Author: rick.

Have you ever heard of the Setting Every Community Up for Retirement Enhancement Act, better known as the “SECURE Act” affecting your 2020 tax return?  Well, you might want to pay attention because it is now law and probably affects you!

This is another round of interesting changes to the U.S. 2020 tax code. The rules regarding Required Minimum Distributions (RMDs) have changed. For those that do not know, these rules dictate when and how much people must withdraw from their retirement accounts to avoid tax penalties.  Beginning Jan. 1, 2020, the new law moves back the age at which you must begin withdrawing money from your qualified retirement accounts from age 70 ½ to 72.  If you turn 70 ½ in 2019, you will still need to take your RMD for 2019, no later than April 1 of 2020.  If you are currently receiving RMDs (or should be) because you are already over age 70 ½, you must continue to take RMDs.  Only those who turn 70 ½ in 2020 (or later) may wait until age 72 to take their Required Minimum Distributions. So, for people who turned 70 ½ in 2019, there is no change.

Beginning with the 2020 tax year, the law will allow you to contribute to your traditional IRA in the year you turn 70 ½ and beyond, provided you have earned income.  You still may not make 2019 (prior year) traditional IRA contributions if you are over 70 ½.  This plays well for both business owners and those who work past 70.

Upon the death of the account owner, distributions to individual beneficiaries must now be made within 10 years.  This is a big change from allowing them to take it over their lifetime (a.k.a. stretch). There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner.  Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.

The new law also allows penalty-free withdrawals from retirement plans for birth or adoption expenses up to certain limits. The new rule allows each parent to use the $5,000 exemption, which means a couple could take up to $10,000 out penalty-free if they each had separate retirement accounts. While new parents can opt to repay the withdrawal amount, this is not a loan and does not need to adhere to the 401(k) repayment rules.

“PLAN EARLY AND PLAN OFTEN!”™

Over the past few months, I’ve been listening to clients, laypersons and politicians talking about how well the economy has done because of deregulation and tax cuts.  While I believe that taxes needed to come down and there were some cases of over-regulation, I’ve been a skeptic of tactic and results.  As a skeptic, I thought that I ought to research a bit of this myself.

Three things came to mind as constant sources of bragging rights.  Gross Domestic Product, Employment and the stock market.  Looking for some quality charting on the subject is not hard.  The Bureau of Labor Statistics, BLS, puts out labor analysis at least annually. The Bureau of Economic Analysis has charts on GDP quite regularly.

Why charts?  Charts depict trend and I believe that we’ve been in a long-term trend that cannot be credited to tax cuts or deregulation.  If tax cuts were fueling growth in any of the above the charts would display the rate of change in an upward steepening of the slope.

The first graph is a BEA chart of the GDP from 2008 to present.  Note that just a bit after 2009 marks the beginning of the Obama presidency, just after 2017 marks the end of Obama and beginning of Trump’s presidency.  If a tax cut was driving productivity we should see a change.  What we’re looking at is a continuation of the trend.

FRED Graph

Moving on to employment, I’ve pulled two current charts.  The first is simply the US Civilian unemployment rate from 1990 to 2019. The last three recessions are marked in light blue.  Note that unemployment bottoms and starts increasing just before a recession.  Since a recession is defined as an economic decline that is identified by two successive quarters of decline in the GDP, it only makes sense that we have a couple of quarters in an uptick in employment prior to the recession being declared.  My bigger point is that between 2010 and today, the negative slope of unemployment has not changed much.  Here are some BIS charts (BLS employment Charts)

CivGraph

The same goes for Unemployment by ethnicity:

EthnicGraph

Now, let’s compare market performance based upon the S&P 500 index to the aforementioned charts. Here are some things that I believe are of note.  The chart begins essentially the beginning of the Obama years and shows a steady rise through the election in November of 2016 (1st vertical bar).  From President Trump’s election, we continue a nice steady rise to the next vertical bar in December of 2017 and on until the first of 2018.  That marks the passage of the Tax Cut and Jobs Act of 2017. 

S&P today

Many years ago, I heard a quote or statement that presidents get way too much credit and way too much blame. But, things they do can affect us and our retirement accounts.  Look at the right side of the last graph (in fact, all graphs).  After the tax cut, stocks are down.  Neither the GDP growth rate nor the employment growth rate seems to have changed from their positive slopes.

Many believed that a big corporate tax cut would make us more competitive in the world.  My contention is that we have always been competitive.  Unless we alienate buyers from us and send them to other sellers, we’ll always be competitive.  This unfortunate lesson might be unfolding in the soybean industry right now.

I contend that the timing of the cut was ill-timed.  We were sub-5% unemployment and growing our GDP.  That hasn’t changed.  That sort of cut would have been better in 2009 when we were in a recession and had a 10% unemployment rate.  The money hasn’t gone toward hiring new employees, bring part-time employees to full-time or much corporate infrastructure.  The money has gone to stock buybacks which prop up corporate share values of officers, board members, and major shareholders.  As I was wrapping this piece up, I saw a Fortune article that confirmed my opinions.  https://finance.yahoo.com/news/why-trump-apos-1-5-120826303.html

Ronald Reagan cut taxes twice but increased them 11 times.  Most agree that the 1981 cuts helped pull us out of a recession that began under Carter.  In other words, a well-timed stimulus.

I’m sure we will be waiting several years to determine if the 2017 Act will perform as advertised.

10/09/2018

WiserAdvisor announces that Richard Oxford of Richard Oxford Financial has been awarded admittance as a member of its directory of financial advisors.

Financial advisors are granted admission into WiserAdvisor (www.wiseradvisor.com) based on their credentials and qualifications. All members offer their services to investors with a fee rather than solely with commissions, allowing them to assist investors with a variety of different investment options. All members are also properly registered with the SEC, FINRA or other regulatory organizations.

Since 2003, WiserAdvisor has focused on taking much of the guesswork out of finding a qualified financial advisor or financial planner. This is done both through the stringent admittance guidelines, as well as through the information provided to investors about each member advisor. All members must complete an extensive profile outlining their services, qualifications, and credentials, including their educational background. 

Because of the strict standards that a financial professional must meet in order to become a member, WiserAdvisor only admits a select few high-quality financial advisors and financial planners. More than 600,000 professionals can provide insurance and financial advice. Less than 1% have been granted membership into WiserAdvisor. 

Thousands of investors use WiserAdvisor each year to find local financial advisors and planners and trust that WiserAdvisor will help them find the right professionals to meet their unique needs.

About WiserAdvisor.com

WiserAdvisor is an online service that connects investors to local financial advisors and financial planners. It is an independent and free service provided to investors, allowing them to find local professionals who can help them build their portfolios, plan for retirement, manage their estates, or to help them with other investment issues. More information about WiserAdvisor and its services can be found at www.wiseradvisor.com.

About Richard Oxford Financial

Richard Oxford is a financial advisor located in Scottsdale, AZ.
More information about Richard can be found at http://www.wiseradvisor.com/advisor_profile_state~id~1885741.asp and at www.richardoxfordfinancial.com

 

Stacking investment returns against index performance is an inherently flawed approach to benchmarking. The forward-thinking innovators at Flexible Plan Investments give clients a more realistic way to assess performance.

 

Founder and President of Flexible Plan Investments Jerry Wagner posed two questions:

  1. Do you care about risk?
  2. Are you investing to reach a goal?

If the answer to both is yes, then it isn’t sensible, he says, to use the Standard & Poor’s 500 or any other index as a benchmark of success. First, regarding risk, the S&P 500 was no stranger to steep market declines in the last decade. And when it plummets 50 percent or more, which it has done twice in recent history, it’s not an index one wants to be mirroring.

“Return is important, but you can’t ignore risk,” says Wagner. “Think about a lottery ticket. Your return can be almost infinite, but your risk is almost 100 percent. You always have to view potential performance in terms of relative risk.”

Second, if you’re investing to reach a goal, which most investors are, then does it make sense to gauge your success against an index that isn’t relevant to that goal?

“The definition of true benchmarking is whether or not you’re on target to reach your goal, not whether you measure up to an arbitrary index,” says Wagner.

OnTarget Investing: Customized Benchmarks

Defining realistic goals and setting appropriate benchmarks is the premise behind the OnTarget Investing system at Flexible Plan Investments, a nearly four-decade-old active investment management firm that holds more than $2 billion in assets under management.

Based on financial goals and time horizons dictated by the client at the onset of the investing relationship, the firm produces regular, color-coded charts that show clients where their portfolio stands in relation to their long-term goals.

The key here is long term. Subjecting oneself to the unfair expectations of short-term results can lead to emotional, knee-jerk decisions. In a perfect world, Wagner says, investors would be encouraged to only review returns once a year, not even quarterly. Reason being, true market highs and lows are only fully known in hindsight, and often results cannot be properly evaluated in quarterly—much less daily—snapshots.

“If you’re measuring against an index, most investors get overly confident at market tops and overly discouraged at market bottoms,” he says. “But when they can evaluate their progress based on a simple chart that tells them whether or not they’re on target to meet their specified goal, it’s easier to sleep at night.”

My firm, Richard Oxford Financial, works with Flexible Plan and offers the OnTarget Investing program to clients.

“Plan Early and Plan Often!”™

As Seen In Bloomberg Businessweek, Fortune & Money

The information provided is intended to be general in nature and should not be construed as investment advice from Flexible Plan Investments Ltd., Richard Oxford Financial or Dutch Asset Corporation.  Inherent in any investment is the potential for loss as well as the potential for gain. Prior to investing, read and understand the risk considerations in our Brochure Form ADV.

Bear Market/Recession

A bear market is considered to be a time when the S&P falls at least 20% before it begins to recover. Because the market is constantly ranging in a several percentage point range, the start of the decline and recovery are difficult to pinpoint at the time. They are very easy to see in hindsight.  On the other hand, recessions are two consecutive quarters of declining GDP.

Shown here are charts on the last two bear markets which happened to also be recessions.

The Last Two Bear Markets!

As you can see from the last two bear markets, market volatility makes it difficult to pick tops and bottoms in real time.

Since The Great Depression, September 1929-June 1932, we have had 14 bear markets.  The average duration of those was 17.0 months with an average time between of 49 months.  The average decline was 36% and the average time to break even was 43.2 months.  I’m seeing The Great Depression as an outlier that would significantly skew the math.  That bear market lasted 33 months, had an 86.7% decline and took 25 years to recover. In fact, we had 4 other recessions before the market recovered to the 1929 level.  Ouch!

Why should you care? Unless you want to be doomed to repeat the mistakes of your ancestors, you need to change your behavior.  Markets work in cycles. Whatever titles someone chooses to use, the cycle looks like this:

This chart alone shows a strong need for active management.  Passive managers would have you believe that buy and hold works for everyone.  I can tell you why it doesn’t. First, individual investors are emotional about their money.  Who cares more about your money than you?  This drives them to make mistakes.  The second reason is that no single person has an unlimited timeframe until they need the money.  If so, I would say split between the SPX and the QQQ’s and ride the storm.

Investor Psychology

The unfortunate reality is that investors’ fears get the best of them and they sell at the wrong time.  Then as the market recovers, greed takes over and they buy at the wrong time.  They hear the news, see the market and believe it should go on forever.   The classic example is my “former” barber and client who I could not convince to not buy gold when it was at $1900 in 2011.  Try as I might, logic didn’t overcome greed. He believed he would miss out on a fortune. This is typical investor psychology.

This is a graphic representation of a full market cycle.

Market Cycle Clock

Look at the second chart again and ask yourself where you believe we are in the cycle? We’ve obviously moved out of the “Easy Money” phase and toward “Raising Interest Rates”.  Does that portend a recession? Remember what I said earlier.  It’s nearly impossible to pinpoint the top or bottom while living through them.  Depending upon how you count, we’re about 113 months into this bull market.  Remember the average is 49 months.

Does this put us in Market Correction territory?  I know what I think.  Tell me what you think!

Always remember, there are Advisors who actively manage the cycle!

“Plan Early and Plan Often!”™

I met with a potential client this week and realized that we were speaking a different language.  This isn’t the first time that I’ve seen the confusion on investment terms.  I’ve always tried to be careful to not devolve into “Work Speak”.  Work Speak is that alphabet soup of acronyms and terms that all professionals share among themselves.  Outsiders do not normally understand and sometimes we need to step back and use explanations.

Here are a few terms that I find myself explaining on a regular basis.  As you can see above, in my community, we’ve got thousands!

  1. A fiduciary is obligated to act in the best interest of their client and avoid any conflicts. They cannot make a recommendation based simply upon higher compensation.
  2. Investment Advisor Representative (IAR). This acronym refers to people who work for investment advisory companies and provide investment-related advice.  They are regulated by either their state or the Securities Exchange Commission (SEC), registered by the states in which they do business, required to act as fiduciaries to their clients, are compensated with fees, and must work through a Registered Investment Advisor (RIA) firm.
  3. Registered Representative (RR). This acronym refers to individuals working for a brokerage company and conducts transaction-based (commission) services for their clients. They are regulated by FINRA, registered to a sponsoring firm (Broker), not required to act as a fiduciary (but may), compensated with commissions from client transactions.
  4. Registered Investment Advisor (RIA). This is a financial firm that has registered with the SEC or state authorities. By law, RIAs have a fiduciary duty toward their clients.  This means they have a fundamental obligation to provide suitable investment advice and always act in their client’s best interest.
  5. Fees are the charge incurred for investment advisory services.  Fees are typically a flat percentage based upon total assets managed.
  6. Commissions are a transaction-based charge for services rendered during securities and insurance transactions.  In a securities or variable annuity transaction, the commission usually reduces the total number of shares/units purchased.  In a fixed insurance transaction (fixed life or annuity), the commission is paid by the insurance company and does not reduce the money paid into the policy.
  7. Risks are typically the quantification of the chance that an investment outcome will not be as expected.
    1. Interest rate risk is the possibility that interest rates will rise during a holding period and drive down the value of the security.
    2. Market Risk is the chance of a decline in investment value because of a development that affects the entire market. Think Tsunami, a plane crashing into a building, etc.
    3. Sector Risk is a similar risk that affects a specific sector of the market. Think Soybean tariffs.
    4. Company Risk is the chance that bad governance, poor decisions, declining earnings or other factors drive down the equity value.
    5. Credit Risk is the risk that a company or government entity will issue a bond or note that they cannot pay. Think of Italy, Greece, Brazil, or Venezuela.
    6. Inflation risk is the potential loss of purchasing power because your investments do not keep up with inflation.
    7. Reinvestment risk is the possibility that at the time for reinvestment, you cannot secure a similar rate of return on your investment. Think: Selling a 5% bond and only able to buy a 4% bond at the time of reinvestment.
  8. Risk Tolerance is your ability to withstand negative market swings in order to get the highest overall long-term return. Typically, the higher your required return, the higher the necessary risk tolerance.
  9. Securities are fungible (tradable with similar assets), negotiable financial instruments that represent some type of financial value. They are often in the forms of stocks, bonds or options.

If you have an unusual one, try to stump me.  Send me a note and I’ll try to help.  You can find more terms scattered throughout here.

“Plan Early and Plan Often!”™

You may not realize that the very first teacher pensioner for the state of Arizona was in 1912.  There were no deposits, or requirements other than having worked 30 years as a teacher.  I wonder how far that $50 / month went in 1912.

It appears this continued (at $50/mo) until 1943 when the Legislature created the Teachers’ Retirement System.  I wonder how far $50 went in 1943.  This is when teachers began contributing a portion of their salary with a variable employer contribution rate. This pension merger with the Arizona State Retirement System (ASRS) 10 years later.

The ASRS was created to provide benefits to state employees as well as for political subdivisions that agreed to sign on.  This included the state university system and some of the smaller colleges.  Today, all of the full-time state employees, school districts, community college districts, state universities, counties and most of the cities and towns are a signatory to the ASRS.

Fortunately for participates, the ASRS has been well run to this point. Some of this has been good fiscal stewardship, some has been continuous increases in contribution rates.  In 1943, the maximum employer contribution was 5%, last year it was 11.34% and this year 11.8% (effective July 1, 2018).

As a Financial Advisor, one thing that I do know is you need to plan for all contingencies.  During the “Not-So-Great Recession” (I may need to © that), we saw the following results from very well-funded pensions. Here is a little piece of a longer article “The Great Recession and Public Pensions” by Tyler Bond.

  • Florida drops from 101.4% funded to 84.1% funded
  • New York drops from 101.5% funded to 94.3% funded
  • Oregon drops from 112.2% funded all the way down to 80.2% funded

This was a during a two-year market retrenchment.  As of June 30th, 2017, Arizona was only funded for 70.5% of its liabilities. Arizona’s fund dropped from $25B to $17B in the last recession.  That’s a 32% drawdown.

I also know something else important.  In the almost 11 years since her early retirement, my wife has never had a pension increase.  Furthermore, her share of the cost of insurance has gone up several times.

Never think that your access to your defined benefit plan (pension) is locked in stone.  It has changed

several times over the last 106 years and will likely change again.  My fear is that it will not be to your benefit.

“Plan Early and Plan Often!”™

A Story of 403b v. 457

People who work in the public non-profit sectors may have a choice in the Defined Contribution Plan (403b or 457)from their employer.  We’re often asked which is better or what makes the most sense for me and my family.  Like most things in the financial world, “It depends!”

Defined Contribution plans come in many flavors.  But, for public employees, it basically boils down to 403(b) Plans, 457(b) Plans (both shortened herein). Federal employees have access to Thrift Savings Plans (TSP). I’m going to explain the features and benefits of each of the first two plans and save TSP for a separate article.

A 403b plan is typically offered to government employees, employees of privately owned nonprofit businesses and churches. This would include government employees at almost any level including public school employees. Like the well-known 401k, 403b plans are a type of “defined-contribution plan”. All of these plans allow employees to shelter money on a tax-deferred basis for retirement. You put untaxed money into the plan and it grows “tax-deferred” until withdrawal. These plans became law in 1958. Originally known as tax-sheltered annuities (TSA) or tax-deferred annuities (TDA) plans, they could only be invested in annuity contracts at that time. These plans are most commonly used by educational institutions.  I can remember my mother-in-law having those as late as the 70’s.

457b plans are offered to state and local government employees and are a form of deferred compensation.  In other words, you defer your current compensation to a future date.  In addition, you can invest the deferred compensation and grow it tax-deferred until you withdraw at a future date.

Both plans have two types of deferral:

  • Non-Elective Contributions are contributions made by the employer in the employee’s name.
  • Elective Deferrals are contributions determined by the employee and withheld from their paycheck.

PROS

  • Both plans offer deferral of current taxes and tax-deferred growth
  • 403b plans have a maximum employee contribution of $18,500 for 2018
  • 403b plans can have additional matching funds added by the employer raising the aggregate total to $55,000/year in 2018
  • 457 plans have a maximum total contribution of $18,500 for 2018
  • Both plans have Catch-up provisions for people over 50.  Allowing an additional $6,000/year
  • 457 plans are not ERISA governed plans and have no early withdrawal penalty
  • 457 plan allows for a double catch-up ($12k/yr.) for people who have under contributed over the life of their plan
  • Many 403b plans have loan provisions. The maximum under the law is $50,000 or ½ of your account (whichever is less)

CONS

  • 403b plans have a 10% tax penalty for pre- 59 ½ distributions (in most cases)
  • Both plans require a minimum distribution (RMD) each year after the year you attain 70 ½ years of age. The percentage of distribution goes up each year after that.
  • You must take your RMD whether you want to or not
  • Not taking RMD subjects you to a 50% tax penalty on the amount you did not withdraw. OUCH!!
  • RMDs can subject you to the extra taxation of Social Security Benefits
  • You may have limited investment choices (more later)
  • Withdrawals are treated as ordinary income when much of the growth is actually capital gains

SUMMARY

All of this is informational and not an attempt to dissuade anyone from joining a plan.  These plans are probably the best any of us will see for saving toward retirement.  As I said earlier, the plan you pick will depend upon many things, including Marital Status, age, health, prior savings, future plans (ie: financial plan), spouses access to a plan, intended retirement age, part-time work in retirement and more.

Your employer may offer both plans.  But, inside each plan is a host of offerings from various annuities to brokerage plans.  Each of these plans has their own pros and cons.  Wading through this muck often requires professional advice.

“Plan Early and Plan Often!”™

The IRS just gave guidance that a “nondeductible” IRA may still be converted into a Roth IRA.  We have had our concerns that the new tax codes might have changed the IRS interpretation.

Until 1997, taxpayers over a certain level of income were no longer able to deduct their IRA contribution.  Many advisors thought that the rule was that the higher income earner could not open an IRA, which was incorrect. Note, that they were still able to make the contribution but simply lost the ability to deduct them.

Why would anyone open an IRA that they could not deduct?  Well, it still allowed tax-deferred growth after it was opened. It was a “tax-deferred annuity” that could be invested in any way that an IRA could be invested.  With the creation of a Roth IRA (1997) and the Roth conversion rules that developed afterward, the planning community spared no time in putting two and two together. Now we could convert the “excess” IRA contribution that had never been deducted into a Roth IRA. The future growth would be “tax-free” instead of “tax differed”.  Some refer to this as a “Back-Door Roth”. This allowed a way for Roth contribution for people who would previously not have been allowed to contribute.

With some of the changes in the new tax code, the planning community wondered if that ability had been forfeited.  The ruling came down in favor of allowing that to continue.

So, at least that part of the planning race is over until 2025!

The changes to the tax code have left bits and pieces like this for clarification that will take years to decipher.  Even grander in scope are new sections of the code like 199A, and new terms of art like “QBI” (Qualified Business Income) that will need to be further defined.  That endeavor will take so much time that several years of business returns will be filled without reliable guidance, so battles over letter audits will likely continue until 2025 and after.  Then, it all sunsets and goes away. We are back to the 2017 tax code. Right about the time we actually understand what we’re doing and reframe our business tax practices.

What should the Trump tax code be nicknamed?  “Finish Line 2025”!  Or, “The Constant Confusion of the American Taxpayer Act”.

So, if you have never used a tax planning firm in the past and have just used tax preparation firms, you may want to rethink that. If you need proof, consider that H&R Block just announced the closing of 400 offices and their stock has dropped significantly in value as a result.

“Plan Early and Plan Often!”™

/* ]]> */