Planning and Advice

During times of uncertainty, communicating with others and your financial professional can be beneficial during any life-altering or world-changing event. For some, survival is their only plan when their financial resources are depleting. Others are more fortunate and their finances are holding while they continue to work. But for most, dealing with COVID-19 and the aftermath can create a fog of uncertainty.

When it comes to our investments, experiencing market volatility does not reflect the economic conditions nor make sense to many of us. How can the markets be up when the economy is down? This confusion can create anxiety and lead us to make poor investment choices. We must consider the lessons of the past and think constructively about our future. Here are some vital elements for communicating during this time of uncertainty:

Distancing is healthy and expected. While face to face meetings may be preferred, keeping everyone healthy is critical. Emails, calls, and video conferencing between you and your financial professional should continue indefinitely. Distancing is also required for your daily interactions with others if you can.

Resiliency is critical. If you are having financial difficulties, communicate this to your financial professional. While they work with you to save and invest for your future, they also want to know if you need to access your investments to make ends meet.

Under the CARES Act, an additional economic relief provision is built-in for COVID-19 hardship distributions. Investors can access up to $100,000 from their employer retirement savings without penalty if impacted in any of the following ways:

· An immediate family member is diagnosed with COVID-19.

· They are not able to work due to a lack of childcare.

· Their job eliminates, reduces operational hours, lays them off, or they quarantine, resulting in financial duress.

· Taxes are due on any hardship distribution from a tax-sheltered retirement plan, but no early distribution penalty will apply.

Find the Silver Lining. If you are having a hard time emotionally or financially, communicate it with your financial professional (or someone else) who can help you find the 'positive in the negative.’ It always helps to communicate with others when they can identify what you are going through and help you focus on the positive. 

As recovery from this period of uncertainty begins, remember that communicating your needs to your financial professional during the good times and the bad is crucial to your financial success.

In today’s volatile market environment, investors seeking safety must consider how any investment fits into their investment strategy. All investments have their place in retirement planning, but only if suitable and part of an overall financial strategy using multiple types of investments, insurance products, and accounts. While investing is not without risk, there are critical elements to consider when building a portfolio:

Measuring your risk - Determining how much ‘risk and reward’ you are willing to take. While stocks provide more reward in their return, they have a level of risk that must be considered. Mitigating risk is accomplished with the addition of insurance products, such as annuities, that are not market sensitive.

Diversifying your investments - There is no formula to finding the top performers in sectors, regions, or asset classes. Therefore, it makes sense to not concentrate all investments in one area. Diversification should include differing asset classes from various regions in many types of business and uncorrelated insurance products to avoid the peaks and valleys that each can bring. 

Understanding what you invest in - If you do not understand what the investment is and how it works, do not add it to your portfolio. Although it makes sense to invest in what you are familiar with, caution is advised in having too much of the same type of investment. Ask your advisor about anything you are unsure about or for additional research on the investments you are considering.

Creating a portfolio of ‘safe investments’ is crucial, especially for those nearing retirement that have limited time to recover from a loss. If you are within ten years of retirement, your investments are at a critical stage to continue to gain value and avoid loss. Without thinking through the dynamics of gains and losses, investors leave themselves open to market risk that could prematurely deplete their retirement assets.  

One way that investors avoid loss is by including annuities in their retirement portfolio. Annuities, which are becoming more widely used in the financial services industry, are a contract with an insurance company to provide investors with a guaranteed stream of income in retirement.

Investors should fully understand the risks associated with each investment, and there are pros and cons to each. Due diligence of investigating each investment and for any annuity should take precedence before purchasing one for your retirement portfolio. If you have questions regarding how to have safety inside your portfolio, now is a great time for us to visit.

The sequence of returns impacts investors when they are either adding to or withdrawing money from their investments, which can create risk depending on the sequence and the market conditions at the time. If an investor is not doing either, the there is no sequence of returns risk.

However, if an investor is drawing down their portfolio and not contributing new capital, there is the risk that the timing of withdrawals will negatively impact the overall rate of return available to the investor. The sequence of the withdraws is critical to the retirement portfolio lasting the investor’s lifetime:

· Timing is everything - the timing of the withdrawals can damage the overall return and the portfolio that may not be recoverable.

· Withdrawals during a bear market are more damaging than during a bull market.

· If a bear market lasts more than a few months, each withdrawal is not being offset by contributions, leaving the portfolio unable to recover what was withdrawn despite future gains.

· Market sensitive investments have the potential to be impacted by sequence of return risk

· Diversified portfolios are less likely to be impacted by sequence of return risk

There is no way to protect against sequence of returns risk but planning for it is important. One way is by including asset protected products such as fixed-indexed annuities in your retirement portfolio: 

· Your principal is protected during a down market, and your accumulation does not deplete either.

· The accumulation grows on a tax-deferred basis.

· The return is based on an index (ex. The S&P 500), which grows the annuity’s value over time.

· Provide a guaranteed lifetime income and protection against longevity risk; you receive annuity payments for life.

Additional recommendations to protect against sequence of returns risk:

· Continue working beyond regular retirement age and continue to contribute to your retirement savings. 

· Maximize your retirement portfolio contributions to create a sequence of returns risk withdrawal buffer.

If you have concerns that your retirement portfolio may be at risk for sequence of returns risk, reach out to our office anytime.

As areas of the U.S. start to lift COVID-19 restrictions, Americans are starting to see the impact of increasing prices at the supermarket and the start of inflation. While the CARES Act provided a one-time payment to individuals and for business stimulus, it will not solve our future economic problems since government action always comes with a price. 

Government-funded recovery will likely lead to higher taxes as it has in the past and passing the price of COVID-19 recovery off to future generations will not work. Likely, the debt will be collected from U.S. taxpayers earlier than later and for extended periods. Increasing taxes is counter-intuitive to stimulating a damaged economy; will consumers spend when everything costs more including taxes?

Coming out of the Great Depression and into WWII, the U.S. experienced historical debt and tax levels, paid for by the American people when the Government held tax rates above 40% for over 40 years (1940-1981). Our older generations can recall these historical events, or at least what they or their family experienced. Many recall high-interest rates, high prices, and people displacing from the poor economy.

What has changed since these periods is the debt the U.S. carries, now close to $24.2 Trillion with a 106% Debt/GDP Ratio (Gross Domestic Product). Our debt to GDP ratio indicates that the U.S. owes more than it produces and consumes domestically, or exports. How do economies recover? By producing and selling more than its expenditures or by raising the prices of their products. How do government coffers recover? Both create problems for everyone, but especially for those nearing or in retirement.

In any market, investors must always consider the five risks that can sideline their financial future:

· Inflation Risk - Investments not optimally positioned to address the rising costs of goods and services will deplete a portfolio.

· Taxes Risk - Increased taxes erode the investment capital; the investment type and timing are critical.

· Longevity Risk - Investment capital is not enough for supporting longer lives and long-term care needs.

· Survivorship Risk - Unexpected loss of a life-partner leading to lower investment capital.

· Market Risk - Loss of principal value can decrease investment capital.

One solution to addressing inflation risk and taxes risk is by increasing the allocation of principal-protected products. The benefits of “safe money” fixed-indexed annuity products address all five significant dangers to one’s financial future:

· Inflation Risk- Allocation to “safe money” products allow asset allocation strategies to address inflation.

· Taxes Risk- Leveraging tax-free investment strategies increases investment capital.

· Longevity Risk- Utilizing “income for life” features address longevity risk and long-term care risk.

· Survivorship Risk- “Death Benefits” provide tax-advantaged mitigant against untimely death.

· Market Risk- Principal protection provides a buffer against stock market fluctuations.

The impact of inflation and taxes due to COVID-19 will continue over the next months and years. For this reason, it is critical that you consider your retirement portfolio’s allocation and prepare for your financial future during today’s volatile market environment. If you are nearing or in retirement, act now versus later to making sure you have adequate assets in retirement by meeting with your financial professional.

When investors think of ‘safe investments,’ they tend to think of bonds or CDs, which calculate from a pre-determined timeline and interest rates. During a low-interest-rate environment, both provide safety, but not necessarily, the returns investors are seeking. Bonds and CDs have differing benefits and risks despite being viewed by investors as ‘safe.’ 

A third ‘safe’ interest-bearing alternative is fixed-indexed annuities, which capture the upside of the market while protecting the principal from the downside risk. Before investing in bonds, CDs, or fixed-indexed annuities, the benefits and risks of each should be considered: 

Bonds are like a loan to a government or corporation for a set period.

· The higher the bond’s rating, the less likely of default, but pay a lower interest rate.

· Lower rated bonds pay a higher interest rate due to their risk of default.

· When interest rates rise, the bond’s value decreases, creating a loss to the investor when the bond is sold (interest rate risk).

CDs are an exchange of money between an investor and a financial institution. The institution pays the investor interest to use their money to borrow to its customers. 

· Are backed by FDIC up to $250,000 so that if the financial institution fails, the investor’s principal returns.

· Are rate sensitive- when interest rates rise, the CD’s rate will not increase but remain the same through the contract.

· Withdrawing the principal out of the CD before maturity results in a penalty the investor must pay to get their money returned.

Fixed-Indexed Annuities have characteristics of both fixed and variable annuities and are a contract between an insurance company and the purchaser. Many indexed annuities have a minimum interest guarantee, and your principal is protected from market volatility, which retirees tend to seek.

· Your principal is protected, and you won’t lose your initial investment or accumulation.

· Grow on a tax-deferred basis.

· The return bases on an index (ex. The S&P 500) which grows the annuity’s value over time.

· Provides a guaranteed lifetime income and protection against longevity risk; you receive annuity payments for life.

In today’s low-interest-rate and volatile market environment, investors seeking safety must consider how any investment fits into their investment strategy. All the above investments offer benefits to the investor. Each has their place in retirement planning, but only if suitable and a part of a financial strategy using other types of investments and accounts. Investors should fully understand the risks associated with annuities before purchasing them. If you have any questions about annuities, now is an excellent time for us to visit.

COVID-19 has changed the way we interact with others and our ability to work. Currently, one in four worldwide confirmed COVID-19 cases is occurring in the U.S. The halting of economic activity is expected to damage our economy more than any other previous occurrence. While remote work is happening at some companies, many Americans are unable to collect their regular paychecks and are waiting on unemployment assistance from their state. Undoubtedly this will negatively impact Social Security tax collection and Social Security Retirement benefits. 

Here’s why:

· The Social Security system is supported by payroll taxes deducted from currently employed Americans paychecks and their employer’s contributions.

· The benefits received by today’s retirees are not from their own ‘banked contributions’ from their working years. The system’s design is to collect and payout benefits almost immediately after collection. 

· As of the end of March 2020, 17 million Americans are not working and have filed for unemployment benefits, and that number is expected to grow. Where will the money deficit come from to pay into the Social Security System?

While current retirement benefit payments aren’t expecting an impact, future retirement benefits for those currently working will be. The Social Security Board of Trustees previously projected that Social Security’s $2.9 Trillion in reserve assets will exhaust by 2035; COVID-19 will push the depletion date sooner. 

This development doesn’t mean that if the reserve reaches zero, there will be no more social security benefits paid to retirees, but that the existing payout schedule isn’t sustainable, primarily due to COVID-19. It may lead to benefit payment cuts for current and future Social Security retirement beneficiaries.

When Americans receive their CARES Act stimulus checks starting in mid-April 2020, there won’t be any Social Security income tax (listed as SSI on pay stubs) taken, nor will it be a source of income for the 2020 income tax filing. Additionally, unemployment benefits checks don’t have Social Security income tax taken out either. Both put additional strain on the Social Security system even though they help Americans during this pandemic. What can you do to help your future Social Security Retirement benefits reduction?

Consider Purchasing an Annuity. An annuity is a contract with an insurance company that provides a guaranteed stream of income in retirement that you can’t outlive. With the possibility of future Social Security Retirement Benefits cuts, an annuity can take the place of fixed, guaranteed payments, regardless of future economic impacts such as today. Additionally, ask your financial advisor to remove Social Security as a source of retirement income from your financial plan. If you do receive benefits, you’ll be happy about the bonus!