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3rd Quarter 2022

October 10, 2022

Inside Financial Connections Newsletter

  • THE VOLATILE STOCK AND BOND MARKETS
  • QUALIFIED CHARITABLE DONATIONS (QCD) FROM IRA
  • PHASING INTO RETIREMENT
  • THE STRENGTHENING DOLLAR
  • MIDDLE CLASS TAX REFUND

SCHWAB – TD AMERITRADE INTEGRATION

Schwab is sending out mailings as part of the integration. If you need assistance, please call Danielle or John-Paul.

THE VOLATILE STOCK AND BOND MARKETS

A bear market is defined as a loss of more than 20%. We are in a bear market both domestically and internationally.

As we’ve mentioned before, bear markets are not unusual but part of investing. Historically, there has never been a bear market that wasn’t followed by a significant up market.

What is different this time is the bond market. Usually, bonds operate as a ballast when stocks decline. Recall that when interest rates rise bond prices decline.

Interest rates have been held artificially low since 2008. It is not normal to have interest rates so close to zero. Instead of gradually increasing rates, the Fed left them near zero so when inflation rose, they were playing catch-up with these quick and significant rises.

The 10-year Treasury Bond lost 17% through September 30, 2022. Vanguard benchmarks going back to 1926 show this has been the worst period since 1969. Kathy A. Jones, Chief Fixed Income Strategist for Schwab, believes the worst is behind us. The Bloomberg US Aggregate Bond Index is yielding almost 5%. “That’s becoming an attractive income stream,” she said. “There’s some good news in there for bond investors.”

As we mentioned before, money market funds are actually paying some nice interest rates. It is a good place for your emergency fund.

The stock market decline may continue into 2023. In a previous podcast, we mentioned that stocks rise 72% of the time and we’re living through the 28% – not an easy time. Dr. David Kelly, Chief Global Strategist for JP Morgan, said “one foot is in a recession and the other on a banana peel.” No one can say when the market will reverse course and rise.

Downturns are sudden and unexpected. The biggest risk to your wealth is selling when the market is down and locking in a real loss. Right now, it is on paper. Further, getting out means you miss the recovery since no one can time when to get back into the market.

Unless you are in the position that your investments are a surplus for the next generation or a charity, staying ahead of inflation and funding your future lifestyle requires growth. Patience is a virtue here when there is a temporary blip in a long-term trend.

Remember that if you are in a withdrawal mode, we have planned for that with cash and short-term bonds so the growth portion of your portfolio can ebb and flow.

QUALIFIED CHARITABLE DONATIONS (QCD) FROM IRA

Like Jill, many of you have a checkbook on your IRA and are over 70-1/2. Writing checks to a qualified charity can offset some of the taxable income incurred on your Required Minimum Distribution (up to $100,000 in a single tax year).

We wanted to suggest you write your QCD checks early this year. Both Schwab and TD Ameritrade have increased volume but may not have more trained workers to handle the volume. Also, if the charity doesn’t cash your check this year, it doesn’t count for 2022. They too may have staffing shortages.

Usually, Jill writes most of her checks around Thanksgiving. Just her annual way of contributing. However, this year she will start the beginning of November.

PHASING INTO RETIREMENT

Decades ago, there was a specific date that you left your working life behind and entered retirement. More recently, the trend has been to work part-time and then move into full retirement. This trend has been exacerbated by the pandemic and the labor shortage. Companies are beginning to realize there is a lot of institutional knowledge walking out the door.

Most companies don’t have a formal policy for the employees to phase into full retirement. It tends to be a case-by-case activity. The Society of Human Resource Management (SHRM) reports only 6% offer a formal policy. However, it is becoming more prevalent. SHRM’s survey shows only 19% of companies had a formal or informal policy but in 2022, the number increased to 23%.

Catherine Collinson, CEO of Transamerica Institute and Transamerica Center for Retirement Studies said, “We’ve learned people can work remotely, they can successfully telecommute, and they can work alternative hours.” Furthermore, she believes companies will begin using retiring in phases as an employee retention tool.

Jill is phasing into retirement. She isn’t ready to stop working. Alternatively, she wants to spend more time outside the office. Two mornings a week she works with a personal trainer and comes to the office in the afternoon. Next year, she’ll probably add some other activity that allows her to stay active yet interact with clients and the staff.

If you’d like to chat about how your finances might work with a phased in retirement, don’t hesitate to call on us.

Source: Based on an article by Kiplinger’s Retirement Report, September 2022

THE STRENGTHENING DOLLAR

According to the US Dollar Index, our dollar is up almost 15% this year. At the time of this writing, you could buy a euro for a dollar and almost a British Pound. You can buy 145 Japanese Yen for a dollar. This is good and bad depending on where you stand.

If you are travelling to Europe or Japan, it will be considerably cheaper than a year ago. Imports are cheaper as well.

A side effect to the Fed rate increases it makes the dollar stronger. If you are an emerging market country, your debt may be denominated in dollars. It is now more expensive to service your debt.

Since the dollar is the currency used for most commodities (e.g. oil, wheat, soybeans), these products become more expensive.

If you are a US manufacturer exporting your goods overseas, your products are less competitive than imports. It is more expensive for others to buy them which will impact your profitability. Foreigners find it more expensive to visit the US.

A strong dollar will impact equity returns. Half the S&P 500 earnings (John Mauldin “Thoughts from the Frontline”) are from outside our borders. The strong dollar will negatively impact the exchange rate which will negatively impact profits.

MIDDLE CLASS TAX REFUND

Between October 2022 and January 2023, some taxpayers may receive a refund. You must:

  • Have filed your 2020 tax return no later than October 15, 2021
  • Meet certain criteria on your California adjusted gross income
  • Not have been claimed as a dependent
  • Be a California resident

To learn more, please go to:

https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-refund/

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