Helping you achieve your personal vision based upon your individual needs, goals and risk tolerance..

Pandemics & Portfolios: Fear & Facts

We understand that market volatility, and uncertainty with the response to the Coronavirus (COVID-19) can be unsettling. We want to remind you that we are here for you, your family and your friends. Part of this is to provide resources to help you feel ready and safe in the days, weeks and months ahead. We will continue to provide resources via the internet, including our Coronavirus Covid-19 Resources Page and Recording of the March 12th Don Connelly event. As always, please reach out to us with any questions, concerns or if we can otherwise be of service.

There is a lot of information, and misinformation, floating around regarding the Coronavirus, the broad markets, and the economic outlook. This is a rapidly evolving situation. As always, we are here for you and your family and are happy to answer any questions and address any concerns.

Below we review some of the main questions people are asking us. Before we get into the details, our team wants to thank everyone for their kind words of support and well wishes. 

Carver Financial Services, Inc. has been in business for 30 years and has weathered many storms by keeping our focus on the well-being of our clients, our team and our community. Our firm was founded with the vision of making lives better. One of the primary ways we do that is living by the mantra of Always Be Prepared—whether in our planning, our training or our mindset. In light of the recent developments around Coronavirus, the necessity for preparedness is clear. We are doing everything possible to provide information to help you feel ready and safe in the days, weeks and months ahead.

We will continue to reach out to you for your regular reviews. These may be done in person, or if you prefer not to come in person, we can do reviews via Skype, Zoom or phone. We are closely following all guidelines and recommendations laid forth by the Center for Disease Control (CDC), the World Health Organization (WHO) and other national and local government organizations to protect our employees and those who visit our office.

Our Personal Vision Planning® process includes holding cash for near-term needs. While this can lead to a portfolio underperforming the index when things go straight up, it can help lower volatility when things go down. We believe the current market environment is offering smart investors three potential opportunities to benefit, which we discuss below.

The Stock Market Is Up More Often than It Is Down

The volatility we are seeing is not unexpected, although the speed at which it has happened is. This is why we have worked with you to have fixed income and cash available to help balance your portfolio. Our Personal Vision Planning process takes into account market and portfolio corrections like the one we are experiencing now—even though we understand that the drop in values may be unsettling.

A market correction is often defined as a 10 percent pullback from a recent peak. A bear market is a period when the market falls by 20 percent or more. Yet a correction doesn’t necessarily mean a bear market is imminent. In fact, history shows us that selloffs are nothing out of the norm. Data from the Schwab Center for Financial Research show that there have been 22 market corrections since 1974, and only four of them—occurring in 1980, 1987, 2000 and 2007—eventually ended up as bear markets.

How the Current Volatility Compares to Past Situations

The recent market volatility is attributed to concern about the Coronavirus. Although we don’t know what the human or financial impact will be at this point, we can look at other recent epidemics and the longer-term impact they have had.

The 2009–10 flu pandemic, or Swine Flu, began on March 17, 2009, in Mexico. At that time, the United States was emerging from the 2008 financial crisis. The virus peaked in this country in October 2009, before officially ending on August 11, 2010. From the start of the virus to its finish, the Dow had risen more than 40 percent (First Trust chart).

March 9, 2020, was the eleventh anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007–09. There are, however, stark differences between 2008–2009 and now. In 2008, there were serious challenges to our economy with the sub-prime loan crisis. Today the economy is showing some of the best numbers in more than 50 years, on everything from unemployment to corporate profits. The recent drop in oil prices will likely help today’s situation, as will the proactive steps the government is taking to bolster the economy.

Another big difference between now and 2008, is the prevalence of social media and the increased number of media outlets, private blogs, and social media, all of which are competing for attention. This causes a lot of dramatic and often incorrect information to be put out.

Look for the Current Opportunities

One upside to uncertainty is that it can create an opportunity. Here are four facts to consider:

  1. Markets move on perceptions and uncertainty in the short run, but on fundamentals in the longer-term. We believe that the fundamentals are very strong, and this will reflect in the valuations over the longer-term. As such, the current environment can be a good opportunity to explore if it fits your individual situation.
  2. The volatility we are seeing is not unexpected; that is why we have worked with you to have fixed income and cash on hand to help balance your portfolio. Our Personal Vision Planning process takes into account market and portfolio corrections like the one we are experiencing now. Therefore, we are not recommending any major adjustments.
  3. Market corrections may provide opportunities for investors, including an opportunity to rebalance or invest at lower valuations, to make tax swaps, to convert IRAs to Roth IRAs with less tax impact on the lower valuations, and to rebalance your portfolio, if appropriate.
  4. Although there is concern about a global slowdown due to the Coronavirus, we have seen a typical pattern with other epidemics, where markets dip and then rebound significantly within 12 months. While the past does not guarantee future results, it can be instructive.

We Must Respond to Uncertainty with Calmness

The common thread between the past and the present market volatility is uncertainty—we simply don’t know where, when or how these phenomena will play out. In our experience, markets can handle bad news, but uncertainty is the one thing in this world that markets hate and fear the most. We have no control over the uncertainty, but we can and should have perfect control over how we respond to it.

Part of what drives feelings of anxiety is lack of information. Because the Coronavirus is new, many questions remain about the illness it causes. The more people learn, the better they feel. We have filled-in some of the blanks, it seems, like who it affects and how it spreads. We know who is more vulnerable and who is less vulnerable.

There have been at least four precipitants of the current decline:

  1. The outbreak of a new strain of virus, the extent of which can’t be predicted
  2. The economic impact of that outbreak, which is equally unknown
  3. The onset of a price war in oil
  4. Uncertainty about the 2020 election, both for president and also for the House and Senate

When a danger or threat is approaching gradually, it tends to be more frightening than when it shows up all at once. The good news is that, for most people, the Coronavirus is generally mild, and its flu-like symptoms of fever and cough do not last long.

We will ride this out together and stay calm. The last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is—you guessed it again—sell. We understand that sometimes the inclination is to ‘stop the bleeding’ or to ‘wait for it to get better’. Ultimately this can cause far more harm than good. If you have concerns, please reach out to us. We will contact you if we feel adjustments are needed.

We Are Here for You

As always, we welcome your questions around this issue or any other matters. While we expect continued volatility in the broader markets, we also know that missing just a few of the best days has a very negative impact on returns over time. It is impossible to time markets and so we encourage you to stick with your long-term plan, while we continue to rebalance and reallocate as necessary. The mainstream media, social media and sometimes our friends will continue to focus on the negative, short-term and often speculative information. The media’s role is to sell advertising and not to inform. We will continue to provide resources and information via our website, personal calls, and planning meetings.

Thank you, our clients and friends, for being the most important part of Carver Financial Services. We are here for you and look forward to speaking with you in the near future. We recognize that the uncertainty with the spread of the Coronavirus and the current market volatility and can be distressing to many. We are also happy to speak to your friends or family, without cost or obligation, if they have questions or concerns—whether or not they are clients. We are always stronger together and look forward to working through this current situation with you.

For more resources, please visit our Coronavirus Covid-19 Resources page.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Carver Financial Team, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Converting a traditional IRA into a Roth IRA has tax implications. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

This Time It’s Different

After more than 30 years in the financial services industry, it is clear that the Media will always focus on the short-term, negative and sensational. 2020 is no different – the media would have you believe that we are facing new issues ranging from Coronavirus to the impact of social media.  

Newsweek wrote a post-recession article that said:

“The economy is booming, and Americans revel in prosperity after bouncing back from a recession, although not everyone is participating. Advancements in technology are changing the way we live, and there is hope that the new century will bring even more progress. But anxiety lurks beneath the New Year’s optimism. Will these new technologies change the world beyond recognition? Has the environment been dangerously damaged? A global epidemic is raging, with no cure in sight. And in the business world, the public wavers about whether to admire or hate a tycoon who’s somehow gained control of one of the most important economic engines of the century.”

Sound familiar? Did you think the reporter was writing about social media and the Coronavirus?  This article was actually written in December of 1899, 121 years ago! The business titan mentioned was John D. Rockefeller (not Donald Trump), the technology concerns that were discussed had to do with the Industrial Revolution, not social media and the internet. The “global epidemic” was Polio, not Coronavirus.

Sir John Templeton famously said, “The four most dangerous words for investors are ‘This Time It’s Different.’” Markets move up when people are investing and move down when there is a concern. Not only does the pattern, repeat but the types of events and concerns do as well – whether fear of a pandemic or concerns about new technology or immigration. The issues people worried about 121 years ago, and farther back, are not that different from those that people are concerned about today- technology, pandemics and even immigration. The more things change, the more they stay the same.

In addition to the concerns of the Polio pandemic, Immigration was also a concern in 1899. Many were concerned with the large influx of immigrants. The cities were rapidly filling up with settlers from Poland, Russia, Germany, Ireland and Italy and many viewed this as a threat.

Increased Volatility Is Likely

As we move toward the November 2020 election, we expect to see increased volatility in the broader markets, which is reflected in your portfolio. We have developed and refined a process that accounts for this volatility. Although many firms have moved to standard models, we continue to take a customized approach to your planning, so we are prepared for any expected needs you may have.

It’s important to note that as portfolios and the level of the broad indices have increased in size, relatively small changes reflect as larger dollar or point swings.

No doubt the media will focus on the larger point swings with apocalyptic headlines portending doom and gloom and that the changes may not be more than normal movements.

For example, on August 14, 2019, the headlines were dire:
  • “Dow Plummets 800 Points on Worsening Global Recession Fears” (Fox Business)
  • “Dow Plummets More Than 800 Points on Recession Red Flag” (New York Post)
  • “Dow Tanks 800 Points in Worst Day of 2019 After Bond Market Sends Recession Warning” (CNBC)

Yet the drop was only about 3% – If we look at market corrections over the 90 years from 1928–2018 we see that corrections of 5% – 10% are very common:

  • 5 percent—About every 2 months
  • 10 percent—About every 8 months
  • 20 percent—About every 30 months
    (Source: DOW Jones/ Wikipedia)

The recent market volatility is attributed to concern about the Coronavirus. While we don’t know what the human or financial impact will be at this point, we can look at other more recent epidemics and the longer-term impact they have had. 

While market dips can be disconcerting, they can also provide several opportunities for longer-term investors:

  1. Dips may provide the chance to add to investments or purchase new ones at lower prices.
  2. Dips may provide the opportunity to convert IRAs to Roths with less tax impact.
  3. Dips may allow for tax swaps to generate write-offs while remaining invested.

Politics as Usual

We saw an increased onslaught of media attention for the 2018 midterm election. We expect to continue to see this, with regard to politics, in general, this year, with a continuation of polarized and partisan reporting.

We believe the economy is strong, as reflected by record-low unemployment, high corporate profits, and growth of the economy.

We are often asked what we feel the markets will do. We believe this may not be the right question. A more appropriate question is, “How will what the markets are doing affect me?” With proper planning, the month-to-month swings in broader markets, regardless of how extreme, should not impact your ability to live the life you want.

Keep Your Eye on the Prize — Your Dream for the Future

You have heard me say, “Never has the pace of change been this fast, and never will be it be this slow again.” We are being inundated with information and are required to make more decisions than ever as we face new challenges, both financially and personally. When our firm was founded 30 years ago, a large part of what we did was provide access to information. Now a large part of what we do is sort through massive amounts of information and provide access to what is relevant to you.

Our team is here to help you achieve your personal vision, while simplifying your life. As always, we are here to discuss any questions, concerns or ideas you may have.

We believe in a proactive approach to wealth management, tax planning and helping you achieve your vision. Although we do not have a crystal ball about the markets—no one does—we plan based on your personal goals and vision. We call this Personal Vision Planning®.  This process takes into account the type of volatility we are experiencing and expect in the coming months.  

We will continue to face a number of challenges in the future, including a more complex tax and investment-planning climate, potentially higher interest rates, inflation, pandemics, to name just a few. Regardless of what happens, we stand by the simple vision on which our firm was founded in 1990: making people’s lives better. Although much has changed with the world, the economy and investments, our commitment to this important goal remains steadfast.

Please contact our team whenever we may be of service to you, your family or your friends.  We look forward to speaking with you.

This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the professionals at Carver Financial Services, Inc., and not necessarily those of Raymond James. The performance shown is not indicative of any particular investment. Past performance is not a guarantee of future results. Individuals cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

10 Mistakes People Make When Hiring and Working With Financial Advisors

There are do-it-yourselfers among us who love the challenge of figuring things out for themselves. Whether it’s car repair, home renovations or home-schooling kids, many people prefer to bypass the experts.

Some things like medical care, wealth management, and complex legal matters are generally better suited for professionals, who focus all of their time and expertise on these matters. Even if you have the technical knowledge and time—which most of us don’t—an impartial trusted advisor can take the emotion out of critical decisions. With tax laws constantly changing and the array of financial products and services becoming more complex, we strongly recommend working with a team of competent, knowledgeable financial advisors. This can and should be a partnership with you involved as much as you want. The key is selecting the right partners.

Below are seven mistakes we see people make when hiring a financial advisor and three that we see people commit when working with a team or individual they have selected. By avoiding these mistakes, you can reduce your stress and have the best chance of optimizing the return on your hard-earned wealth.

Seven Mistakes People Make When Choosing a Financial Advisor

Here are seven mistakes to avoid when hiring a financial advisor.

1. Consulting with a “captive” advisor instead of an independent advisor

Financial advisors who work for a single or branded firm—sometimes called “captive” advisors—are required to sell the products those companies offer. Certainly companies with good reputations can sell you good financial products. But because their advisors are compensated for leading with those products—or selling those products exclusively—you are missing out on the ability to consider myriad options.  This is like the difference between phoning a specific airline, who will offer you their flights, versus a travel agent who can find you the best flight at the best cost for you. You will get more options if you work with an independent advisor who is free to sell products from many different companies. This can allow the advisor to find the best products for your unique situation.

2. Hiring an individual instead of a team

It is extremely important to work with an advisor you trust and feel comfortable with. After all, he or she is going to know everything about your financial situation. But if that advisor works alone, what happens when he or she retires? What happens if he or she passes away unexpectedly or leaves the business? All that work you’ve done together to build a financial plan based on your goals and dreams will evaporate. You’ll have to find someone else you trust and like, and you will both basically have to start over.

That’s why we recommend choosing an advisor who works as part of a team. In a team environment, advisors have backup. Plus, on a team, the advisors are likely to have varied expertise, knowledge and experience, making them a stronger and more valuable resource for you overall.

3. Choosing an advisor who focuses on just one area of planning

It makes sense that investment planners will be focused on getting the highest possible return on the investments in your portfolio. The key to true wealth management, however, is holistic planning. This involves looking at everything from your tax and legal planning to your insurance (risk management) and cash management. Planning will look at debt, long-term goals, short-term needs and a myriad of other factors. Your trusted advisor should act as a quarterback coordinating all of the professionals you work with.

Referring back to mistake #2, this is another reason it’s ideal to work with a team of advisors. Today, it’s simply not possible for one person to be an expert in insurance, college planning for your kids and grandkids, investments, annuities, retirement planning and all the other components of a sound financial plan.

4. Not understanding how an advisor is paid

Financial advisors are compensated in a number of ways. These can include commissions for selling a product, fee’s or a combination. The compensation is independent of investment expense. It’s important for you to understand both. The least expensive option is not always the best however, you should understand what your cost is and what you are getting for that.

While you are interviewing advisors, ask each one, “Do you earn a commission from the products I buy or investments I make?” If the advisor says yes, that means he or she could have a conflict of interest on what they offer. This doesn’t mean that commission based advisors will necessarily work against your best interests. It just means they might be more inclined to recommend products and services they will get a commission on that may or may not be the best option for your financial-planning needs.

In contrast, fee-only financial advisors must follow the fiduciary standard. When an advisor follows the fiduciary standard, it means he or she is required to make recommendations that are in your best interest, and they are compensated through fees rather than commissions. Those fees can be an hourly fee, flat retainer fees or asset under management (AUM) fees. In deciding to pay a fee rather than commissions, it is important to understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs.

5. Failing to get referrals

There are a lot of financial advisors out there, so getting started with your search can seem overwhelming. It pays to ask people you know who their advisors are. Ask people whose opinions matter to you who they work with, but keep the other recommendations we’ve made in mind when considering those advisors. 

For example, if your brother-in-law refers a firm that only sells annuities that may not make sense for you if you need a financial-planning team whose advisors cover every aspect of financial planning. Ultimately this is will be your advisor, so you must be comfortable with them and what they offer. 

Also, consider more seriously those referrals who work with people in situations like yours. If you are only 10 years away from retirement, but someone recommends to you an advisor team who specializes in working with people who are just getting started in their careers, that probably isn’t a good match for you.

6. Choosing the first advisor you meet

Yes, it takes time and effort to interview more than one advisor or advisor team. But it’s worth it. Your future financial security is critical, and you don’t want to entrust it to just anyone! Make appointments with at least three advisors or firms. Ask them all the same questions, and take good notes. Then go home and compare their answers. Which one seems to be the best fit for you? 

Not only is this important as an information-gathering step; it also gives you an idea of how well you and an advisor get along. How comfortable would you feel about telling each advisor your most personal financial information? This is a critical step. Don’t skip it!

7. Making a decision without your significant other

If you are married, engaged or otherwise partnered, it’s important to include your partner in your decision to hire a financial-planning team. Getting on the same page financially is a critical step toward creating harmony in your relationship. You both need to interview advisors; don’t assume you know what your partner would want to do, and don’t let your partner assume he or she knows what you would want to do.

What if an advisor seems great on paper or on a website, but when you show up for an appointment, he or she speaks only to one of you and ignores the other partner? That is not going to bode well for a lifetime’s worth of discussions about your financial situation. Find a team of advisors whom you both like and whose approach and philosophies you both agree with.

Now that we’ve covered the mistakes people commonly make when searching for financial advisors, let’s look at three mistakes that many people make once they’ve chosen and have begun working with their advisors.

Three Mistakes to Avoid when Working with a Financial Advisor

Once you’ve made the important decision to work with a team of advisors, avoid these three common mistakes when working with your team.

1. Being unwilling to disclose your details

Imagine that you take your car to a mechanic, and when he asks what’s wrong, you tell him you’d rather not say. Or imagine that you go to your doctor and tell him or her you don’t feel well, but you won’t tell them why or what medications you are taking. They can’t help you, and may even hurt you, if you are not completely open about your situation. This is true for financial advisors, too.

Your team of financial advisors can help you only if you are willing to share with them details about your income, your assets, your goals and dreams, your retirement plans, etc. If you have investments with many different firms, you must disclose that. This doesn’t mean you have to move the investments; it just means that your advisor has a complete picture.

If your advisors make suggestions that you resist, ask yourself if it’s a reasonable suggestion. Maybe they are encouraging you to pay off your mortgage before you retire or perhaps, they are recommending you get a mortgage when you are retired. Maybe they are urging you to pay off your high-interest credit cards. The recommendations can be an uncomfortable reality to face. But one of the important ways financial advisors add value is to be your accountability partner.

Be open, honest and coachable! You are paying your advisor team to help you prepare for the future and protect what you treasure. Let them share their expertise with you and suggest what they think are the best options. Chances are, they know a lot more than you do. That’s what you’re paying them for.

2. Showing up unprepared

The more prepared you are for your first meeting, and all subsequent meetings, the more smoothly the process will go. Get all your paperwork together before your first meeting with your new advisor team. Think about the questions and concerns you have and be prepared to bring them up. 

3. Being unwilling to, or forgetting to, mention changes

Your financial advisor team needs to know when change happens for you or your family. Have you have gotten separated or divorced, had a baby, taken in your elderly parents, started a business, closed a business, bought a boat, etc.? True wealth management and financial planning is a dynamic process. The financial plan you and your team developed when you first met them was based on your financial situation at that time. As your needs and circumstances change your plan should be updated.

If you are planning to make a major purchase, or considering a big life change, you should discuss it with you advisor before implementing. Your trusted advisor can help you initiate the change in the way that is most optimal for you potentially reducing tax, saving expense or letting your assets continue to work. This is part of what you are paying them for so take advantage of the service and their advice.

Much like your relationship with your doctor, the more open and honest you are about your situation, concerns and goals the better your wealth advisor team can help you. Moreover, just like your doctor may refer you to a specialist, a great advisory team has access to a wide range of resources for you. Our team has partnered with Raymond James Financial Services giving us access to world class resources such as investment banking, trust company, legal review, and lending to name a few. At the same time, we are fully independent and can work with virtually any investment or product that makes sense for you.

We have helped thousands of people over the last 30 years and welcome the opportunity to speak to you about your personal goals and situation. There is neither a cost nor any obligation to contact our team and we work with people in all 50 states. We look forward to speaking with you. You may contact our office or me personally at randy.carver@raymondjames.com or (440) 974-0808.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

2020 Carver Financial Annual Resource Breakfast

Watch the entire presentation from the 24th Annual Carver Financial Resource Breakfast. Learn more about what resources are available for you and your family from Carver Financial and Raymond James. Plus, hear our perspective on current events, as well as a wealth of information on resources, cybersecurity, new technology and much more.

Randy Carver named to Forbes 2020 Best-in-State List of Top Wealth Advisors

January 21, 2020 – Randy Carver, RJFS Financial Advisor was recognized on Forbes list of Best-In-State Wealth Advisors, as one of the top advisors in Ohio. There were more than 32,000 nominations received nationwide. Randy Carver was ranked #4 out of the 120 recognized in Ohio. This is the fourth year in a row that Randy has been included on this prestigious list of top wealth advisors from national, regional and independent firms.

Click here to view the profile on the Forbes list.

The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research is based on an algorithm of qualitative criteria and quantitative data. Those advisors that are considered have a minimum of 7 years of experience, and the algorithm weighs factors like revenue trends, AUM, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of 32,000 advisors nominated by their firms, more than 4,000 received the award. This ranking is not indicative of an advisor’s future performance, is not an endorsement, and may not be representative of individual clients’ experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC.

New Bipartisan Law Encourages Retirement Saving

True bipartisan support of just about anything in Washington has become as rare as sightings of the Loch Ness monster — and almost a tale from the past. Yet on December 17th, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in the House with a 417–3 vote. Two days later, it also passed in the Senate with bipartisan support. Late in the evening on Friday, December 20th, President Trump signed the SECURE Act into law as part of the year-end appropriations package.

This is the first major retirement plan legislation since the Pension Protection Act of 2006, and it affects millions of Americans. The far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets. Our country needed this legislation. According to GOBankingRates’ sixth annual savings survey, in 2019, 69 percent of respondents said they had less than $1,000 in a savings account.

Yet sadly, reporting of this historic bill and its bipartisan support was lost and underreported as the media chose to focus instead on partisan politics.

So what does it mean for you? The Secure ACT has 29 major provisions. Here are just a few key provisions that could have an immediate impact on you:

  1. Section 113 of the SECURE Act raises the required minimum distribution age (RMD) from 70½ to 72. This means that people can now wait to begin making their RMDs. The age 70½ was first applied in the retirement-plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy.
  2. Section 106 of the new law removes the age limitation on IRA contributions. In the past, once you reached age 70½, you could no longer contribute to a traditional IRA, if working, although you could contribute to a Roth IRA. With the new law, there is no age limitation on contributing to a traditional IRA, as long as you have earned income.
  3. Section 401 of the bill reduces the “stretch IRA” provision for nonspouses. Previously, a nonspouse beneficiary could stretch payments from a retirement plan over his or her life. The SECURE Act requires a nonspouse beneficiary to draw inherited retirement plans like 401(k)s, traditional IRAs and Roth IRAs over a period no longer than 10 years.
  4. Some 401(k) plans will automatically enroll you and start deferring part of your salary unless you actively opt-out. Currently, the maximum percentage of employee compensation that may be deferred under a 401(k) plan that includes a “qualified automatic contribution arrangement” (QACA), unless the participant affirmatively elects otherwise, is 10 percent of eligible compensation. Section 101 of the SECURE Act raises this maximum to 15 percent.
  5. Currently, safe harbor 401(k) plans are required to provide an annual notice to participants apprising them of their rights and obligations under the plan, whether the employer safe harbor contribution is satisfied by a matching contribution or a nonelective (i.e., profit-sharing) contribution. Section 102 of the SECURE Act eliminates the requirement to provide such notices with respect to safe harbor 401(k) plans that satisfy the employer safe harbor contribution with nonelective contributions. The notice requirement remains in place with respect to plans that use matching contributions to meet the safe harbor requirements.
  6. Section 112 of the Act provides the ability to draw up to $5,000 from a retirement plan without penalty for the birth or adoption of a child.
  7. Section 204 creates new rules that expand lifetime income options within retirement plans, such as annuities.
  8. Section 302 allows 529 plan owners to withdraw up to $10,000 tax-free for payments toward qualified education loans. However, there is no double-dipping when it comes to federal education tax benefits. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. Also, the $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings.

One important item to note is the potential impact on IRA’s with a trust named as beneficiary or a trusteed IRA. We believe it is always good practice for all beneficiary designations of retirement accounts to be periodically reviewed to see if they are still in line with your wishes.  The changes introduced by the SECURE Act make it important to review any situations where trusts are named as retirement account beneficiaries. This is something you should discuss with your estate planning attorney.

In general, trusts created to serve as the beneficiary of a retirement account are drafted in such a manner as to comply with the “see-through trust” rules which allow the trust to stretch distributions over the oldest applicable trust beneficiary. Both Conduit and Discretionary trusts could be treated unfavorably by the provisions in the SECURE Act. For instance, many Conduit Trusts are drafted in a manner that only allows for the required minimum distribution to be disbursed from an inherited IRA to the trust each year, with a corresponding requirement for that amount to be passed directly out to the trust beneficiaries. In light of the changes made by the SECURE Act, for those beneficiaries subject to the 10-Year Rule, there is only one year where there is an RMD… the 10th year! As a result of this change, Conduit Trusts drafted with this type of language may not allow distributions of the inherited account until the 10th year after death (because prior to that 10th year, any IRA distributions would be ‘voluntary’). And then, in the 10th year, the entire balance would have to come out in one year to the trust… and be passed entirely along to the trust beneficiaries (as a mandated RMD that under the Conduit provisions ‘must’ be passed through). The end result could be what would amount to a very high tax bill, as the entire value of the retirement account is lumped into a single tax year as a distribution to the beneficiary.

 Discretionary Trusts may not fare much better though, if at all. It is not yet clear whether the IRS will allow all See-Through Trusts to actually see through the trust to an Eligible Designated Beneficiary. The SECURE Act specifically provides that such trusts can (subject to certain rules) be treated as an Eligible Designated Beneficiary when the applicable trust beneficiary is a disabled or chronically ill person. The law is silent, however, as to how a trust benefiting other Eligible Designated Beneficiaries (i.e., a spouse, a minor child, or a beneficiary within 10 years of the deceased retirement owner’s age) should be treated. Thus, it remains ambiguous. Future IRS guidance will likely be needed to address this question.

Because each person’s planning needs and situation are unique, it’s important to work with your financial advisor to develop a plan that is best for you. The SECURE Act is intended to encourage Americans to save more for their own retirement. As we live longer and do more later in life, it is critical that we have the financial resources to maintain and even enhance our standard of living.

The passage of this bill serves as a reminder that bipartisan work is possible and is happening. Ultimately, the government and regulations will not make financial security a reality for us. We have to take some personal responsibility, and the end results are largely dependent on our own actions.

Please contact our team with questions or if we can help you figure out how to optimize your retirement savings and planning. It’s your vision, and we are here to help you achieve it. Please contact me, or our team, with questions or whenever we may be of service: 440-974-0808 or randy.carver@raymondjames.com.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Ultimate Vacation

It’s been said that retirement is the ultimate vacation. Many people spend more time researching and planning for their next vacation than they do for their retirement. There are a number of reasons for this, but one reason is that often, the process seems overwhelming. Here are five truths about retirement that can shed some light on why many people—and maybe you—put off retirement planning.

1. Retirement planning doesn’t have to be overwhelming or scary; treat it like you’re planning for a vacation, and you’ll be better off. Research shows that 39 percent of Americans spend more than five hours exploring vacation possibilities—while only 11 percent spend the same amount of time researching their 401(k) plans. In our new book, Ultimate Vacation, I walk you through retirement planning just as you would prepare for a trip: where are you now, where you want to go (and why), how you will get there, and what will you do once you’ve arrived.

2. It’s easy to think that retirement planning is all about the numbers. It’s not. If at any point you start to feel overwhelmed, remember, numbers are only one part of the picture. Understanding your numbers is just a way of helping you answer bigger, more important questions—namely, how to align your current reality to your hopes for the future. While most financial planning is investment-centric, our team focuses on each client’s individual, personal vision.

3. You’re likely putting off important decisions because of fear. Our team has heard it from more than a few clients: they put off insurance, long-term care, and estate planning because, as they say, “I worry that if I do it, I’m going to die.” It’s human to feel this way. But even if taking these steps won’t literally kill us, it will remind us of our own mortality, which is scary. The best way to live longer—and to enjoy the time you have—is to plan for the future.

4. Can the FIRE movement really help you retire by age 40? FIRE is an acronym that stands for “Financial Independence, Retire Early.” FIRE is a movement dedicated to a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow. By dedicating up to 70 percent of their income to savings, followers of the FIRE movement may eventually be able to quit their jobs and live solely off small withdrawals from their portfolios.

But someone using this method would have to save up between 25 and 35 times his or her anticipated living expenses. On the low end, that’s more than $1.3 million, which is a pretty distant goal for most young people. To make the FIRE method work, you would need to maintain a high-paying job and live an austere lifestyle for years—or pray that you get an unexpected financial windfall. For most people, the math simply doesn’t make sense.

5. Budgeting is a lost art. In five easy steps, you can become an effective budgeter without an overwrought or complex process. A 2019 poll by Debt.com of more than 1,000 Americans revealed that precisely 67 percent of respondents had their family on a budget, down from 70 percent in 2018.

Many people either don’t think they need to, or they don’t think they can afford to. But it’s simple to find out how much you spend and where you can save a bit. In the book, I demolish your excuses and layout exactly what you need to do to make big changes in small steps. And no, it doesn’t include itemizing every penny you spend!

Ultimate Vacation: The Definitive Guide to Living Well Today and Retiring Well Tomorrow looks at this entire process and provides a road map you can use on your own or with your trusted advisor. Contact us for more information on how to obtain a copy.

When planned properly, retirement really is the ultimate vacation!

Please contact our team with any questions or if we can otherwise be of service. We are happy to discuss your personal vision and how you can live well today while being prepared for tomorrow. There is no cost or obligation. Contact me at randy.carver@raymondjames.com or (440) 974-0808.

Any opinions are those of Randy Carver, and not necessarily those of Raymond James. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.  Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

Here We Go Again – Income Tax, Politics, and History

“Income tax returns are the most imaginative fiction being written today.” ― Herman Wouk

The election season is in full swing, and once again, we are hearing politicians campaigning on the idea of raising taxes on the wealthiest Americans and businesses to pay for various programs. 

Intuitively, it makes sense that if you raise tax rates, tax revenue will go up. Moreover, it seems logical that if you raise tax rates on the wealthiest Americans, they will pay a larger share of the income tax.

But it doesn’t work that way. We have written about this for the last decade, and yet history continues to repeat itself with each election.

Tax policy proposed to help lower- and middle-income American’s often hurts them. This is not an economic debate; the facts stand for themselves. This is simply, and unfortunately, politics. Never before have we seen such extremes proposed as we are now, and thus the risk is higher than ever before, for those who are most vulnerable.

Taxing the rich more isn’t the answer

Bernie Sanders is proposing a 97 percent tax on the wealthiest Americans via his “Corporate Accountability and Democracy Plan.” Elizabeth Warren has proposed a 70 percent marginal tax rate, while Alexandria Ocasio-Cortez has also proposed a 70 percent income tax on the country’s highest-earning citizens, to pay for a new green energy plan.

The reality is that today, the wealthiest Americans are already paying the bulk of all income tax.

According to the Tax Foundation, in 2016, the top 50 percent of taxpayers paid 97 percent of all individual income taxes. The top 1 percent of taxpayers paid more income tax (37.3 percent) than the bottom 90 percent combined (30.5 percent).

Some politicians are ignoring history

Yet the debate continues on raising tax rates in the face of mounting government deficits. It makes sense that the government taxes people more and uses the money to reduce deficits. Yet history objectively shows us the impact of lowering tax rates versus raising them, so any debate about this is purely political. Some of today’s issues, such as health-care reform, Social Security and immigration, are often difficult to quantify objectively because we have not had experience with proposed changes. On the other hand, we do have objective experience with income tax cuts and their impact.

Tax cuts have historically shifted the tax burden from middle-income people to the wealthiest Americans while creating jobs and increasing government revenue. This seems counterintuitive, but the fact is true and undebatable. Critics, often with the best of intentions, have said that extending tax cuts and further reducing income taxes will benefit the rich over the poor and will lead to more deficit spending. This simply is not the case. The only reason any informed person would propose raising income tax rates is to gain votes — or to intentionally hurt lower- and middle-income Americans.

The public is told we cannot afford tax cuts due to government spending on entitlements, defense and all the other important things the government does. While cutting taxes in the face of mounting deficits may seem counterintuitive, critics are ignoring history.

Past income tax rate cuts have increased government revenues, boosted our economy, created jobs and shifted the tax burden away from low-income families to middle- and upper-income folks. There is no doubt that we will have to deal with excessive government spending to balance the federal budget. Independent of that, extending and expanding tax cuts, while closing loopholes, is a proven way to increase government revenue. This approach benefits all Americans by shifting the burden to those who can most afford it.

TEFRA from 1982 gives us a great history lesson

The Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248), also known as TEFRA, was enacted on Sept. 3, 1982. According to US Treasury statistics, TEFRA increased revenues by $130 billion in its first four years — after tax rates were cut dramatically. The top rate was slashed from 70 percent to 50 percent.

TEFRA was created in response to the recession at the time and faced fierce opposition from those who felt that taxes should be increased, not decreased, to offset government shortfalls. Sounds like a familiar debate, doesn’t it? TEFRA reduced the budget gap by generating revenue from closed tax loopholes and enforcement of tougher tax rules, as opposed to changing marginal income tax rates.

This legislation modified some aspects of the Economic Recovery Tax Act of 1981 (ERTA). Both of these pieces of tax legislation took place during the Reagan presidency.

TEFRA was considered the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. Reluctantly signing the bill into law, President Ronald Reagan stated that he was supporting “a limited loophole-closing tax increase to raise more than $98.3 billion over three years in return for…agreement to cut spending by $280 billion during the same period.” In the period between 1981 and 1986, it was believed that TEFRA would reclaim approximately $215 billion of the $750 billion given up by ERTA. According to the Bureau of Economic Analysis (BEA), the economy’s growth rates after TEFRA took effect were among the fastest in history.

Two years later, the 1984 Deficit Reduction Act increased tax collections by $72 billion in the four years after taxes were cut again. The bulk of these revenue increases came from the wealthiest Americans. This should not have been a surprise.

The broad-based income tax cuts that President Reagan implemented in the 1980s set off an entrepreneurial boom that propelled the growth of the economy for the next 20 years. Certainly, the Clinton presidency benefited from the tax cuts, and to Clinton’s credit, he even added his own cut by reducing the capital gains tax.

Reagan’s detractors point to his lack of sensitivity for social issues and the legacy of his deficit spending — yet his legacy is a positive one. In the seven years following the Reagan tax cuts, almost 20 million good-paying jobs were created, according to the U.S. Department of Labor.

Top earners already pay the lion’s share of taxes

A Joint Economic Committee for the US Congress report in 1996 revealed that the share of the income tax burden borne by the top 10 percent of taxpayers increased from 48 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

The middle class also benefited — those between the 50th percentile and the 95th percentile for income. Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. The increase borne by the top 1 percent of income earners is entirely responsible for this 8.8 percentage point decline in the middle-class tax burden.

According to the IRS, in 1981, the top 1 percent of income earners paid 17.6 percent of all personal income taxes. By 1988, their share had jumped to 27.5 percent — after the top tax rate had been cut from 69.13 percent in 1981 to 28 percent in 1988.

According to the Bureau of Labor Statistics, inflation, measured by the consumer price index, increased by 49.5 percent between 1977 and 1981. Between 1982 and 1986, inflation was 19.1 percent — much lower than it was prior to the tax cuts.

Across-the-board tax cuts were implemented way back in the 1920s as the Mellon tax cuts and in the 1960s as the Kennedy tax cuts. In both cases, the reduction of high marginal tax rates actually increased tax payments by “the rich” and also increased their share of total individual income taxes paid.

We are here for you, as always

Those who would benefit the most from lower taxes could be hurt, with the best of intentions, by the current path we are going down. Clearly, there is an optimal point below which taxes should not be cut but increasing taxes today does not make sense from an economic or even social standpoint. Lower-income taxes stimulate growth, create good jobs, increase government revenues and shift the tax burden from low-income families to upper-income payers.

If all the intellectual energy that is being used to debate historically established facts were channeled into solving problems that Americans face, instead of promoting partisan rhetoric, all Americans would benefit. Then again, it’s much easier to offer something for free if you’re just hunting for votes. We believe most Americans are too smart to fall for the false narrative about dramatically raising income tax rates.

Regardless of what happens in Washington, our team will continue to take a very proactive approach to legally minimizing taxes for our clients. At the end of the day, it’s not what you make that’s important, but what you keep, net of fees, expense and taxes.

Our Personal Vision Planning Process® focuses on developing a plan to help you achieve your personal goals, regardless of changes to tax rules, the economy or markets. We are here for you. You can contact me personally at randy.carver@raymondjames.com or (440) 974-0808.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.