Thursday, April 30th the Windward Private Wealth Management advisors addressed common financial planning questions in today’s reality.
Covid-19 has changed the economy, the markets, tax law, portfolios and financial plans. What wealth management plan changes should you consider now and in the coming months?
- What government programs have changed – unemployment benefits, stimulus payments, small business relief, student loan payments, tax filing deadlines, IRA and HSA contributions, retirement plan distributions?
- Should I change my cash and debt management strategies? Is my estate plan current?
- What portfolio changes should I consider today?
- Do my retirement plans need to change?
- What should I expect in the markets going forward?
- What tax planning moves should I consider?
Hi everybody. We’re going to go ahead and get started here in just a couple minutes, but we’re going to wait for a few more people to log on. If you already know you have questions, feel free to drop them in the questions box and we will get to a couple of them at the end of the webinar. We will get started here in just a minute.
Hi everybody. We’re going to get started here and just one more minute. Just a sec.
Hello, welcome to Windward Private Wealth Management’s first ever webinar. We are really excited to do this and think it’s a great way to connect with everyone during this weird time, but this is our first webinar. So bear with us if we have any technical difficulties, we appreciate some grace. We’re thankful you’ve made the time to attend today and we hope we can answer some of the questions you have on your mind.
I’m Brandy Ward an Associate Wealth Manager here at Windward and I’ll be moderating today’s discussion. We know things are challenging right now and you have a lot on your mind, but hopefully today we can answer a few questions.
Today we will be discussing recent legislative changes, (excuse me), your personal finances, Required Minimum Distribution in 2020, what actions to consider in your portfolio and how to deal with the market and economic uncertainty. As you have questions, feel free to drop them in the question box below and we’ll answer a few of them at the end of the presentation as time allows.
Before we get into the presentation today though. I want to introduce our speakers.
Drew Osborne is Windward’s CEO and a wealth manager. Drew is a Certified Financial Planner and works in our Overland Park office and our North Kansas City offices. Emily Petty is a wealth manager at Windward and a Certified Financial Planner as well. Emily works at our Overland Park office and has several clients at our North Kansas City office.
Matthew Bellomo or Matt is Windward’s newest member. Matt is a Certified Public Accountant who brings a wealth of tax knowledge as well as investment knowledge to the firm. Matt previously owned his own CPA practice, but joined Windward to help clients with all of their financial planning needs.
Lastly Darrell Tierney is Windward’s founder and a senior wealth manager. Darrell is a Certified Financial Planner, CPA and Personal Financial Specialist. Darrell primarily works at our Overland Park office, but like all of our advisors here, works with clients all across the country. Now, I’ll pass the hypothetical mic on to Drew, our CEO for a few words.
Okay. Thank you so much Brandy. About seven months ago Windward had a party at Boulevard Brewery with many of you to celebrate Windward’s 20th anniversary. Twenty years of developing financial plans with you. Those 20 years included the 90’s tech bubble, the 07-08’ real estate crash, the financial crisis of ’08 and 2009. And founder Darrell Tierney and the team sometimes talked about the difficulty of being an advisor in those days. People watch their retirement account get cut in half. They wondered if the entire financial system was going to collapse. Darrell often said that it was amazing to come out the other side with clients. Some adjusted their plans, especially those near or in retirement. Others just had to ride it out.
I heard some of those stories at Boulevard last September. Great stories from clients who worked with their Windward team. They hung together. They stayed invested in the market. They reviewed and adjusted their plan as needed. They did tax-loss harvesting, consistent rebalancing, but more than anything they were resilient. They didn’t panic. They didn’t blow up their plans. It was a special night at Boulevard with so many of you and what I would give to share a beer, right now with all of you again in one place, but our current realities of social distancing sure have made me appreciate some of the simple things like being able to celebrate in places with you. When I took over as Windward’s CEO in January of this year on the heels of the longest bull market in history, I was feeling pretty good. But within two months, we are all facing a pandemic that has turned everything upside down.
This crisis has been unlike anything the world has seen or known. It’s a health crisis that cascades into an economic crisis and no one knows how everything is going to play out. Our Windward team has reached out and spoken to nearly all of our clients since March and it has been so good to talk to you. We’ve spoken to clients who said they have just avoided looking at their investment accounts. Others of you have understandably been stressed by some of the most volatile financial markets in history. Many are working from home. Some are learning how to parent, home school, and work in the same setting 24 hours a day. Business owners have talked to us about how to be strategic in this crisis. Some have had family and friends get sick. In pain, in recovery and isolation and some have died.
People are left to grieve and cope without hugs, physical connections, or goodbyes.
But we’ve spoken to clients who are healthcare workers putting themselves so bravely in harm’s way to serve and care. We’ve spoken to other clients who are being generous and creative. Clients who have given their time and energy to feed other people, donate their technical knowledge to set up other charitable organizations and their remote technology. You have literally inspired me, you have inspired us to look beyond ourselves to help the community and the world.
We’re going to collectively make it through this and no one knows how long it will take or what a new normal will look like but we will be a stronger and hopefully more generous and caring people when we come out on the other side.
Thank you to the clients who have offered really great perspective about what’s most important in our health, family, friends and faith in a greater good. So we hope today that there is at least one planning nugget that is helpful for you or someone close to you. There will be a lot of information in here but please pay attention for the one or two things that you can take away from this and let us know when we are finished what those things are because we want to help. Also if you are not a client and you have a specific question, please please reach out to us in times like this we are here to help each other. I hope the message that you hear most clearly today is this: that we miss you. We are proud of you. We’re here to listen and we are here to help. So with that I’m going to dive into the first question that we’ve heard most frequently, is that what immediate things should I consider in light of the passage of the CARES Act? So, in response to this crisis Congress passed the CARES Act, the biggest stimulus bill in US history, to help individuals and families.
I’m going to start by talking about recovery rebates also called stimulus checks. So recovery rebates: 90% of Americans qualify and many who qualify have already received their recovery rebate. If you haven’t and you likely qualify, it’s likely that no action is needed. But, the IRS created two applications for people to look and see if there’s any action to be taken. The first is the “Get My Payment” application where you can check on your payment status.
Just enter your bank information if your payment hasn’t been sent. The second is the “Non-Filers Payment Information” application for those who haven’t filed tax returns in 2018 and 2019. A lot of folks who haven’t filed tax returns. Maybe those are people on Social Security who have no other income. They may not need to take action, but you can go there to double-check. Last point on the rebates is that the 2020 tax return filing will true up any recovery rebate for people who didn’t qualify based on their 2018 or 2019 income, but they do qualify here this year in 2020. So if your income is lower this year and you didn’t qualify to get an immediate rebate because of your 2018 or 2019 income you will get that rebate if you qualify when you file your tax return in the spring of 2021 for 2020. But reversed it’s different.
If you got the rebate because of your income in 2018 or 2019 but your 2020 income iron will not have it taken. This is what you get. Next up an unemployment update: regular unemployment compensation has increased by six hundred dollars per week and been extended by a full quarter. People that are now unemployed, they will file their claim with the state where they work. That hasn’t changed but what has changed is that self-employed individuals, they are eligible where in the past they have generally been ineligible. If you have questions, please let us know or reach directly out to the state agency for unemployment. Next up when it comes to small business benefits, there are two big things that have changed. The first general place is on loan options and the other on payroll options. So the two loan programs, the Paycheck Protection Program and the Economic Injury Disaster Loan program have had so much demand that their funding has had to be replenished once and it was used up almost immediately. The big point to say is that if you are a small business owner, including a self-employed business owner you need to be proactive now in talking with your Windward team and also importantly with your bank so that if there are future opportunities, you’re ready the moment they happen because if you wait, they will likely be gone.
The second big picture point is around payroll. The two options are an Employee Retention Credit, and if your 2020 quarter has been significantly worse than the same quarter in 2019, you may qualify for a payroll credit. You should talk to your tax preparer and your Windward team about how that may impact the rest of the year if you do qualify. But the other part that payroll tax deferral is really for folks who want to be sure that they aren’t going to have cash flow issues for the rest of the year. You may be able to defer part of your payroll tax. You’ll still have to pay it but not in 2020. Half of it could be paid in 2021 and the other half not being paid until the end of 2022. So there’s options available. You should be strategic with your team to think through what might be right for you. So the next information is on Coronavirus-related distributions.
So if you’ve been directly impacted by the Coronavirus, and those definitions include if you’ve been diagnosed with COVID-19, had a spouse or dependent diagnosed with COVID-19, experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced or being unable to work because of lack of childcare or own a business that had to close or operate under reduced hours and you need money, the distributions from IRAs and retirement accounts – those rules have been relaxed. There are no early distribution penalties on those if you’ve been directly impacted. They’re eligible to be repaid within three years and the income could be spread out over three years. Employer retirement plan enhancements refers to the fact that some 401ks and other retirement plans have had loan options in the past and those rules have been reduced and adjusted even more than typical. So if you need money and you’ve been impacted by the virus, that maybe a place to figure out what needs to happen so that you can take care of yourself and your family. Next point on student loan payments. So federal student loans, including principal and interest have been suspended until September 30th of 2020.
So it’s an automatic suspension of payments, but you can still make payments if you want and those full payments will count towards principal which could let you pay down your loans more quickly. Private student loans are not covered by the CARES Act. So we have a client who’s being strategic. He has moved his Federal payment amount and since they have been suspended he’s taking that full amount and paying it on top of his private student loans, which is going to result in him paying off his full student loan debt several years earlier. Be strategic is the main point of probably everything we’ll cover here. Finally tax filing and contribution extensions. So the 2019 tax return due date is now July 15th, 2020. That means that the 2019 IRA, Roth IRA, and Health Savings Account contributions are due on July 15th. If you have long-term funds that haven’t been allocated to IRAs or a Health Savings Account, you may want to coordinate with your tax planner to see if you still can do that and make sure that it fits on your tax return. Last point, the 2020 first quarter and second quarter federal and state estimated payments including Missouri and Kansas are now due on July 15th. So July 15th is a big year for 2019 tax returns and 2020 estimated payments. With that, I’ll pass it along to Matt Bellomo. We’ll talk about the final piece to the CARES Act and Required Minimum Distributions.
Thanks, Drew. Good job.
As Drew mentions, the CARES Act is a far-reaching two trillion plus dollar stimulus bill that just got passed. And one of the features of the CARES Act is they suspended Required Minimum Distributions for the 2020 tax year. So want to take a few minutes to talk about what that means.
The first question we’re getting is to which distribution does this apply? And those distributions are from IRAs, 401(k)s, 403(b)s, 457s and the like. Big broad brushstroke defined contribution plans.
I want to just note that pension distributions have not been suspended. Those will continue. Some of you may be saying to yourself. Wait a minute. I’ve already taken my 2020 Required Minimum Distribution and whatnot.
Matt we’re not able to hear you. Give me just a second there to see if we can.
Get your mic figured out and if that we can come back.
How about now?
There we go.
Okay, we’re going to move along and we’ll come back to this here in a minute.
How about now?
Can you hear me now?
Would you like me to continue? Yes, please. Continue. I’ll move this back. Sorry about that. So if you received the distribution after January 31st, for 2020 and replace those funds by July 15th 2020 that will not be income in the 2020 tax year. If you received a distribution in January, there’s currently no mechanism to replace those funds.
This is an obvious inequity and our hope is that Congress recognizes this inequity and fixes it. So, what does this mean going forward?
The first and most obvious effect is lower tax liabilities in 2020. I’ve run some numbers for some clients and one client in particular, the savings was $20,000. So the tax savings in and of themselves are significant. A few other things that you may benefit from are one, reduced taxability of your Social Security benefits. You might qualify for the zero percent tax rate for long-term capital gains and qualified dividend income.
It may reduce your surcharges for Medicare premiums.
As Drew mentioned earlier the stimulus payment to date was somewhat provisional. That is, based on either you’re ‘18 or ‘19 tax liability taxable income, excuse me, and in 2020, when you file your return absent the RMD it may mean that you receive some or all of the stimulus payment.
Some of you are going to say I need to continue to take distributions from my IRA in order to meet my cash flow needs and by all means continue to take those payments. Might I offer two suggestions, however. The first one being: utilize other assets first to reduce the amount of RMD that’s ultimately needed in the 2020 tax year. And when taking money out of the IRA we suggest perhaps taking cash and fixed income before equities. Let the equities bounce back as the markets bounce back as well. And finally the last question we’re fielding is “can I continue to make qualified charitable distributions?” And just to remind everybody what a charitable contribution qualified charitable distribution is. And that is a distribution from a taxpayer who is 70.5 or older directly from their IRA to a qualified charity.
Most people now do not itemize their deductions and therefore receive no benefit from making charitable contributions. Thus, utilizing your IRA to make a QCD, you are using income that is subject to future taxation and using it to give it to a charity and not having to pay tax on that distribution.
Implicit in that is that you are reducing the base of the IRA on which future RMDs will be computed thus receiving some tax benefits along the way. So with that I thank you for your time. I apologize again for the snafu and I’m going to pass you over to Emily who’s going to give you some tips and tricks for financial planning.
Thank you, Matt.
So right now is a great time to do what you can to be prepared for a worst-case scenario. And I want to talk to you about three key things to review for your financial health, especially in these times of uncertainty. So the first thing is an emergency fund. Having a solid emergency fund is the foundation of financial wellness. So why is this so important? Well, you really want a good chunk of cash that’s sitting there, easily accessible for unplanned expenses. You want this here to keep you out of debt and so you don’t get derailed cash-flow wise. Your monthly cash flow isn’t isn’t disrupted.
How much should you keep? Well, typically we recommend three to six months’ worth of living expenses saved in cash. And that 3 to 6 months range really depends on the stability of your household income. During these uncertain times it definitely makes sense to hold on to more.
It might make sense to hold on to a year’s worth of living expenses. Probably the more the better. So where should you keep your emergency fund? You want to keep it in cash and you want to keep it separate from any other funds. So you don’t want to keep it commingled in your checking account or commingled with any other earmarked savings account.
Clients frequently asked me “where can I park this emergency fund so that I earn the most interest?” and that’s a really great question, especially in a low interest rate environment and there are high yield savings accounts and money markets account accounts out there that you can utilize but the goal is not earning interest on the emergency fund. It’s just having it there kind of like insurance.
So what if you don’t have an emergency fund? Well, now may or may not be an ideal time to be starting this, but what you want to do is just start where you are today and take baby steps to build it. One of the best ways to accumulate savings is to set up automatic transfers. So through online banking you can set up automatic transfers that coincide with your pay periods that just go from your checking straight into your emergency fund account. I would encourage you to start small and then work up to a bigger amount. It’s getting in the habit of doing those automatic transfers that’s key. The other thing you can do if you don’t have an emergency fund is survey your expenses. So comb through your last few months expenses and categorize them and see where you can trim the fat and cut back spending.
The other thing you can do is stop retirement contributions. I would definitely consider putting your emergency fund of ahead of retirement planning. You might stop making any extra payments on debts that you may have been paying extra on and while now may not be an ideal time for this you want to do what you can do to generate additional income.
So the other thing that’s good to review right now are your debts. So the lockdown has likely changed your income or expenses situation; what you’re spending. So if your income is the same, but your monthly spending has gone down because you’re not commuting. You’re not eating out as much, you’re not going to concerts.
It may make sense for you, if you have a fully funded emergency fund, to start making extra payments on your debts, even if there’s zero percent interest. If you have the capacity to get ahead on your debts, I would encourage you to do that. If you’re in the other camp where your income has dropped or the future of your income may be uncertain and you are struggling making payments on your debts, it’s best to do what you can now. Make payments as you can even if it’s not the full payment. And get in touch with your lenders, let them know what’s going on with your situation and see if there’s any flexibility or negotiation room in there. See if they’re willing to give you some grace. It also may make sense for you to refinance or recast the term of the loan.
We’re in a really low interest rate environment and there are newer and appealing financing terms out there now. So it may make sense for you to look through that. While recasting the term of the loan can potentially lead to paying more interest over time, what you’re trying to do is get your monthly expenses down right now.
So like Drew mentioned if you’re someone with federal student loan debt, federal student loan payments have been placed in forbearance until September 30th. So like Drew’s client’s example, that’s a great planning opportunity to funnel those payments to interest-bearing debts instead. If your student loan debt is your only debt you should continue to make payments to that principal. Because there are newer and appealing financing terms out there, I would urge you to be cautious with this. Don’t consider taking on debt just because the financing options are appealing and so is something new and shiny. You want to make sure it makes sense for you and it frequently makes sense to save up and pay cash.
So the third thing that is good to review during these uncertain times are things that you don’t normally get around to reviewing. So what I mean by this is beneficiaries on your qualified retirement accounts. So IRAs, 401(k)s, 403(b)s, you want to review your beneficiary designations, make sure that you have a person named on there that you want and you want to consider if it’s an option, potentially naming a contingent beneficiary or second beneficiary if the primary beneficiary is deceased. The other thing you want to do is review the titling of any accounts that don’t have beneficiary designations or property. So bank accounts, investment accounts and property, you want to review how are these things titled? Maybe you just got married and you have several things titled in just your name that maybe need to be retitled jointly or maybe you live in a state that allows transfer on death designations (TODs) or payable on death designations (PODs) and that may make sense for your situation. You just want to review those things and stay on top of it.
Finally if you don’t have a estate planning documents, so estate planning documents, when I say that I mean wills, trust, powers of attorney, advance directive, now is a great time to get on top of it and obtain estate planning documents. Estate planning attorneys are working remotely and you can execute these documents now, it’s a great time to do that. If you already have those documents, it’s an excellent time to review them.
Make sure they reflect your wishes and see if there are any room for changes. So those are just three key things that we would recommend reviewing right now in these times of uncertainty and coordinating with a trusted advisory team is always a great way to help get a better perspective on topics like these.
So with that I’m going to turn it back to Matt who is going to discuss some of the questions we’ve been getting about portfolios.
Great job, Emily.
Now we’re going to talk about what actions can I take in my portfolio. And these three recommendations are the same things that we are working with our clients to help them with their long-term goals given the challenging circumstances in which we are living right now.
The first thing we’re going to talk about is rebalancing your portfolio.
And given the current market conditions, there’s been some of the target allocations of cause to deviate from their stated objective. An example of that might be in a typical 60/40 portfolio (60 equities, 40 fixed income), equities might only represent fifty two or three percent and so now is a good time to get it at or near that 60%. And so we just wanted to leave you with a few things to keep in mind as you rebalance. One, and probably most importantly, we rebalance to keep our plans on track.
We suggest you pick a trigger. And triggers either are time triggers such as monthly, quarterly, semi-annually, or threshold triggers. Threshold triggers oftentimes are a certain percentage of deviation from the stated asset allocation.
We also suggest to be sensitive to transaction costs and taxes. In today’s day in age the transaction costs really aren’t too material and don’t cause too much pain, but we do know the taxes can be significant and we want to keep those in mind as well. Lastly, we suggest taking income and cash versus reinvesting it so that you’ve got a pot of cash to rebalance in the future and you don’t have to sell one asset to buy another.
The second recommendation that we are going through with clients right now is addressing individual stock positions. Oftentimes clients have individual stock holdings that may be inconsistent with their target allocation.
And are being held primarily to avoid capital gains tax.
Likely that position or positions are lower in value than they were earlier in the year and that reduces the tax bite. So that might be a good example of something to do right now.
Simultaneously, take the opportunity to tax loss harvest. And what that means is when you have losses in your portfolio match them with your gains. And so in a situation like this, you may have losses to offset some or all of the gain of the position that you want to strategically reallocate. And then when you have the cash to reinvest we suggest using those proceeds to reinvest in diversified assets that are closer to your target allocation and much more consistent so that the plan again stays on track. Now this next recommendation is near and dear to my heart.
And I kind of get excited about it.
So that is considerations of converting your IRA to Roth IRA.
And just so that you know earnings in a Roth IRA are not taxable current. But as in all things in life, there are pros and there are cons of doing everything.
So we’ll talk about that and then we’re going to give you an example.
The pros of doing a Roth conversion are we are experiencing historically low tax rates that are due to increase in 2026. We are experiencing depressed markets, thus making the valuations a little bit more attractive in minimizing the taxes that are paid on a conversion. And it allows for optimal asset location.
And that is location not allocation and we’ll talk about that in the example.
Because our – it creates a current tax liability that ideally is paid out of funds separate from those being converted.
A conversion is subject to a five-year holding period. So if you think you’re going to utilize these funds inside of five years, this might not be the best strategy. And unlike in the past, Roth conversions cannot be undone. Once they’re made, pay the tax, you move on. So now let’s look at a little example here that will demonstrate the power of the Roth IRA.
Let’s assume that on January 1st you owned a thousand shares of XYZ stock in your IRA, your traditional IRA. And it was currently trading at that time at $10 per share. Had you converted that stock on January 1st, you would have paid tax on $10,000. Fast forward to April 1st after the market correction. Now that stock is trading at $5 per share. So if you were to convert on April 1st, you only pay tax on $5,000. But the really neat thing is you still own all 1,000 shares of that stock.
Now this next slide is going to show you the real power of the Roth IRA.
Let’s further assume that on December 31st those shares of XYZ company are now trading at eight dollars per share. The appreciation of the $3,000 post-conversion has occurred tax-free. Zero dollars.
And this is a very good example of what we talk about with asset location.
In this example the asset allocation has not changed.
But the location has. And we have utilized the tax attributes of the different types of accounts.
So this is a very powerful technique.
The last slide here as it relates to Roth IRAs. I just wanted to point out a few other things that make a Roth IRA attractive. First, it allows for flexibility in managing future tax liabilities via tax diversification. And what I mean by that is hopefully when you retire you have assets in three buckets. Those buckets being after tax assets, IRA assets (of traditional IRA assets that is) and Roth IRA assets. All three of which have different tax attributes.
And as you need to raise cash in retirement, having these three buckets gives you three different levers to pull when trying to maximize cash flow and minimize your tax expense. So very, very powerful. Two other items: one, Roth IRAs are not subject to Required Minimum Distributions. So under current law when you have to start taking a Required Minimum Distribution at 72, you do not (out of your traditional IRAs that is) you do not have to take them out of your Roth IRAs. Thus saving taxes. Lastly and not to be morbid, but under current law after you pass away all IRA assets, traditional and Roth, have to be distributed within ten years of your death. Well if assets from the Roth IRA, they can accumulate for 10 years before anybody receives them.
And when they are received it is received tax free. So kind of a silver lining in black cloud. So with that thank you for your time bearing with me twice, and now we’re going to turn it over to Darrell Tierney to discuss what the markets are doing right now. Thank you.
Thanks Matt. Appreciate it. So what I want to talk to you about today is what if this time really is different? So that’s known as the most dangerous question in investing, “what if this time really is different?”
What if we are facing a generational difficult market, generational difficult economy that really only our parents have seen? And what effect does that have on your plan? And so as I think about that I found it helpful to think about, what, are their universal truths about markets? Universal things that we know about that were true before the pandemic that are true after the pandemic. Whether you’re in a thriving economy, a recession, a depression, what things are true that are useful when it comes to your wealth management plan. And I think there are basically four things that are kind of these universal truths. Number one. The future is unknowable. Personally, markets, economy, we don’t know if there’s uncertainty ahead and it’s unknowable. Before the pandemic it was unknowable. It’s unknowable now. I doubt any of us would have guessed a year ago where we’d be right now.
Secondly, the market is volatile. It ebbs and flows. But volatility in the market, is really, it’s a constant. And then the third, I think a third universal truth is consistently timing the market is very difficult. Getting in and getting out at the right times is very, very difficult.
And then lastly the stock market is a risky place in the short term. And for our purpose this afternoon, I consider a five-year window, the next five years. And frankly I think that’s true all the time. I think always pre- and post-pandemic being in the stock market is a risky proposition in the next five years. So let’s look at these a little bit more closely.
So how do you deal with market and economic uncertainty?
So I believe that the global economy and the markets are so complex in today’s world that it’s virtually impossible to make accurate predictions consistently. And so despite what we hear on business television and read and listen to on the news whether we’re going to have a V-shaped recovery or a U-shaped recovery, things are going to be normal in two months or two years. The truth is it’s unknowable. The good news about that is with respect to your wealth management plan. I don’t believe that that is, that that’s a terrible thing when it comes to wealth management.
I think it’s important to realize there’s always going to be uncertainty, you know. Are we facing inflation in the future? Are we going to face a big rally, you know as we pull through this? What’s going to happen? We know there’s uncertainty. I think taking time to try to predict the next turn of the market or the next turn of the economy really is unknowable. It’s kind of a waste of time. What you can do and I think what’s important when it comes to your wealth management plans is to prepare. So what I would advocate is what you want to do is prepare and not predict.
So the question is: how do we prepare for this uncertainty that we know is coming with respect to our wealth management plans?
I think there’s two things that are important. So number one would be you want to make sure in your plan, you’ve positioned yourself for upside optionality. Secondly you don’t want to take any risk that could blow up the plan, the plan breaks, it doesn’t work. So any risk like that.
So what do I mean by position yourself for upside optionality? What I mean by that is you want to have enough in the way of safe assets, meaning cash and bonds, to get you through to a potential recovery. So that you can hang on and not have to liquidate assets when they’re down. And in terms of the assets that would position you for upside optionality, really what I’m talking about here is the classic asset allocation.
So it’s you want to have positions in the equity market that can potentially benefit down the road. And diversified in the way of small companies, large companies, international companies – a broad array; a diversified portfolio.
What is to me the opposite of positioning yourself for upside optionality would be, let’s say you are in the kind of doomsday mode on this and you say this is over. We’re never going to recover to the point we are, I want to position myself a hundred percent in bonds so that I am totally out of the market. The problem with that is you’re making a singular bet on one outcome. So you’re predicting the doomsday scenario and if there is an upside, you’re not positioned to take advantage of it. The flip side of that is just the opposite would be somebody who says “this is the buying opportunity of a lifetime, it’s time to mortgage the house, get every nickel of cash we can and we’re all in the market.” So again, you’ve lost that balance. And I think that’s really important to have a balanced approach to this. Then the last, the second point to make is you don’t want to take a risk that will make your plan fail; do you in. We don’t see this that often but occasionally that happens. It may be a concentration.
I think single stock concentrations are much more dangerous than ever because some of these companies aren’t going to make it through this. For example, if you say I’m putting 40% of my retirement assets into healthcare because I think that’s a great opportunity right now. If that bet doesn’t work out, you’ve got a problem. Your plan is likely to fail. So the final comment I’ll make and I think we just address this head-on.
I mentioned at the outset a universal truth. It’s difficult to talk to time the market. We hear frequently, isn’t it just a good idea? Why don’t we just go to cash wait for this thing to get back to “normal times”. So let why is that a bad idea to go to cash? Let’s take a look at that.
Okay, what we have here, this is a slide that is courtesy of JPMorgan. They put together a fantastic Monthly Guide to the Market and we’re not affiliated with JP Morgan but we like their stuff.
So this this basically this is pre-pandemic and it says let’s look at the last 20 years. That left-hand bar says if you would have made an investment in the S&P 500, 20, excuse me, 20 years ago, your average annual return would have been a just north of 6%. But if we move to the next right-hand bar, you can see if you miss the best 10 days in that 20 year period your return falls from six percent down to just short of two and a half percent. And if we go all the way over to the far right you can see that the return is negative seven percent on an average annual basis. And that’s by missing 60 days in the last 20 years. And interesting, you can see in the box that six of the best ten days occurred within two weeks of the 10 worst days in the market. So the market is a volatile place and it’s virtually impossible. By getting out of the market again, you’ve removed this upside optionality and the ability to guess getting in and getting out, very, very difficult. So I think one of the things that’s helpful is we talk about volatility. Let’s look at volatility.
What does it look like? So this next slide. Basically, this is just a 40-year survey. The black bars represent the calendar year returns for the last 40 years. And if you go over to the far right the year to date column just shows, this slide by the way is as of March 31st, and you can see the market, this is the S&P 500, was down 20 percent at the end of March.
Now what I find interesting about this slide is these red numbers. So below that negative 20 you see that red negative 34, that is the decline in the market from the high point this year to the lowest point. So that’s the peak to trough decline in the market by March 31st. We’d recovered to negative 20 percent and we’ve recovered some since then.
Well, if you look at across this for the last 40 years, look at all these peak to trough declines. You can see there are lots of double digit declines. And some of those double digit declines translate into a positive return for the year, but if we average them all that’s a 14 percent roughly average annual double-digit, excuse me, a 14 percent average decline every year. So that’s what I would consider kind of a garden-variety volatility with you know, some 30s and 40s dropped in there. And so the question then becomes okay, if the market such a volatile place and maybe this is generationally going to be very, very difficult, how do we deal with the market volatility and position ourselves so that we have that upside optionality? And so this last slide I want to show you, this time we’re going to go back and look at 70 years.
This is going back to 1950 and you might put your attention to the green bars. And so this what this is showing is the far left green bar shows in the last 70 years, the worst decline was a negative 39 percent. The best most positive market was positive 47. And then when we roll over to the to the right, the next the next bar shows you they look at every single five-year period during the last 70 years and you can see if we look at an average annual return for five-year-rolling periods of the worst is negative 3, the best is 28 and so forth as we go to the right and look at 10 and 20 year rolling returns.
And so I made the comment at the outset that the stock market is a dangerous place in the next five years and I think this shows that that’s always true. If you need money two years from now and you’ve got it in the stock market, there’s a pretty good chance it will be down and you’ll get clipped when you need it. There’s a pretty good chance, but the longer you put that out there the better off you are. So my mind immediately, if somebody comes in with a million dollar retirement portfolio and they want to withdraw $40,000 a year, I look at that and say well they better have 200 to 500 thousand worth of safe assets that can last them through a declining market and give them time to recover. That they can draw on those assets and give the market plenty of time to recover.
So as I think about that and what if this is kind of the big bad, bad market of our lifetimes, you want to give yourself plenty of time for this positive optionality and I think the key question comes as we think about the uncertainty, it’s not what’s only on with the markets this month, this year, next year. Is it going to recover in two years, three years? It’s where are we going to be five years from now? 10 years from now? If you’ve got your plan setup right, that’s the question. And I think by that point in time realistically, we’re probably down two or three more different uncertainties in our life. So with that, thank you for your kind attention. I’m going to turn it back to Brandy.
Forgot to unmute myself there. All right, we have time for just a couple questions but we have quite a few. So if we don’t get to your question, please feel free to email me, Brandy Ward at windwardfp.com following up from this because we’d love to get to all of your questions. So the first one is for Matt in the first part of your presentation. What was the distribution you’re referring to?
The distribution I was referring to are required distributions because of your age. So 70.5 if it was prior to 2019 and 72 going forward. So in the past if you take Required Minimum Distributions, this year they’re suspended.
By the way, Matt, that would apply also on inherited retirement plans as well as well.
It does apply to inherited IRAs as well, non-spousal inherited IRAs. Okay. The next question I see is for Emily. This person wants to know if you have any specific budgeting software you would recommend if someone wanted to start a budget.
So using budgeting software is probably one of the easiest ways to look back and categorize your expenses because it kind of does it for you. Windward clients get the benefit of using software that we have called eMoney which has budgeting features in it, but some of the other products out there are mint.com and YNAB or youneedabudget.com. There’s also everydollar.com which is Dave Ramsey’s budgeting app. Those are those are all good tools to use you definitely want to use something that you’re attracted to using because you’re going to be using it a lot and I will say while budgeting softwares are fantastic, they’re not for everyone.
So there are a lot of different ways to budget and using budgeting software is just one of those ways.
Awesome. Okay, the last question we’re going to get to and then we’ll have to wrap this up is for Emily again.
Should a client talk to Windward or their attorney about beneficiaries on their IRAs?
They should definitely speak with their attorney. So financial advisors are typically not attorneys. So any kind of legal advice should come from an attorney. As a financial adviser, we can give you some guidance and explain how those work, but it’s best to speak with your estate planning attorney.
I would add to that, we are happy to be a part of that conversation also. We realize a lot of our clients aren’t quite sure what questions to ask and that’s part of our job is to kind of facilitate that as well.
So. All right. And with that we will conclude today’s discussion. If we didn’t get a chance to answer your question or you have specific questions or issues you’d like to address please email me. My email address is on the screen firstname.lastname@example.org. If I can’t answer your question, I’ll pass it along to who can. We’d love to discuss whatever is top of mind for you and we really want to be a resource and a guide through these changing circumstances.
We really appreciate you taking the time to listen to us today and we will hopefully talk to you soon. Have a great evening.