Insights: quarterly newsletter from RKL Wealth Management LLC (Winter 2016)
Nothing Worked, Now What?
2015 will likely go down in the history books as one of the few years in the financial records that “nothing worked.” As of this writing, the S&P 500 is flat including dividends, international stocks are also flat including dividends, the aggregate bond index is up .60%, and Small Company stocks are -2.9%. Commodities? Ugly – down – 25%. Historically speaking when building a portfolio of these different asset classes, when one isn’t doing so hot, one of the others is, which is why you build diversified portfolios with these asset classes. As always, there are exceptions to the rule – this year being one of them.
Do we expect this type of return environment to continue where every asset class is flat to negative? No. However, with future expected economic growth and inflation still below historical norms, a stock market that has appreciated in price north of 100% since the bottom in 2009, and a Fed that is tightening monetary policy, less than double-digit returns in general may be our future. Relying on price appreciation alone may not be enough and a greater focus may need to be placed on dividends than in the recent past.
Most retirees can withdraw 4-5% from their assets and not have to worry about running out of money too early with a balanced asset allocation. That assumes that we are able to get at least an 8% return from stocks and 4% from bonds over time for a total return of 6.4% as some of this return is given back towards management fees and inflation. Relying on the market to appreciate 8% every year with little help from dividends is likely to not get the job done going forward. Retirement goals can become much more achievable if we can get 3% from dividends every year and only have to rely on stock price appreciation of 5% or so. Yes, we are aware that there are companies out there that pay well north of 3%, but beware – a dividend yield that is way above the market yield could be a signal of trouble and a looming dividend cut.
We are optimistic that returns will be better than last year; however, the volatility will not be going away anytime soon. We encourage you to stick to your long-term investment plan and not panic, and make changes based on short-term market movements we encounter. Best wishes for a happy new year, and we look forward to better markets in 2016!
What is an Exchange Traded Fund?
An exchange-traded fund (ETF) is a pooled investment vehicle with shares that can be bought or sold throughout the day on a stock exchange at a market-determined price. In many ways, an ETF is like a traditional index fund in that it offers investors a proportionate share of assets (in most cases stocks or bonds). ETFs have become increasingly popular over the last ten years, with total investments approaching $2 trillion in U.S. based ETFs in 2015. The popularity of ETFs is due to several similarities to mutual funds as well as some key differences.
ETFs and mutual funds are similar in the following ways:
- They offer investors a proportionate share of assets (typically stocks, bonds or other assets)
- They typically are governed by the Investment Company Act of 1940
- Creation and redemption of share/units are executed once each day at the Net Asset Value (NAV) of the fund by Authorized Participants
- They can provide broad based asset allocation through one security (such as an S&P 500 fund / ETF) at a low cost
- The can provide broad based exposure to a specific market sector at a low cost (such as the Technology Sector)
ETFs are different from mutual funds in the following ways:
- ETFs can be bought and sold throughout the day on the secondary market (i.e. stock exchange) via a broker-dealer
- ETFs prices fluctuate throughout the trading day
- ETFs can provide greater tax efficiency than mutual funds as ETFs do like-kind-exchanges whereas mutual funds pay out capital gains (typically once a year)
- ETFs have no investment minimums unlike many mutual funds
If you have any questions regarding ETFs that are purchased in your account, please contact your investment advisor from RKL Wealth Management.
RMD Letters
As you probably are aware, for clients 70 ½ years and older in 2016 holding an IRA account, there is a requirement to take a distribution from this account. This Required Minimum Distribution (RMD) also applies if you have an Inherited IRA. Lisa Griffiths will be sending you a letter in early February, stating what your RMD is calculated on the 12/31/2015 value of the IRA account. You will be asked to confirm when you want to take the distribution and if you have any tax withholding changes. If you reach this age milestone in 2016, Lisa will send you paperwork to complete asking these same questions. Some of you have chosen already, to receive your distribution in January, or monthly beginning in January. You will still receive a letter, stating what has already occurred. If you have any questions pertaining to RMDs, please give us a call.
What Social Security Claiming Changes Mean for You
By: Thomas D. Reardon, CFP ®
Congress unexpectedly eliminated two Social Security claiming strategies as part of the Bipartisan Budget Act of 2015. This action makes retirement planning a little more complicated for people who expected to use these strategies to boost retirement income.
The provision of the budget called “Closure of Unintended Loopholes” primarily addresses two Social Security claiming strategies that have become increasingly popular over the last several years. These strategies, known as “file and suspend” and “restricted application for a spousal benefit,” have often been used to increase cumulative Social Security for married couples.
File and Suspend
Under the old rules, individuals who had reached full retirement age could file for retired worker benefits in order to allow a spouse or dependent child to file for a spousal or dependent benefit. The individual could then suspend the retired worker benefit in order to accrue delayed retirement credits and further claim an increased benefit at a later date, up to age 70.
Under the new rules, effective for requests submitted on or after April 30, 2016, the worker can file and suspend and accrue those delayed retirement credits, but no one can collect benefits on the worker’s earnings record during the suspension period. This change effectively ends the “file and suspend” strategy for couples and families. The new rules also mean that a worker can no longer request a lump-sum payment in lieu of receiving delayed retirement credits.
Restricted Application for a Spousal Benefit
Under the old rules, a married individual who had reached full retirement age could file a “restricted application for a spousal benefit” after the other spouse had filed for retired worker benefits. This allowed the individual to collect spousal benefits while delaying filing for his or her own benefit, in order to accrue delayed retirement credits.
Under the new rules, an individual born in 1954 or later who files a benefit application will be deemed to have filed for both worker and spousal benefits, and will receive whichever benefit is higher.
Still Time Left to Use These Strategies
A limited window still exists to take advantage of these two claiming strategies. If you are currently at least age 66 or will be by April 30, 2016, you may be able to use the “file and suspend strategy” to allow your eligible spouse or dependent children to file for benefits, while also increasing your future benefit. To file a restricted application and claim only spousal benefits at age 66, you must be at least age 62 by the end of December 2015. At the time you file, your spouse must have already claimed Social Security retirement benefits.
Planning Opportunities
The age when you begin receiving Social Security benefits can significantly affect your retirement income and the income available to your survivors. Determining when to file for benefits is one of the biggest financial decisions you’ll need to make as you approach retirement. There’s no “one size fits all” answer – it is an individual decision that must be based on many factors, including other sources of retirement income, plans to continue working and your income tax situation. Married couples need to plan together, taking into account the benefits to which you are each entitled. Although some claiming options are being eliminated, plenty of planning opportunities remain. It’s important to take the time to consider all opportunities and make an informed decision about when to file for Social Security. Contact your financial planning professional to develop a Social Security plan that adheres with your long-term financial goals.