up with a ‘Brexit’ deal acceptable to both the European Union and the British Parliament, and trade tariffs are hitting European automakers particularly hard. Add to this the worrisome growth of debt among many public and private entities worldwide, including the U.S. government, leaving central banks with less flexibility if the global economy stumbles.

The International Monetary Fund recently published an eye-opening study about the amount of debt accumulated around the world. (see chart below) The large light blue circle in the ‘Advanced Economies’ section at the top of the chart represents U.S. public and private debt at 256% of GDP. Japan is the green circle at the top right with nearly 400% debt to GDP(!), and Germany is the medium blue circle at the top left with 171% debt.

The dark blue circle in the middle ‘Emerging Markets’ section represents the debt load of mainland China at 254%. The lower section reflects ‘Low Income’ countries including Bangladesh, the light blue circle in the middle with 76% debt, and Vietnam in dark blue at the far right of this group with 189% debt to GDP.

Global Public and Private Debt as a Percent of GDP

Global Public and Private Debt as a Percent of GDP

7. https://blogs.imf.org/2019/01/02/new-data-on-global-debt/

Is all this debt a problem, especially for the U.S. government with over $22 trillion debt outstanding?

You might be comforted to know that though the U.S. government debt load is growing ever higher – due in some part to the ever-expanding U.S. economy – the interest servicing cost is only 1 ½% of GDP, compared to about 3% of GDP in the much higher interest rate environment of the 1980s and 1990s.

 interest rate

Source: www.treasurydirect.gov

As long as government borrowing and spending doesn’t ‘crowd out’ the private sector capacity to lend and spend, the debt shouldn’t be a problem. However, if government debt becomes so large that the government’s need to borrow pushes up interest rates for the rest of us, the economy could slow, kicking off a vicious cycle of unsustainable borrowing to keep the economy afloat. But there’s no need to panic just yet! Government debt is nowhere near the danger level and is unlikely to get there any time soon.

How do we weigh the positive and negative economic data?

Based on the available information, it’s hard to say whether 2019 will be an outstanding year for financial assets, below average, or somewhere in between. The International Monetary Fund is forecasting an economic slowdown – not a recession – across most developed markets in 2019 and 2020 (including Europe and the U.S.)

Growth Projections

On balance, there is enough positive data to support the case that a recession is not on the horizon. This outlook is becoming more widely held, which should enable the financial markets to hold their position and cross the finish line in positive territory by the end of 2019.

As always, the investment team at Warren Street Wealth Advisors will keep a sharp lookout for confirming or contrary evidence as the year unfolds, and will base our investment decisions on the best information we can find. While the future remains unclear, we promise to keep you informed as we journey forward.

8. https://www.treasurydirect.gov/NP/debt/current
9.https://www.ftportfolios.com/Commentary/EconomicResearch/2019/2/22/debt,-the-economy-and-stocks
10. https://www.investopedia.com/terms/c/crowdingouteffect.asp

Quiz:

Referring to the IMF ‘Debt Around the World’ blog post at https://blogs.imf.org/2019/01/02/new-data-on-global-debt/, which of the following countries has the largest debt as a percent of GDP, including both government and private entities? (Hint: click on the link, then move your mouse over the circles to see the details for each country)

  1. United States
  2. China
  3. Japan
  4. Germany

If you’re the sort of person who likes to draw your own conclusions, we highly recommend the IMF website from which we source much of our global information. Click on this link to see global economic data: https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

Answer below…

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

 

DISCLOSURES

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications.

Form ADV available upon request 714-876-6200

 

Quiz Answer: Japan

 

WSWA Monthly Market Commentary

WSWA Monthly Market Commentary for January 2019

Key Takeaways

  • All major asset classes were up strongly in January, one of the best yearly starts in recent memory, despite the month-long partial government shutdown in the U.S. and continuing uncertainty internationally about the economic impact of trade tariffs and the U.K. ‘Brexit’ negotiations
  • Global real estate took the lead with a monthly return of 9.7%, followed by commodities and U.S. growth stocks at 9% each. The S&P 500 posted an 8% return for the month
  • Recession fears in the U.S. receded as job growth was strong despite the unemployment rate edging up to 4%;Corporate profits continued to grow in the 4th quarter of 2018, though will slow in 2019
  • Fears of a recession due to rising interest rates diminished with Federal Reserve officials holding short-term rates steady at their January meeting and commenting on being ‘patient’ with future rate increases

What a way to start the year!

All major asset classes were up strongly in January, one of the best yearly starts in recent memory, despite the month-long partial government shutdown in the U.S., continuing uncertainty about trade tariffs’ impact on international growth, and the failure of U.K. ‘Brexit’ negotiations.

Global real estate took the lead among major asset classes with a monthly return of 9.70%, followed by commodities and U.S. growth stocks at 8.99% each. The S&P 500 gained 8.01% for the month, with emerging markets equities up 8.77% and developed international equities up 5.72%. U.S. bonds also had a strong month, rising 1.06%.

Morningstar Direct

Source: Morningstar Direct

Among commodities, crude oil prices led the way with a strong rebound from the December 24th low of $42.53, ending the month at $53.79. The S&P GSCI Agriculture index, the second largest component of the S&P GSCI index, stabilized after declining steadily in recent years[1].

West Texas Crude Oil Price
West Texas Crude Oil Price

Source: www.macrotrends.net

GSCI Agriculture Index

GSCI Agriculture Index

International equity markets are well priced for future growth.

Emerging Markets equities (EEM) led the international equity markets in January, followed by the MSCI All Country World Index (ACWI), with Europe, Australasia, and Far East (EAFE) markets not far behind.


[1]https://us.spindices.com/indices/

European markets posted solid returns despite Prime Minister Theresa May’s Brexit plan being voted down by Parliament. After the Brexit agreement was rejected, Prime Minister May survived a ‘no confidence’ vote and promised renewed efforts to negotiate an acceptable exit plan with European Union leadership.

According to Harris Associates, manager of the Oakmark International fund, international markets have been the victim of “overly emotional equity markets” in recent months[2] and U.K. businesses are generating the highest percent free cash flow in the world (6%[3]). Prominent companies such as Daimler, Lloyds, and Tencent are trading at significant discounts to intrinsic value, and the Oakmark International portfolio has a Price/Cash Flow ratio of 4.8x compared to 7.5x for the world, indicating the shares held in the fund are priced significantly lower than the world markets.

Oakmark International, MSCI ACWI, EAFE, and Emerging Markets Equity Returns

Oakmark International

Source: https://stockcharts.com/h-perf/ui

Worries about a near-term recession in the U.S. receded as corporate earnings continued to grow in the 4th quarter of 2018 and employers added more new jobs than expected.

Unemployment in the U.S. remained near historic lows, edging up to 4%[4] due to the temporary addition of government workers furloughed during the partial government shutdown. The labor participation rate continued to increase slowly and job creation exceeded expectations in January with 304,000 jobs added[5].

Fears of rising interest rates derailing the U.S. economy diminished with Federal Reserve officials holding short-term rates steady at their January meeting and commenting on being ‘patient’ with future interest rate increases[6].


[2]https://www.im.natixis.com/us/markets/finding-value-in-overly-emotional-equity-markets
[3] As presented Natixis National Sales Meeting January 10, 2019 Source: Corporate Reports, Empirical Research Partners Analysis as of November 30, 2018. Excluding financials and utilities; data smoothed on a trailing six-month basis.
[4]https://www.wsj.com/articles/global-stocks-edge-up-after-a-january-surge-in-the-u-s
[5]https://www.bls.gov/news.release/empsit.nr0.htm
[6]https://www.federalreserve.gov/monetarypolicy/fomcpresconf20190130.htm

U.S. Unemployment Rate, Participation Rate, and 10-yr. Treasury Yield

Corporate earnings for the 4th quarter were generally near the 5-year average with 10 of the 11 S&P sectors reporting year-over-year earnings growth.

Energy, Industrials, and Communication Services led the way with double-digit growth rates in the 4th quarter, though earnings estimates for 2019 are trending lower across most sectors[7].

4th Quarter 2018 Actual Earnings Growth vs. 12/31/2018 Projections

2019 Forecast Earnings Growth vs. 12/31/2018 Projections


[7]https://insight.factset.com/earnings-season-update-february-1-2019
The investment team at Warren Street Wealth Advisors held the line through a difficult 4th quarter of 2018, reaping the reward with a strong start to 2019.

Despite some negative headlines in December, the U.S. economy does not seem poised for a recession and we will remain fully invested across market sectors until evidence to the contrary becomes clear. With the Federal Reserve cautious on raising interest rates, job growth and wages increasing, and trade talks moving forward, we expect market volatility in 2019 to settle closer to historic norms, though not without some bumps along the way.

Despite recent weakness in overseas markets relative to the U.S., we are strong in our conviction that international markets are poised to rebound as stock prices stabilize at attractive levels, particularly in Europe and Emerging Markets, and negative headlines diminish. While economic and fundamental data appear mixed globally, we continue to be broadly diversified as international markets work through the next phase of political and economic developments.

As always, if you have any concerns or questions, the investment and financial planning teams at Warren Street Wealth Advisors want to hear from you! Call, write, or drop by our Tustin or El Segundo offices any time. We are here to help.

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

 

Does PG&E’s Recent Bankruptcy Announcement Scare You?

Here Are The Things All Employees Should Be Aware of Regardless of Where You Work

By Justin D. Rucci, CFP® 

As many of you are likely aware, PG&E recently announced a bankruptcy filing as the result of roughly $30B in potential liabilities stemming from recent California wildfires. Regardless of whether or not you work for a public utility, it is only natural to have questions around what to expect or what precautions you should be taking with your own money. With that said, below are some items you will want to remain cognizant of should more wildfires occur or things change.

Things to Think About:

401k

While your 401(k) account is technically “tied” to your employer, your contributions and vested matching contributions will not be at creditor risk should your company go bankrupt. As part of the Employee Retirement Income Security Act of 1974(ERISA), your 401(k) assets are required by law to be held in trust separate from the company. This means the assets are not commingled with the company’s general operating funds and are not accessible to the company should they need operating capital or funds to pay creditors. Your investments within the 401(k) are always subject to your own investment risk, so be sure to contact Warren Street Wealth Advisors if you would like guidance on the plan’s investment options.

Pension

Pension plans are another common concern for those worried about their company potentially filing for bankruptcy. Luckily ERISA comes into play here as well. As part of the enacting of ERISA, a government agency titled the Pension Benefit & Guaranty Corp.(PBGC) was formed. This agency is designed to step in to pay benefits should a private pension plan fall to bankruptcy. This agency will step in to pay receipt of your pension benefits at normal retirement age, annuity benefits to your survivors, disability benefits, and most early retirement benefits. The PBGC will not however pay for severance packages, vacation pay, or similar benefits. While benefits are guaranteed by the PBGC, they do enforce limits on what is covered by the agency, meaning it is possible that you would not necessarily receive your entire benefit. Maximum benefit guarantees can vary, but more information is available on the PBGC website here.

Retirement

How should you time your retirement if you are worried about your company going bankrupt? The short answer is, you probably shouldn’t dictate your retirement decision based solely on the possibility of a corporate bankruptcy. While the possibility of benefits being cut and severance package offerings are very real for companies that are struggling financially, often times it makes sense to take an individualized approach to analyze the situation before making a rash decision on retirement. Pension plans may change from a defined benefit annuity stream to a cash balance “lump sum” in some cases, but this does not necessarily mean it is time to retire. I would recommend speaking to an advisor should you have questions about your specific company and situation to determine what the best course of action may be for you.

What Should I Do?

For those interested in learning more about retirement and would like to meet with professional advisors, Warren Street Wealth Advisors hosts many events throughout the year. You can view our upcoming events here.

If you have any questions, contact info@warrenstreetwealth.com or call 714-876-6200. We are well versed in interpreting company benefits and are happy to talk through any of your questions or concerns.


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Sources

https://www.bankrate.com/retirement/your-pension-when-the-unexpected-happens/

https://money.usnews.com/money/blogs/on-retirement/2010/12/14/what-happens-to-my-pension-if-my-company-goes-bankrupt-

Market Commentary – December 2018

Market Commentary – December 2018

Key Takeaways

  • Though the U.S. stock market closed the year with its first annual loss since 2008 (S&P 500 -4.38%)(1), investors retained the vast majority of gains earned in 2017 (21.83%.) International stocks as measured by the MSCI EAFE(2) index were down -8.96%, giving up just over half of 2017’s gains (16.84%), and the Barclays Aggregate U.S. bond index ended the year flat at +0.01% after a very strong November and December.
  • Though market turbulence in the 4th quarter felt extreme, volatility over the year didn’t approach the peaks seen after the Dot Com bubble burst in 2001-2002 or during the financial crisis of 2008-2009.
  • Global financial markets tend to exhibit a ‘sector rotation’ pattern of recent losers becoming the next period’s winners. If the pattern holds true, international stocks are poised for a strong year in 2019.
  • 2018’s poor performance followed an unusually steady 10-year period of growth. Investors bold enough to put their money at risk after the market plummeted in 2008 were handsomely rewarded. Investors willing to do the same in 2019 may be rewarded once again.

 

 

 

It wasn’t pretty, but the year is finally over and we already see indications of better times ahead in 2019.

Though the U.S. stock market closed the year with its first annual loss since 2008 (-4.38%) , investors retained the vast majority of gains earned in 2017 (21.83%) and the previous 9 years of recovery post the 2008 financial crisis. Though European stock markets fell behind the U.S. last summer and never caught up, these markets also ended 2018 well ahead of where they started in 2017. International stocks as measured by the MSCI EAFE index were down -8.96% in 2018 compared to +16.84% in 2017, and U.S. bonds ended the year flat after recovering strongly late in the 4th quarter.

Source: https://stockcharts.com/h-perf/ui

Market sectors which lagged in the strong quarters, especially bonds (AGG) and gold (GLD), provided welcome relief during the 4th quarter downturn. International stock markets avoided some of the December tumble and rebounded into January 2019, easing some of the pain from lagging the robust U.S. market earlier in the year.

The return of stock market volatility in the 4th quarter surprised investors, especially compared to an unusually stable 2017.

Volatility in 2018 was more than double that of 2017, though did not approach the peak volatility seen during the financial crisis of 2008-2009 and post the Dot Com bubble/credit crisis in 2001-2002. The pattern seems to be that periods of unusual stability are often followed by a spike in volatility. We know that the past isn’t always reflective of the future, but as Mark Twain is reported to have said: “History doesn’t repeat itself, but it often rhymes.”

Just as periods of stability are often followed by turbulence, extreme market moves are commonly followed by reversion toward the mean (average).

This tendency is illustrated by the two charts below. The first chart shows the drop in the SPY and EFA ETFs in the period between July-November 2011. Notice the jagged ups and downs just after the drop, followed by a fairly steady up-trend through 2013, though not without some negative surprises along the way.

We see a similar pattern in the 4th quarter of 2015 before the start of the bull market of 2016-2017.

And while the downturns are painful, they tend to be relatively brief compared to the recovery period.

 

  • Dot Com bust lasted from early 2000 to early 2003, followed by 5 years of positive returns
  • Financial crisis crash lasted from late 2007 to early 2009, followed by 9 years of mostly positive returns
  • Less dramatic declines in 2011 and 2015 were followed by 3 years of positive returns

Asset class returns tend to follow a ‘sector rotation’ pattern with prior period winners commonly falling in the rankings in subsequent periods, and prior period losers tending to rise in the rankings.

Source: Morningstar Direct

Though historical context is helpful, we need to face forward when making investment decisions. Following the crowd and expecting history to repeat itself without considering the underlying drivers of returns isn’t likely to be a successful strategy in the coming year.

Though market conditions vary from year to year, the investment team at Warren Street Wealth Advisors believes international stocks in particular have been hit by political and economic ‘headline risk’ more than actual financial distress. Many European companies such as BNP Paribas (one of the largest banks in Europe), Daimler (maker of Mercedes Benz), and Lloyds Banking Group (a leading U.K. financial service firm) are poised for a strong rebound in 2019. In emerging countries, stalwart firms such as Samsung and Taiwan Semiconductor remain solid global players, with disruptors such as Alibaba and Tencent making their presence felt beyond their home base in AsiaPacific.

Another important thing to remember is that the stock market is not the real economy. Fundamental strength in corporate balance sheets should keep the global economy, and the markets, positive in 2019.

GDP reflects the value of goods and services produced in a country – ultimately, GDP reflects corporate earnings. Robust U.S. GDP growth early in 2017 led to tight labor markets and rising inflation, supporting the Federal Reserve’s plan to ‘normalize’ short-term interest rates(3). Though GDP growth is expected to slow in 2019, the Federal Reserve forecasts a positive growth rate of approximately 2%. Not stellar, but certainly not in recession territory. And not so strong as to require the Fed to increase their pace of raising short-term interest rates, since modest GDP growth is unlikely to spark inflation. The International Monetary Fund is projecting similar modest positive growth for developed nations, and near 5% growth for emerging economies.

 

 

Growth Projection for U.S. GDP

Source: Factset

 

 

Growth Projection for the World

Source: International Monetary Fund

 

Economic fundamentals should ultimately find their way into stock prices, but the markets often become overly optimistic or pessimistic along the way.

As we mentioned in our November commentary, S&P 500 corporate profits were very strong in the 4th quarter of 2018. And for the calendar year, growth in corporate profits was 20.3% due in part to the reduced corporate tax rate(4). This is the highest growth rate we’ve seen since 2010 when profits jumped nearly 40% coming out of the Great Recession of 2008-2009. All 11 sectors of the S&P 500 reported positive growth for the year, with 9 of the 11 sectors reporting double-digit growth.

 

 

You might be surprised to see that Energy companies reported the highest calendar year earnings growth of all the 11 sectors. Despite the 4th quarter fall in oil prices, oil has actually increased when compared against the prior year-end. Materials and Financials also posted strong earnings growth in 2018, a fact not reflected in their December closing stock prices.

As shown in the chart above from Fidelity Research(5), the biggest losers in the S&P 500 were not Technology companies which were grabbing most of the news headlines, but rather Industrials, Financials, Materials, and Energy firms. Industrials and materials were hard hit by concerns over trade tariffs and a slowing, though still strong, pace of new home building(6). Energy equipment and services firms suffered from falling oil prices hurting profit margins. Financial firms also struggled as increasing short-term funding rates squeezed investors’ profit expectations.

Conclusion: Though we can’t predict the future, periods of extreme market movements are often followed by reversion toward the mean. The underlying economic data remains solid and sooner or later investors will incorporate this reality into global stock and bond prices. In the meantime, the investment team at Warren Street Wealth Advisors is watching the data, rebalancing into weakness, and looking forward to a smoother ride in 2019.

 

 

 


Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

 

 

 

Sources

  1. All returns retrieved from Morningstar Direct
  2. EAFE = Europe, Australasia, Far East
  3. https://insight.factset.com/2017-look-back-2018-predictions-0
  4. https://insight.factset.com/sp-500-2018-earnings-preview-highest-earnings-growth-in-eight-years
  5. https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml
  6. https://tradingeconomics.com/united-states/housing-starts

 

Case Study: Start Retirement on Vacation

Case Study – Start Retirement on Vacation

Learn how we helped a client retire early, without penalty, move out-of-state, and get their desired income level by constructing a strong financial plan.

When most people think of working with a financial advisor for retirement, people think about investment management strategies. Having someone whom they could trust and feel confident in handling their money. Believe us, having trust and confidence in someone to handle your money correctly is a big piece of the puzzle when choosing an advisor.

However, a good financial advisor brings more to the table than their investment strategy. They should bring some financial planning knowledge that can help you retire smoothly and utilize as much of your retirement benefits as possible, and that is exactly what we want to share in this case study.

We worked with a client who planned on retiring towards the end of the year. They had done a great job saving, had plenty of assets to retire, and they were counting down the days to their December retirement date.

It was hard to not get wrapped up in their excitement because it is such an exhilarating time, but we wanted to make sure we had done all the due diligence on their benefits package. During our research, we learned how their vacation time worked which gave our client an incredible start to
retirement.

At this particular job, vacation time was reset as of the first of the year, so on January 1st, our client earned 6 weeks of paid vacation time. If you retire with vacation days left over, then you will get paid based off of how much of that time you “accrued”. For example, if you worked 6 months out of the year, then you would be able to get one-half of the unused vacation time paid out.

With our client planning on retiring so close to the new year, we advised them to delay their retirement a couple weeks, take vacation time the first 6 weeks of the new year, and be able to enjoy the full value of the benefit. The client even gets to collect a couple of paychecks to start their retirement.

By doing a bit of digging, we were able to get them more benefit than they had believed available and a great start to retirement. You want an advisor who is competent when it comes to building an investment strategy, but you also want to make sure your advisor is looking into every avenue possible to get you the benefits you have earned.

It would have been easy to tell the client to go ahead and retire, but it’s not about doing what is easy for the client.

It is about doing what is right and in the client’s best interest.


 

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Social Security Gets Its Biggest Boost in Years

Social Security Gets Its Biggest Boost in Years

Seniors will see their retirement benefits increase by an average of 2.8% in 2019.

Social Security will soon give seniors their largest “raise” since 2012. In view of inflation, the Social Security Administration has authorized a 2.8% increase for retirement benefits in 2019. (1)

This is especially welcome, as annual Social Security cost-of-living adjustments, or COLAs, have been irregular in recent years. There were no COLAs at all in 2010, 2011, and 2016, and the 2017 COLA was 0.3%. This marks the second year in a row in which the COLA has been at least 2%. (2)

Not every retiree will see their benefits grow 2.8% next year. While affluent seniors will probably get the full COLA, more than 5 million comparatively poorer seniors may not, according to the Senior Citizens League, a lobbying group active in the nation’s capital. (1)

Why, exactly? It has to do with Medicare’s “hold harmless” provision, which held down the cost of Part B premiums for select Medicare recipients earlier in this decade. That rule prevents Medicare Part B premiums, which are automatically deducted from monthly Social Security benefits, from increasing more than a Social Security COLA in a given year. (Without this provision in place, some retirees might see their Social Security benefits effectively shrink from one year to the next.) (1)

After years of Part B premium inflation being held in check, the “hold harmless” provision is likely fading for the above-mentioned 5+ million Social Security recipients. They may not see much of the 2019 COLA at all. (1)

Even so, the average Social Security beneficiary will see a difference. The increase will take the average individual monthly Social Security payment from $1,422 to $1,461, meaning $468 more in retirement benefits for the year. An average couple receiving Social Security is projected to receive $2,448 per month, which will give them $804 more for 2019 than they would get without the COLA. How about a widower living alone? The average monthly benefit is set to rise $38 per month to $1,386, which implies an improvement of $456 in total benefits for 2019. (1)

Lastly, it should be noted that some disabled workers also receive Social Security benefits. Payments to their households will also grow larger next year. Right now, the average disabled worker enrolled in Social Security gets $1,200 per month in benefits. That will rise to $1,234 per month in 2019. The increase for the year will be $408. (1)


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations
1 – fool.com/retirement/2018/10/26/heres-what-the-average-social-security-beneficiary.aspx [10/26/18]
2 – tinyurl.com/y9spspqe [8/31/18]

Taking a Loan from Your Retirement Plan = Bad Idea

Taking a Loan from Your Retirement Plan = Bad Idea

Why you should refrain from making this move.

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that because these loans are not only risky but injurious to your retirement planning.

A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan. (1)

In borrowing from a 401(k), 403(b), or 457, you siphon down invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense. (1)

Most plan providers charge an origination fee for a loan (it can be in the neighborhood of $100), and of course, they charge interest. While you will repay interest and the principal as you repay the loan, that interest still represents money that could have remained in the account and remained invested. (1,2)

As you strive to repay the loan amount, there may be a financial side effect. You may end up reducing or suspending your regular per-paycheck contributions to the plan. Some plans may even bar you from making plan contributions for several months after the loan is taken. (3,4)

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored. (1)

If you leave your job, you will have to pay 100% of your 401(k) loan back. This applies if you quit; it applies if you are laid off or fired. Formerly, you had a maximum of 60 days to repay a workplace retirement plan loan. The Tax Cuts & Jobs Act of 2017 changed that for loans originated in 2018 and years forward. You now have until October of the year following the year you leave your job to repay the loan (the deadline is the due date of your federal taxes plus a 6-month extension, which usually means October 15). You also have a choice: you can either restore the funds to your workplace retirement plan or transfer them to either an IRA or a workplace retirement plan elsewhere. (2)

If you are younger than age 59½ and fail to pay the full amount of the loan back, the I.R.S. will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty. (3)

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you are younger than 59½. (1)

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. You will be repaying your loan with after-tax dollars, and those dollars will be taxed again when you make a qualified withdrawal of them in the future (unless your plan offers you a Roth option). (3,4)

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.   

You should never confuse your retirement plan with a bank account. Some employees seem to do just that. Fidelity Investments says that 20.8% of its 401(k) plan participants have outstanding loans in 2018. In taking their loans, they are opening the door to the possibility of having less money saved when they retire. (4)

Why risk that? Look elsewhere for money in a crisis. Borrow from your employer-sponsored retirement plan only as a last resort.


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations
1 – gobankingrates.com/retirement/401k/borrowing-401k/ [10/7/17]
2 – forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18]
3 – cbsnews.com/news/when-is-it-ok-to-withdraw-or-borrow-from-your-retirement-savings/ [1/31/17]
4 – cnbc.com/2018/06/26/the-lure-of-a-401k-loan-could-mask-its-risks.html [6/26/18]

Rate Watch 2018 – August

Rate Watch 2018 – August – SCE Grandfathered Pension

August’s rate is typically used for Edison’s official grandfathered pension plan interest rate. Where did it land, and how does that impact your pension?

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison.

The most important month of the year for grandfathered pension holders is upon us. August is typically used to set the grandfathered pension interest rate for the following plan year. Let’s take a look at where the rate it at:

These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates). Plan rate changes are made by Southern California Edison on an annual basis.

August came in at 4.46 and 0.10 higher than the current plan rate. Very simply, this means that your lump sum payout value will be higher with the 2018 plan value as opposed to the 2019 value.

Again, simply put, if you are grandfathered and thinking about retiring soon, then it might be in your best interest to retire and take the 2018 value to get a higher lump sum payout.

Since the difference in potential rates is small, the change in value is probably not great enough to heavily influence a decision to retire now or continue working, but it is something that should be capitalized on if retirement is on the horizon.

If you are unsure on how to request your paperwork or the timing to make sure you receive the 2018 pension rate, then contact us for a free retirement consultation, and we can show you how you can retire with confidence.


WSWA Team Compressed-19-squareJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 


Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. 
Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss.