The Weekly Wealth of Knowledge is your download of this week's most important topics related to financial planning, the markets, and our community. In this issue:
- Silver linings of economic disruptions - Required Minimum Distributions (3 minute read)
- Market Update - "Where do we go from here?" (4 minute read)
- Technology partner spotlight (2 minute video)
Silver Linings of Economic Disruptions
This month we are focused on timely financial planning “action items” that everyone can act on given our current economic environment. Our last “to do” for the month is skipping your Required Minimum Distribution (“RMD”) to lower your taxable income. An RMD is a distribution you are forced to take from your retirement accounts every year once you reach 72 years of age. The amount is calculated using a formula that looks at how old you are and how much money is in your accounts as of the last day of the previous year. Since your RMD is coming out of your retirement accounts it is a taxable distribution – and the bigger your retirement accounts are the bigger the tax hit.
When congress passed the act SECURE last year it moved the starting age from RMDs back to 72, for 70.5 year old (unfortunately, if you fell in the gap between 70.5 and 72 and had already started taking RMDs you had to continue). The 1.5 years delay is a big benefit in itself (see our blog on Roth conversions), but in the more recent CARES act, congress eliminated the need to take an RMD at all in 2020.
The question then becomes – if I do not need the funds from the RMD should I still take it? That depends on your other income (employment income, pension income, annuity income, etc.). If you other income is low or non-existent than you should take some money out of your retirement accounts, but maybe not the full amount of your RMD. Taking some out can keep you in the lower tax brackets, while still reducing the amount of money in your retirement accounts (which will be used to calculate next years RMD). If your other income is high, than the benefit of skipping will likely outweigh the downside of having a slightly higher RMD next year (it would be higher since you didn’t take anything out. Your year end value will be higher and thus the amount you have to take out will be as well).
If you have questions about your RMD in 2020, how much it is or whether or not you should take it, we are here to help! Don’t hesitate to reach out to your advisor to find out more and put a plan in place.
Market Update - "Where Do We Go From Here?"
“Never confuse a single defeat with a final defeat.” — F. Scott Fitzgerald
The economic struggles in our country are among the worst we’ve ever seen. In April, a record 20 million people lost their jobs, and 36 million people have filed for unemployment since the COVID-19 pandemic struck in mid-March. Record drops in consumer confidence, manufacturing, and spending are all adding to the immediate economic fallout. Specific industries have been devastated, with names like J.C. Penney, J.Crew, and Neiman Marcus filing for bankruptcy.
Clothing sales are down 89%, furniture sales down 66%, and restaurant sales down 49% from this time last year, according to the United States Census Bureau. Yet, as F. Scott Fitzgerald wrote, these many single defeats won’t necessarily add up to the final defeat. Our country has survived many trying times before, and we are starting to see glimmers of hope on both the medical and economic fronts. Our resolve and fortitude will once again shine, as we head toward better times in the second half of 2020.
More testing for COVID-19 is needed to help identify infected people and to stop the virus from spreading. As testing has soared, the number of positive COVID-19 results as a percentage of total tests has trended lower, and that percentage consistently has been beneath 10%, according to data from the COVID Tracking Project. In addition, doctors have developed a “toolbox” of drugs to help provide patients a better chance at survival. Antiviral drugs like remdesivir in combination with other drugs are showing significantly better results now than just a few weeks ago. The World Health Organization has reported “potentially positive data” in several treatments. Although a vaccine could still be a year or more away, human drug trials are underway with encouraging initial results.
In the face of the devastating loss of human life and historically weak economic data, however, the S&P 500 Index has experienced one of its greatest short-term rallies ever, up more than 30% from the March 23 lows at its recent peak. Based on historical trends, a warranted correction in stocks over the coming months may be possible. Stock valuations are historically expensive, tensions are building between the United States and China, the stock market’s momentum is showing signs of waning, and we’re entering the historically weak summer months—all of these are reasons to be alert.
History bears this out. All major S&P 500 bear markets in the past 60 years had a significant bounce off the market lows, followed by a correction of about 10% on average before another surge higher. Based on this historical trend, a market correction of 8–12% after the recent big rally may be likely over the coming months.
While current economic data may sound bad, it’s important to remember it is backward-looking. Real-time economic data points such as public transportation, traveler data from the Transportation Security Administration, fuel sales, railroad traffic, and federal tax withholding are all showing improvement as the economy begins to re-open.
Finally, small businesses are the lifeblood of the US economy, and the Bureau of Labor Statistics shows they employ 47% of all private sector jobs. Recent data showed small businesses are as optimistic about the next six months as they’ve been in 18 months, suggesting the worst may be behind us, and a growing demand for their products and services could be brewing. The pain from this recession is impacting all of us, but better times are coming.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of May 19, 2020.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Technology Partner Spotlight - An Interview with Charlie Rocco
Like other businesses during the Pandemic, we were forced to shut our office down for the safety of or staff and resume work remotely. Although we did have a contingency plan in place, Aegis Technology stepped in to ensure our entire staff was ready to go on day one from a technology standpoint. Listen to the interview with or own Charlie Rocco, that was put together by Datto, one of Aegis' technology vendors...Enjoy! (you don't need a Facebook account to view)