Staying Calm in Uncertainty
Photo by Külli Kittus on Unsplash
As I write to my clients being surprised usually makes things worse. And last weeks Federal reserve meeting was a surprise, indicating that rates would not only go up a half point in May but even more aggressively through out the year. The market felt the blow!
As Seneca, the Roman philosopher, put it, "The unexpected blow lands most heavily."
Seneca endured a decade-long battle with tuberculosis (and two exiles by two different emperors!) because he imagined the worst so he could prepare himself for life's possibilities. In doing so, he engineered his own death, but very calmly it is said.
Vice Admiral James Stockdale survived the POW camps of Vietnam using the same mental exercise, imagine the worst.
Rockefeller turned economic chaos into the biggest business in the world by seeing times of fear as windows of opportunity. Seems Buffett has made a career of this.
There are countless others who have done the same.
What these individuals realized is that in times of significant stress, making rational decisions with a clear mind is the ultimate asset.
The only way to do that is to expect the unexpected and prepare ourselves accordingly.
Because without preparation, our natural reaction is panic.
And panic causes mistakes.
For those of you who have known me for a long time you know I'm optimistic about the future, always, even though anything can happen in the short term.
Today is no different.
Inflation may get worse. The war in Europe may escalate further. The Fed may raise rates too quickly.
Or it may be something totally ... unexpected.
We don't know, and can't know, what will happen next. But thankfully, we don't need to know.
As Howard Marks put it:
"I'm not going to try to control the future. I'm not going to know the future. I'm going to try to prepare for an uncertain future."
Preparing doesn’t mean we should attempt to eliminate all risk from our lives.
As alluring as that may seem, attempting to eliminate all risk is a risk in and of itself.
"…we encounter situations that call for us to assume a reasonable amount of risk to achieve our goals, and if we try to make ourselves 'bulletproof,' we may ultimately collapse under the weight of our gear."
~General Stanley McCrystal
As an example, avoiding risk in investments leads to low returns and a high chance of running out of money in when we need it, the risk has simply shifted from now until later.
As you can imagine, there's a sweet spot between being overly focused on risk and ignoring it completely, which is the land of preparation.
As a planner, my objective is to help you:
1. Prepare for the downside to mitigate surprise
2. Establish a "war chest" to fund near-term needs
3. Take a prudent amount of risk to achieve your specific goals
Having a plan that balances these possibilities is the only way I've found to stay sane during times of unquestionable uncertainty.
At some point, this will all pass and become a footnote in market history. But in the meantime, we will stay vigilant and as prepared as we can be for whatever comes next.
To your financial success.
Securing a Strong Retirement Act of 2022
A few weeks ago, the House overwhelmingly passed the Securing a Strong Retirement Act of 2022, or SECURE Act 2.0.
It seems likely that the Senate will pass their version of SECURE Act 2.0 as well.
Given its strong support and probability of passing in a similar form, I thought you might be interested in hearing what's inside.
Instead of summarizing all 142 pages, I'm sharing the 7 provisions that may impact retirement savers the most.
1.) The Age for Required Minimum Distributions (RMD) Would Change Again
The original SECURE Act from 2019 increased the RMD age from 70½ to 72.
This bill (Secure Act 2.0) would increase the age again, ultimately to age 75.
However, this increase will happen in phases.
As the bill stands, the RMD age would move to age 73 in 2023, then increase to age 74 in 2030, and finally rise to age 75 in 2033.
2.) RMD Penalties to Be Reduced
The steepest penalty that the IRS levies is for missed RMDs which currently stands at 50%.
Under SECURE Act 2.0, the penalty would be reduced to 25%. If the mistake is corrected in a "timely manner," it will be reduced further to 10%.
Given that they are making RMD ages more complicated, it seems reasonable to reduce the penalty.
3.) Catch-Up Contributions Increasing
Under current law, employees 50 and older who participate in their 401(k) or 403(b) plan can contribute an additional $6,500 beyond the standard $20,500.
This will remain the case except for workers ages 62 through 64.
For those investors, the catch-up amount would increase to $10,000 starting in 2024.
SIMPLE IRA catch-up contributions will increase from $3,000 to $5,000 during the same three-year age band, also starting in 2024.
Each of the catch-up provisions noted above will continue to be indexed to inflation. Additionally, for the first time, IRA catch-up contributions (currently $1,000 per person) will also be indexed for inflation.
But there is a significant change that would impact the taxability of employer plan catch-up contributions...
4.) Catch-Up Contributions Will be Subject to Roth Treatment
Here's the big change. All employer-plan catch-up contributions will be subject to Roth treatment.
In other words, the extra contribution amounts won't offer the tax savings we're accustomed to because the contributions will come from after-tax pay.
This provision is one way Congress is seeking to raise revenue to help offset the cost of this bill.
5.) Employer Matching Contributions Can Be Roth Contributions
Under current law, all employer matching contributions must be pre-tax regardless of the funding choice of the employee.
If this bill passes, participants may be given the choice to receive their matching contributions on a Roth basis starting in 2023.
If the employee chooses to do so, it will result in additional taxable income for the employee.
6.) SIMPLE & SEP Roth IRAs
At current, all plans that accept pre-tax employee contributions can accept Roth contributions except for SIMPLE and SEP IRAs.
This exclusion will be removed with SECURE Act 2.0, which is good news for many small business owners and their employees.
7.) The Creation of a "Retirement Savings Lost & Found"
There are many times where I've seen people "find" old 401(k) plans, but this often requires quite a bit of effort.
Under this law, the Department of Labor will create a new online database to help investors find old plans.
The database is supposed to be set up within two years after enactment.
While the bill addresses many other retirement issues, these are the major items.
As I said initially, this is not yet law.
If and when it goes into effect, I'll be sharing how to address the changes from a retirement & tax planning perspective.
To a successful retirement.
Sally J Boyle
Sally Boyle is committed to being high-net worthy. A certified financial planner, she believes the single most important part of any wealth planning process is her conversation with you.