"The hardest thing in the world to understand is the income tax." -- Albert Einstein, theoretical physicist, (1879-1955)
BY JULIA ANDERSON
Federal and state agencies are doing their best to keep the economy going as we move through the virus crisis. A key element is leaving money in our pockets, longer.
On the tax front here’s what’s happening, so far:
The federal deadline for paying 2019 personal income tax has been extended
from April 15 to July 15.
The purpose of these moves is to leave more money in our checking accounts short-term to help us pay for immediate expenses (food, rent) as we sit home in quarantine.
“How you invest during retirement is as critical as how you invest in preparing for retirement," ----
- Daniel R. Solin, author, "7. Steps to Save Your Financial Life."
BY JULIA ANDERSON
The big virus crisis stimulus bill passed by the U.S. Senate and now headed to the House and the President, suspends for the rest of 2020 the requirement that seniors over 70 1/2 take RMD (Required Minimum Distribution) withdrawals from their tax-deferred savings accounts.
We said this was a possibility a few days ago in our most recent post here at sixtyandsingle.com but suggested it might not happen until later this year. Now, Congress is charging ahead.
RMD withdrawals are determined as a percentage of your nest egg such as a Rollover IRA at the end of the prior calendar year. In 2020, retirees were required to take RMD withdrawals from their tax-deferred nest egg based on the value of their funds on Dec. 31, 2019 before the big market crash.
Now, this year’s withdrawal requirement has been suspended. This is long-term help for seniors already worried that they might run out of money before they die.
Tax law requires RMDs to begin the year you turn 71/2, (now 72 with the recent change).
RMD money, by the way, is taxed as ordinary income on your federal income tax return.
The suspension is good news for two reasons:
1. Seniors can avoid taking taxable money out of their retirement savings when their investments have likely been hit by the 30 percent market downturn. The money stays and helps reinvest in the expected recovery over the long-term.
2. The RMD suspension lowers seniors’ taxable income in 2020. We will be getting out their calculators to see how much less they can withdraw but still pay their basic household bills. Or we may choose to live without RMD income all together. Either way our taxable income in 2020 will be lower. That’s good news going into 2021 when we pay estimated taxes based on 2020 income.
For those not yet over age 70, the IRS uses a life-expectancy actuarial chart to calculate percentage withdrawals for you that increase each year. For example:
If you are 72 this year and had $500,000 in your retirement tax-deferred nest egg on Dec. 31, 2019, the required withdrawal amount would have been $19,531 or $1,627 a month. Next year, the withdrawal amount would increase to $20,565, ($1,713 per month) assuming that the value of our nest egg increased from earnings by 5.5 percent.
If you are 72 this year and had $1,000,000 in your retirement tax deferred nest egg on Dec. 31, 2019, the IRS required that you withdraw $39,062 from that account this year. That’s $3,255 a month. Under normal circumstances, next year, the withdrawal amount would have increased to $41,131, if your remaining balance went up in value thanks to earnings by an estimated 5.5 percent.
All that is on hold thanks to the suspension. Take it or leave it, it’s up to you.
IRS RMD basics: click here
IRS RMD worksheet: click here
Nerdwallet.com click here
Kiplinger.com "Everything you need to know about RMDs." click here.
“Only when the tide goes out do you discover who’s been swimming naked,” --
Warren Buffett, investor, 1930 --
BY JULIA ANDERSON
Here’s hoping that my 65-and-older friends have a cash rainy-day fund to draw on while they endure the market virus crisis. It seems like an economic deck of cards has been thrown up in the air but has yet to land. Right now, where we end up, nobody really knows.
In three days, we went from a greedy over-extended 12-year bull market to a snarling bear market downturn as the coronavirus pandemic began to claim victims. Businesses shutdown, offices and restaurants closed. Airlines cut operations. Boeing is facing bankruptcy. We all are sitting in quarantine at home wondering what’s next. It’s global.
With so many questions and so few answers when will things calm down, turn around?
What should I do with my long-term retirement portfolio?
Are we headed for a Depression with a 30 percent jobless rate, bread lines and displaced people?
When will the number of new virus infections begin to slow?
Can our federal banking system and financial agencies pump enough money into the system to avoid a melt-down? A total of 37 million jobs could be at risk.
When Disney closes its parks, you know it’s serious.
A real recovery marked by sustained and reasonable stock buying might be three months or longer away. A sustained sensible recovery might not happen until fall or (depending on virus and economic news), not until the end of the year after the U.S. presidential election.
That’s a long time to hold your breath.
How to manage your portfolio depends on your age:
70-plus age group: Those in retirement, living on their nest egg and required to take RMDs (Required Minimum Distributions):
The IRS dictates how much you must withdraw from your regular tax-deferred Individual Retirement Accounts once you reach 70 ½ or now 72. Bottom line: Let’s hope you have cash on hand so that you can avoid selling stocks or bonds that are in the tank to pay out the RMDs. Your cash reserve inside your IRA should cover RMD withdrawals for at least 12 to 18 months. That way you’re not selling at a discount to generate cash. Let the rest of your portfolio continue to reinvest dividends and earnings. After all, stocks are now on sale.
There’s been some talk of suspending RMD withdrawals to help people hold on to cash through the virus crisis. “Suspension of 2020 RMDs and other types of financial plan participants, while possible, isn’t likely to be enacted and made effective this year,” say experts at Retirement Income Center (retrementincomecenter.com). “If the economy and stock market continue their downward trend for the next six months or so, it’s more likely that legislation suspending RMDs and delaying the commencement of the (new) nonspouse beneficiary 10-year rule on tax-deferred accounts, or potentially changing to a 12-year rule, would be enacted at the end of 2020 effective 2021.” Remember that Congress made a similar move during the Great Recession of 2007-08.
In the short-term, I am delaying RMD withdrawals until later in the year in the hope that Congress might make the change sooner. And I am tightening up my household spending. We have cancelled our planned big trips and instead will make quicker regional getaways. Could we live on Social Security benefits, alone? Maybe.
Those 55-70: People nearing or in early “active” retirement.
Money managers say don’t retire into a bear market. If you take money out of our nest egg at the start of your retirement when stocks are down, you undermine the long-term growth and sustainability of your funds.
Keep working or at least work part-time. Delay tapping into your retirement savings and instead let them recover in value while continuing to reinvest dividends. If you can, put off taking Social Security benefits to increase the annual benefit amount.
Ages 25-55: Those working full-time and happy with the job.
Do nothing, stay the course.
Stocks are on sale, right now. That means your reinvested dividends can buy more shares at a cheaper price. Keep in mind that it is impossible to “time” the market by jumping out at a market peak then jumping back in when it dips. Those that bailed out of the market after the Great Recession missed the first four months of recovery when stocks made the biggest gains.
For the past six months, maybe a year, I have been telling myself that the increasing value of my stock portfolio was fake money and didn’t exist. I estimated what a 20-30 percent selloff would look like. Sure enough, that’s what my portfolio now looks like. Ouch.
The thing is, we’ve been overdue for a retraction or a correction for more than two years, so the virus triggered a predicted decline. But the total economic shutdown has put us into new harsh territory.
For my money, the longer the bull market continued, the more brutal the sell-off would be (with or without the virus). Yes, the virus is new territory, the Boeing implosion is a problem, global oil prices are too low, and the political climate isn’t helping. But here we are. Through every dark time, U.S. capitalist markets have persevered, delivered dividends and created wealth for all of us in terms of assets, jobs and profits.
Sadly, this sell-off will scare some out of the market at the bottom, never to return. They will miss dividend earnings going forward. Inflation will eat into their cash. That’s when a good financial adviser can help by explaining why staying with markets is the way forward.
I am not into doomsday scenarios. As my mother, the ultimate investor, often told me, “things will come back.”
According to Google research: Before the current correction, there have been 37 declines of at least 10 percent in the S&P 500 since the beginning of 1950. Each of these drops, many of which lasted less than 3.5 months from peak to trough, were completely erased by a later bull-market rally.
Here are the positives of the global market meltdown:
Energy costs are dropping. Oil, gasoline and diesel prices are dropping. That helps with household expenses, helps with business operating budgets, helps trucking companies, helps airlines. They all need help.
Stocks are cheap and present a buying opportunity for those with a long-term horizon. Use dollar-cost-averaging to routinely buy in.
Until the virus hit, the U.S. economy was the best of the past 30 years with a low unemployment and strong job demand. That isn’t going to disappear.
Housing will continue to be in demand. A key part of the economy.
The Fed is pouring money into banks. That means cheaper cheap loans or refinanced loans that will help people get by until a paycheck returns.
Experts are saying the virus outbreak could peak by June, then likely decline. Many expect a return to more normal economic activity and a run-up in stocks whenever that happens. The rapid and huge sell-off tells me there could well be a rapid and huge market recovery whenever it becomes clear that we are getting through the virus-induced downturn.
“Market Bottom: Are We There Yet? – Fidelity.com https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-market-drops-2020
“Control the One Thing you Can" by Jason Zweig writing at the WSJ -- https://www.wsj.com/articles/stocks-are-cratering-control-the-one-thing-you-can-11584055737?mod=hp_featst_pos1
RMDS. Will Congress suspend withdrawals? Retirement Income Center -- https://www.retirementincomecenter.com/will-congress-suspend-2020-required-minimum-distributions/
“I’m Scared. That’s a Reason to Buy." WSJ -- https://www.wsj.com/articles/im-scared-thats-a-reason-to-buy-11584984021?tesla=y&mod=article_inline
ll information provided here is for informational purposes only. Consult your financial adviser.
"Save your money and one day your money will save you." - www.clevergirlCGF.com
BY JULIA ANDERSON
A 13-year-old girl asked me the other day what advice I could give her about money…. saving it, investing it, and building a nest egg.
She’s keen and already has cash in the bank saved from raising 4-H animals during the summer, selling them in the fall and depositing her net earnings.
I told her I’d need to think about her question before answering because most of my reporting and writing targets women 18 and older. Secondly, a 13-year-old faces shorter-term challenges related to getting an education beyond high school and paying for it. (More on that below)
Instead of pulling answers out of my head or off the Internet, I turned to my Facebook friends. Wow, did they come through!
The cool thing about those who took time to comment is their diversity in age and background. Among tipsters were younger people with children and full-time jobs, a middle-aged winery owner, a retired high-tech executive, an investment professional, a banker and a Realtor, plus a few folks managing their investments in retirement. Thanks to all.
What follows are great tips for the 13-year-old. Thanks, everybody!
A teacher in her 40s: Create a budget for something small you want to purchase in the next three months, something bigger you want in a year, and something even bigger you would like to have in five years. Figure out how much you need for the items you want, list all your sources of income, and create a plan for how you will save those funds. Practice planning lots, make goals, keep a journal with a simple list of what you buy every day.
Working woman in her 60s: It’s not what you make it’s what you don’t spend‼️ My mom was a financial whiz in her day.
Real estate professional: Learn about “dollar cost averaging." Regardless of the market, make a small monthly contribution into a mutual fund. I use Vanguard.
Investment adviser: Create a habit of saving. Invest in equities over bonds or cash. Maintain your saving and investing discipline.
Retired female high-tech executive: Learn about compounding interest. "How Teens Can become Millionaires," Click here.
60-ish woman working in retail: At 13 when parents are paying for nearly everything, I would advise her to save every dollar she receives. Let’s say her allowance is $10 per week. That’s $520 per year. Let’s say, on her birthday she gets $100 from Grandma and $50 from Aunt Sarah. Now she has $670 per year. Let’s say she earns around $25 per month for babysitting. That’s another $300 for a total annual income of $970. At 16, she gets a minimum-wage, part-time job and earns around $8,000 per year. That’s $16,000 in two years to add to her savings.
She could open and deposit this cash into a savings account at a brick-and-mortar bank and keep $5 in that account. Then, she could open an online savings account and link it to her brick-and-mortar account. Online accounts typically pay higher APYs (annual percentage yield). E-Trade has one paying 1.75 percent with no minimum deposit. With a minimum of $10,000 at Marcus by Goldman Sachs, they would give her a $100 bonus for opening a new account.
(For 10 best high-yield savings accounts, click here.)
A 70ish professional writer: When I got my first job at 16 (department store clerk) my parents insisted that I save 50 per cent of every paycheck. I thought they were the meanest people in the world. Turns out that they were quite wise!
Teacher in her 40s: Create a budget for something small you want to purchase in the next three months, something bigger you want in a year, and something even bigger you would like to have in five years. Figure out how much you need for the items you want, list all your sources of income, and create a plan for how you will save those funds. Practice planning lots, make goals, keep a journal with a simple list of what you buy every day.
(For best personal finance software apps for 2020, click here.)
Freelance writer: When I got my first job at 16 (department store clerk) my parents insisted that I save 50 per cent of every paycheck. I thought they were the meanest people in the world. Turns out that they were quite wise!
Retired nurse: Always live within your means. Save for a rainy day. When you want to buy something, wait 24 hours before you go back to buy it.
Working 30ish mom: Don't buy on impulse - make a rule for yourself, like waiting a day before buying anything over $20 (or whatever feels right to a 13-year-old girl). Learn how debt works (specifically, credit cards and loans) and when and how to use debt wisely.
Save toward multiple goals. This mimics aspects of a budget for someone who isn't used to one. Learn what things cost on a monthly basis (as a precursor to budgeting and $$$$ independence). Practice micro-investing with something like Acorns (an online site that “helps people invest, save and spend smarter starting at just $1 per month”).
Retired retail store owner: Practice the rule of 78 and once the concept is understood... create a classic example of what it can do for her (or work against her when borrowing).
Help her pick a low-dollar entry mutual fund that she can watch rise and yes, fall in value (with markets) because that's important to learn. A gift for the minimum entry would be a nice 13th birthday present.
Winery co-owner: Save and invest 10 cents out of each dollar earned (that's 10 percent of your income). Do it always, start young. My uncle gave me this advice, which I did not follow (cringe), and the other day I added it up out of curiosity and was SHOCKED at what it would be today. The 10 percent is hardly missed at the time, but that constant trickle can make a BIG difference over time. Pay cash or wait until you can, avoid debt especially on depreciating assets or non-assets. (for more, click here.)
Pass the marshmallow test. When faced with the choice of one marshmallow now or two later, choose what's better long-term than short-term. Two marshmallows are twice as good as one -- patience pays off! Don't be afraid of money, learn about how it works and put that knowledge to use in your favor.
Forget keeping up with the Jones’s, it’s probably a house of cards anyway. Don't be too frugal either, budget in some "fun money" (maybe also 10 percent?) so you don't feel deprived.
However little or much you have, be thankful and manage it wisely. Also budget in generosity, give back 10 percent to a cause of your choice to help others. (Choose any three, lol.)
Retired grandma: She should always save half of her earnings, no matter how small or great. That is what I taught my children and they are now teaching that to their children.
A full-time female executive: Keep a tight budget as cash is king. Invest with every paycheck. Real estate and education are great investments.
Using a 529 plan (or not):
If you google 529 tax-advantaged investment plans designed to encourage savings for higher education expenses, you find a range of pros and cons about them. A 13-year-old girl and her family (including grandparents) must decide what works financially for them. Start the conversation, now!!
With only 4 or 5 years until high school graduation, she needs a money strategy that includes estimated costs and an outline of where the money will come from to pay those costs. A 529 can be part of that plan.
529 Pros: Investments inside a 529 grow tax-deferred and are tax-free when withdrawn.
529 Cons: These plans offer limited investment options, may have higher management fees and may reduce need-based aid offered by schools up to a maximum of 5.64 percent of asset value. However, the experts say the trade-offs are worth it.
That’s because you get tax-free growth inside a 529 account and are putting money away that won’t turn into crippling student loan debt, later. Winning a free ride to college is rare.
Applying for scholarship and aid money is a big job. Start learning about it now. Believe it or not, I know young people who have won a four-year degree without taking on student debt!!
Helpful web sites on 529s:
cappex.com – free information about colleges, scholarships, majors and student aid.
Michelle Singletary, Washington Post financial columnist, click here.
Pros and cons of 529 plans, click here.
"Why no one should have a 529 plan," click here.
For more general money advice:
How teens can become millionaires, click here.
MarketWatch; Talking to kids about money, click here.
10 Money Lessons for kids, click here. Parents.com
BY JULIA ANDERSON
Futures contracts are beyond my investment expertise.
Neither do I understand “puts” and “calls.” Nor do I care to buy gold, collectibles, artwork or limited partnerships in the hope that their values will increase. Annuities make me nervous.
For me, these investment options for my retirement savings are too risky even though their promised payout might be tempting.
On the other hand, if I put money into U.S. Treasury bonds or into a bank savings account insured by the federal government, it would be secure. No risk there.
I am an investor in the middle trying to balance risk against a reasonable investment reward.
For me that means investing in high-grade blue-chip dividend-paying common stock in U.S.-based corporations and in low-fee growth U.S.-based mutual funds such as a S&P 500 Index Fund.
Bottom line: I am willing to endure a future economic downturn and accompanying stock market sell off because history shows that the American economy is resilient and will recover. Over the past 75 years, U.S. markets have averaged 10 percent annual growth. To benefit as an investor, I must take on moderate risk to ensure my long-term financial future.
Determining your RISK TOLERANCE is an important but often over-looked aspect of investing. However, risk tolerance is among the first things an investment adviser will ask you about. Be prepared with an informed answer.
Too many investors (especially woman) get off track because of their response to the risk tolerance question. “No, I don’t want to see the value of my investments ever go down,” they say. “No, I can’t stand the idea of ever losing money.”
During a recent Women & Money workshop, a woman in the audience lamented to me that her husband was in charge of their retirement investments and that “he does not trust the stock market. All our money is in bank CDs,” she said.
I told her that strategy was OK in terms of no risk but that she and her husband were likely getting a 1 percent or less return on their savings over the past 10 years. That’s while U.S. stock markets delivered annual average gains (share price increases and dividends reinvestment) of 17 percent. That means a $10,000 stock investment 10 years ago would now be worth $48,068.
She left the presentation upset. I doubt she will have any success convincing her husband that his savings and investment strategy is too conservative. I didn’t have the heart to tell her that they are losing money on their “safe” CDs investments because inflation (the rising cost of living) is eating into the purchasing power of their nest egg.
People --both men and women -- get nervous when markets are volatile (as they are now at the beginning of 2020) and there’s more talk about the next recession. Our bull market can’t go on forever, right?
Preparing for a recession
How should we plan for a downturn? Where should they put their money? In bonds, stocks, the bank or under a mattress? The risk factor is becoming more importance.
Burton Malkiel, author of the famous investing book, “A Random Walk Down Wall Street,” wrote a piece for the Wall Street Journal recently (Dec. 2019) that offers these suggestions:
Back to the risk factor. In his book, Malkiel makes a case for taking on moderate risk. He points out that the return on a portfolio of U.S. common stocks has averaged 10.5 percent a year over the past 25 years or so. Your portfolio with reinvested dividends (at 10 percent) should double every seven years!
Further, he suggests that your capacity for risk is usually related to your age. The younger you are the more risk you can take on because time is on your side and you have many working years ahead of you to accommodate market downturns. A higher-risk portfolio of smaller growth stocks might be appropriate, he said.
If you’re on your 60s, facing retirement with less income, a portfolio of safer investments makes sense. Bonds and high-dividend stocks could be the solution. Bank CDs still may not be the answer because your savings have got to generate some income.
“The longer you can hold on to your investments, the greater should be the share of common stock in your portfolio,” Malkiel states. “Moreover, the longer an individual’s investment horizon, the more likely it is that stocks will outperform bonds.” (here's a link to a 2010 Malkiel lecture the continues to have merit, click here.)
(The Internet offers numerous calculators that will determine the return on investment with compound interest (dividends) and savings contributions. Here's one, click here.
My tips on managing RISK:
1. Be informed. Read Malkiel’s book, “A Random Walk Down Wall Street.” or at least read the parts that are relevant to your age and financial situation. Go online and watch his investment lectures on YouTube. Click here.
2. Understand that downturns are normal and part of the trade-off between risk and financial reward. Don’t sell during a downturn. Don’t expect to jump back in before markets go up.
3. A higher rate of return typically means taking on more risk. Don’t invest in stuff you don’t understand, even if you are guaranteed a high return. There is no free lunch. And realize that short-term fluctuations in markets can be scary. Don’t panic, stay the course.
4. Realize that it doesn’t have to be all or nothing.
or me, a return of 2 to 4 percent a year on an investment is reasonable. Most of my investment portfolio generates dividends in the 2 to 3 percent range, plus whatever happens to the value of the stock. I continue to reinvest dividends paid inside my tax deferred IRA even as I know must take the Required Minimum Withdrawals. I have enough in cash to cover RMDs for a year That way, I’m prepared for a downturn and won’t have to sell principal at a lower price.
5. You don’t have to be a stock picker. Managing risk might mean investing in a low-cost index fund tied to the S&P 500 or a broad mix of a sectors such as telecom, high-tech or industrials. Look at the track record for the funds you buy and be sure to check out any management fees that can eat into your return.
6. Save and invest even in bad times. Make saving AND INVESTING a regular part of your long-term financial strategy.
YouTube - What is investment risk?, click here.
“A Random Walk Down Wall Street, “by Burton Malkiel, click here
"A Way to secure retirement income later in life," click here.
The Risk of Different Types of Investments, click here.
Saving and investment options, usa.gov, click here
Risk Management and You, Edward Jones, click here.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
Editor's note: All information provided at sixtyandsingle.com is for informational purposes only. Sixtyandsingle.com makes no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions in this information or any damages arising from its display or use.