Personal Finances: Focusing on What You Can Control + Financial Market Update + 3.31.2020

Personal Finances: Focusing on What You Can Control + Financial Market Update + 3.31.2020

FINANCIAL MARKET UPDATE 3.31.2020

STORY OF THE WEEK

personal finances: focusing on what you can control

GUEST AUTHOR: JUSTIN VOSSEN, CFP®, NAPFA, INVESTMENT ADVISER & PRINCIPALL

Like many of us, you may feel a bit disoriented, fearful, and anxious. Not only has your life been dramatically altered in the past few weeks, but the market continues to drastically swing every day. The uncertainty of it all is perhaps the most difficult thing to comprehend. While nobody has answers, we can be sure of one thing; mankind has focused all of its resources on one problem. One can hope that with a dedicated effort, positive change is on the horizon.

The disruption to the financial markets and economy is a difficult thing to gauge. Globally, many governmental programs are focused on mitigating the damage in the near term by stimulating their economy in various ways. This stimulus will provide a lubricant for the financial system in order to continue to function as normally as it can.

There is little question that there will be a recession. We have already dipped into a bear market as fast as we have seen in history. Since 1926, the average bear market lasted 22 months, while the longest bull market lasted 9 years.  Bull markets follow bear markets, and much of the recovery typically comes in the front end of the bull market.

WEEK IN REVIEW

  • On Friday the House approved the CARES Act, which was quickly signed by the President. The rescue package is designed to provide support to the economy that has been damaged by the coronavirus fallout. The $2 trillion stimulus will be the largest in history, and roughly doubles the stimulus package used during the financial crisis. Support measures from the bill include increased unemployment benefits, direct payments of $1,200 to individuals, small business loans, and support for large corporations, hospitals, and local governments (among other items).
  • Last Thursday the weekly publication of initial jobless claims garnered significant headlines. This weekly measure represents individuals who file for unemployment benefits for the first time. The figure had been hovering around multi-decade lows just a few weeks ago, but jumped to the highest level ever. At 3.3 million, the recent reading dwarfs the peak during the financial crisis of 665,000, as well as the all-time record of 695,00 in October 1982. The spike in jobless claims is a testament to how abruptly the response to the coronavirus has slammed the breaks on economic activity.
  • Additional economic data to be published during the week may begin to reflect the impact of the coronavirus on the economy. On Wednesday we will get an update on manufacturing activity for March. On Friday we will get the Jobs report, as well as an update on services sector activity for March.

HOT READS

Markets

  • Trump Signs $2 Trillion Coronavirus Relief Bill As The US Tries to Prevent Economic Devastation (CNBC)
  • China’s Coronavirus-Battered Economy Shows Tentative Signs of Renewed Life (WSJ)
  • Larry Fink Says Economy Will Recover From Coronavirus, ‘Tremendous Opportunities’ in Markets (CNBC)

Investing

  • We Can’t Prevent Market Panics. We Can Control How We React. (Zweig)
  • A Short History of Dead Cat Bounces (AWOCS)
  • Three Reasons Its Not 1929 (The Reformed Broker)

Other

  • Even If a Restaurant Worker Coughs Or Sneezes Directly In Your Food, You Won’t Catch Coronavirus From Eating The Meal (Business Insider)
  • 15 Best Work From Home Tips During the Coronavirus Pandemic (Prevention)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

Personal Finances: Focusing on What You Can Control

Personal Finances: Focusing on What You Can Control

 

LUTZ BUSINESS INSIGHTS

 

personal finances: focusing on what you can control

justin vossen, cfp®, napfa, investment adviser & principal

 

Like many of us, you may feel a bit disoriented, fearful, and anxious. Not only has your life been dramatically altered in the past few weeks, but the market continues to drastically swing every day. The uncertainty of it all is perhaps the most difficult thing to comprehend. While nobody has answers, we can be sure of one thing; mankind has focused all of its resources on one problem. One can hope that with a dedicated effort, positive change is on the horizon.

The disruption to the financial markets and economy is a difficult thing to gauge. Globally, many governmental programs are focused on mitigating the damage in the near term by stimulating their economy in various ways. This stimulus will provide a lubricant for the financial system in order to continue to function as normally as it can.

There is little question that there will be a recession. We have already dipped into a bear market as fast as we have seen in history. Since 1926, the average bear market lasted 22 months, while the longest bull market lasted 9 years.  Bull markets follow bear markets, and much of the recovery typically comes in the front end of the bull market.

One could argue that the markets are like a rubber band, the further you pull it back the quicker and harder it snaps back. As a result, in this particular environment, we recommend that we hold steady and make sure we have enough cash to get us through the coming quarters. That way we can effectively tune out the noise, focus on long-term goals, and let the benefits of diversification play out.

To conclude, if the best advice we can provide is to hold steady and ride through these coming weeks/months, what can we be doing proactively to help our mental and financial state?

We will be contacting Lutz Financial clients to discuss a variety of the following topics:

  • Gather tax filing items. This will help provide some level of certainty on payments/estimates and wrap up last year. In addition, it will allow you to plan for this coming year, as well to get closure.
  • Review your home budget. Are there things you don’t need immediately? Do you have unnecessary subscriptions or payments that don’t need to be made?
  • Look at tax-loss harvesting and asset location. Are there any tax plays now when the market has pulled back that you couldn’t do when greater gains were built-in?
  • Should you consider a Roth IRA conversion?
  • Should you reconsider you required minimum distributions for this year?
  • Revisit healthcare proxies, living wills and other advanced directives.
  • Make 2020 Roth/IRA contributions.

If you have immediate questions or concerns, please contact Lutz Financial today at 402.827.2300.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL

 Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.

AREAS OF FOCUS
  • Investment Advisory Services
  • Comprehensive Financial Planning
  • Business Owner Planning & Succession
  • High Net Worth Families
AFFILIATIONS AND CREDENTIALS
  • CERTIFIED FINANCIAL PLANNER™
  • National Association of Personal Financial Advisors, Member
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • Mount Michael Booster Club Board
  • Lutz Gives Back, Committee Chair
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Personal Finances: Focusing on What You Can Control + Financial Market Update + 3.31.2020

Controlling What You Can + Financial Market Update + 3.24.2020

FINANCIAL MARKET UPDATE 3.24.2020

STORY OF THE WEEK

CONTROLLING WHAT YOU CAN

A critical concept investors must understand is that markets are forward looking. This means prices reflect the aggregate of all future expectations. As a result, stock prices will often decline (rise) ahead of bad (good) data. With the S&P 500 down over 33% from its mid-February peak, the market is definitely expecting some bad news. We are now on the precipice of those expectations becoming reality. As coronavirus testing ramps up, the number of confirmed cases will likely jump. At the same time, economic data (which is backwards looking) is going to start reflecting the impact of the virus on business and consumer activity. The news flow has been scary, but it will probably get worse before it gets better.

The real question relates to how expectations will compare to reality. The market has already priced in a great deal of the bad news that we are about to get. Has it fallen too much? Or not enough? It is impossible to know in advance, and it is out of our control. Instead of dwelling on this, investors are better served by focusing on what they CAN control.

Recent volatility has presented a variety of opportunities for investors. For those that are not in or near retirement, the selloff provides a BIG opportunity to invest at a steep discount. Many investors could also benefit from “rebalancing” their portfolio. Balanced portfolios made up of both stocks and bonds have likely seen their allocation to stocks fall relative to their bonds. The act of rebalancing moves the portfolio back to its target by selling what has done relatively well (bonds), and buying what has done relatively poor (stocks). Effectively buy low/sell high. Finally, tax loss harvesting can be beneficial for any taxable investor. Tax loss harvesting involves realizing losses on certain positions, and investing the proceeds into a similar (but not substantially identical) investment. The losses generated can be used to offset other realized gains and a certain amount of ordinary income in the current tax year, while unused losses can be carried into futures years. Each of these items are within an investor’s control, and offer a way to take advantage of an otherwise scary and tumultuous event.

Remember this important concept: markets are forward looking. Stock prices fell in advance of the bad news arriving. Like all of the past challenges our nation has faced, we will overcome this threat. Expect prices to rise ahead of the good news.

WEEK IN REVIEW

  • On Monday the Federal Reserve dramatically increased the level of support it is providing to the markets. Headlining the new support measures is a new program called the Secondary Market Corporate Credit Facility. Under the program the Fed will begin purchasing corporate debt (in addition to the previously announced agency mortgages and Treasury bonds). This includes individual investment grade bonds, and ETFs that are comprised of investment grade bonds. The corporate bond market has been under pressure amid the coronavirus fears, and the Fed’s purchases is designed to provide some stability.
  • Congress continues to work on a large stimulus bill aimed at mitigating damage to the economy caused by the coronavirus. The amount of stimulus being discussed would be very large, even compared to what was rolled out during the financial crisis.
  • Last Thursday the market got a small taste of the bad economic data to come. The number of new individuals filing unemployment increased by roughly a third, and the number is expected to increase even more dramatically this Thursday. Today we will get an early look at activity in the services and manufacturing sector when HIS Markit publishes its flash (early estimate) PMI data. This survey based data is expected to reflect a sharp drop in sentiment and activity during the month of March.

HOT READS

Markets

  • Fed Surprises Market With Program to Support Corporate Bonds Amid Coronavirus Pandemic (CNBC)
  • Congress is Getting Closer to a Deal on the Massive Coronavirus Stimulus Bill (CNBC)

Investing

  • What if You Buy Stocks Too Early During a Market Crash (AWOCS)
  • The Panic of 2020? Oh, I made a Ton of Money – and So Did You (Zweig)
  • Bird in the Hand (TheBelleCurve)

Other

  • This is your Brain on a Crashing Stock Market (Zweig)
  • Coronavirus ‘Infodemic,’ Here’s How to Avoid Bad Information (WSJ)
  • Blood Donations Needed During Coronavirus Pandemic (CNBC)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

Personal Finances: Focusing on What You Can Control + Financial Market Update + 3.31.2020

Large One-Day Market Declines + Financial Market Update + 3.17.2020

FINANCIAL MARKET UPDATE 3.17.2020

STORY OF THE WEEK

LARGE ONE-DAY MARKET DECLINES

Over the course of the last week the market has experienced extreme volatility. The last three days alone have seen the largest one-day drop since 1987, the largest one-day gain since October 2008, followed by the new largest one-day drop since 1987. These dramatic price moves come as the market incorporates new developments, and tries to anticipate the ultimate impact on businesses and the economy.

It does not matter who you are, seeing the value of your portfolio decline is painful, and watching the market register these large drops in rapid succession will make you feel the pain won’t end. History, however, shows us that it will.

The table below highlights the 20 worst one-day declines for the S&P 500 going back to 1950, and how it performed over a handful of subsequent periods. It turns out the market has responded to these large drawdowns in a variety of ways. In some cases stocks have rebounded quickly and delivered positive returns over all subsequent time periods. Other cases were followed by negative returns in the near-term, with positive returns coming over the longer time periods. There was even a case where the market rallied immediately after, only to decline again over the longer periods (but ultimately recover).

Source: Morningstar Direct. Data from 1/1/1950 to 3/16/2020. Stock Returns are based on the S&P 500 price return index, and exclude the effect of dividends. Return series greater than 1 year is annualized.

The important take-away resides in the green summary section of the table. Here we compare average performance following a large decline with the typical market experience over the entire (roughly) 70 year period. Not only have stocks generally been positive following a large decline, they have actually been materially higher than normal. The bottom line is lower prices today lead to higher returns in the future.

Recent volatility in the market is without a doubt unnerving. Just remember the decline in your portfolio is not permanent unless we make it so by selling. The reason we maintain some assets in cash and bonds is to get through these tough times without needing to sell stocks. We are fortunate to have a wonderful group of clients that understand this and have maintained discipline and patience. We know it’s not easy, so please don’t hesitate to reach out to us if you need to.

WEEK IN REVIEW

  • On Sunday afternoon the Federal Reserve made a surprise policy announcement aimed at supporting the economy and financial system amid the fallout from the coronavirus outbreak. The federal funds rate was reduced by 1.0% to a new target range of 0.00-0.25%, following up on a 0.50% cut to the rate just days prior. Additionally, the Fed reduced the discount rate (rate at which banks can borrow from the Fed) to 0.25%, and announced it will restart a bond purchasing program known as “quantitative easing” (QE). While the Fed may still have other tools at its disposal, this move represents a significant use of its available firepower.
  • In addition to the monetary policy announcement, there appears to be movement on the fiscal front. Over the weekend the White house endorsed a new bill that has since been passed by the House of Representatives, and is currently being debated in the Senate. The bill would provide free coronavirus testing to anyone whose doctor says needs one, increase paid sick leave, extend unemployment benefits to furloughed workers, and increase funding for state Medicaid programs. The Senate is expected to quickly pass the bill.
  • Additionally, Treasury Secretary Steven Mnuchin is expected to ask congress for an additional stimulus package of $850 billion, that would include measures like an airline bailout, payroll tax cut, and a delay in tax deadlines. 

HOT READS

Markets

  • Fed Takes Emergency Steps as Virus Pushes Economy Toward Recession (WSJ)
  • Fed Deploys Its Full Arsenal, but It Still Has Some Tools (WSJ)
  • Mnuchin to Ask Congress for $850 Billion Virus Stimulus Package (Bloomberg)

Investing

  • Stocks Are in Chaos. Control the One Thing you Can (Zweig)
  • The Historic Sell-Off & a Game of Expectations (AWOCS)
  • What Happens After The Stock Market Falls (Irrelevant Investor)

Other

  • Why Outbreaks Like Coronavirus Spread Exponentially, and How To “Flatten the Curve” (Washington Post)
  • Coronavirus Social Distancing Forces Painful Choices On Small Businesses (WSJ)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

Planning For College Pragmatically

Planning For College Pragmatically

 

LUTZ BUSINESS INSIGHTS

 

planning for college pragmatically

justin vossen, cfp®, napfa + Investment adviser, principal

 

Many parents have a goal of encouraging their kids to go to college. The dream of higher education is often a large driver in most parental decisions for their children. Financially it makes sense; the average college graduate with a bachelor’s degree makes $71,155, according to the U.S. Census Bureau for workers 18- and older in 2018. This is 83% higher than a high school graduate’s average annual earnings¹.

If you annualize the difference in earnings, the investment in college is clearly worth it monetarily over someone’s lifetime.  Thus, it makes sense that the demand for college continues to increase.  With that, the competition has increased as applications are up by more than 95% in 2018-19 compared to just 15 years ago².

This has obviously had an impact on the cost of education.  Since 1983, the cost of tuition has risen at a rate of 6.3% per year.  To put that in cumulative terms, the cost of tuition has almost risen eight-fold (798%) over the last 35 years.  Compare that to housing, where costs have only risen about 169% over that same period of time³.

The meteoric rise of college costs scares most and confounds parents when they are trying to think about the future — so what is the best way to plan for college?

Acknowledge the Uncertainty

The problem with planning for college when children are young is that there is so much uncertainty surrounding it. Will your child go to college? Where will they go? How many years will they attend? How much will it cost? How much of tuition am I willing to pay? Will they get a scholarship? What will financials look like at the time they enroll?

You can be paralyzed by variables to place into the equation.  This generally causes willy-nilly decision making and even causes some to ignore the situation completely.  Admit you don’t know exactly what is going to happen but try to apply some current reality to the situation by establishing a concrete starting point.

Pick a school and a number to quantify your goal

It’s probably best to begin by quantifying the situation from the beginning. Generally, when we advise folks, we take a specific approach to their location. For example, since we are located in Nebraska, we use the cost of its largest University, The University of Nebraska. The cost of tuition, fees, housing and meal plans in 2019-20 is $21,286.

Obviously, this tuition amount is in today’s dollars.  Based on your child’s age and an assumed tuition inflation rate, you can come up with a four-year undergrad cost need in the future (going for more than four years is a behavioral event which we will not solve for).  Then you can begin to do the math around how much is needed to fund college depending on the time horizon of your child.

When you have the numbers, you can solve for age. Below is an example of what an estimated cost of tuition will be (assuming 5% tuition inflation each year) for the University of Nebraska Lincoln. (Note: This does not include the effect of tax on any earnings/growth)

1. S. Census Bureau – Current Population Survey 2018; 2. National Center for Education Statistics; 3. BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represent cumulative percentage price change from 12/31/82 to 12/31/2018

How much of college tuition are you willing to help pay for your child?

The right columns show how much you would need to save per month in order to pay for those future amounts assuming a 6% return on the assets invested monthly over the time from the beginning age.  With this information, we can estimate the cost of paying for 75% of University Nebraska tuition for a current newborn would require an estimated monthly savings of $425.

To make a plan, one needs to quantify how much they would like to pay for their children’s college and then acknowledge their ability to do so. The ability to contribute to their children’s future education must be contemplated concurrently with other income, savings, liquidity and planning for retirement. We always solve for retirement first because college is easier to fund, and frankly, it is not a necessity but a desire.

The combination of the ability to pay and the amount parents are willing to pay is what still needs to be solved for. Parents need to ask themselves if they want their children to have “skin-in-the-game” and what sacrifices they will need to make to go to college. What, then, are the parents willing to sacrifice to get them there?

The shortfall amounts can be filled with scholarships, grants and loans.  Financing college and paying back debt is another topic we will write about as a follow-up, but we want to give you some context.  According to Savingforcollege.com, the class of 2019 will have debt totaling roughly $29,900 when they graduate.  Their parents will acquire more than $37,200 in debt in addition to the children.  Whatever shortfall people haven’t saved for or haven’t paid for will generally get borrowed in some fashion.

Okay, I get it, I need to start saving now.  But to what vehicle?

Deciding what vehicle to use to save is determinant on the ability to have assets grow, tax efficiency, control and time. In our opinion, 529 plans offer the best way to plan for college.  While there are multiple 529 options out there sponsored by each state, the one that is best for you comes down to three things.

  1. Do I get a tax deduction for contributions?
  2. Is this plan low-cost?
  3. Does it have low-cost and diversified investment options?

All 529 plans have the ability to defer taxes on growth and potentially have the ability to shield growth from all taxes if used for a qualified educational expense. However, each plan has a different tax treatment on contributions determined by state laws. For example, Nebraska allows for a state income tax deduction on contributions up to $10,000 annually in totality. This could save someone up to $650 annually, depending on your income tax rate. However, it is important to note that some states offer no state tax breaks on contributions such as Minnesota.

You also have the ability to maintain control of the funds and distributions that occur throughout the lifetime of your child/beneficiary.  These are considered the assets of the owner (parent), not the beneficiary (student).  However, these accounts can be opened up by grandparents or others on behalf of a student.  These are subject to gifting limits, so please consult your tax advisor prior to opening one up.

After you decide what tax treatment you get in your state, you can narrow down the plan offerings based on cost and investment options.  The types of costs you need to look at within the 529 plan are the following:

  1. Program manager fee (what financial institution sponsors the plan)
  2. Investment advisor fee (what your financial advisor collects, if anything)
  3. Mutual Fund expenses (underlying costs of the investments)
  4. State administration fees (what the state charges to sponsor the plan)

Other options are Coverdell ESAs, which are limited to $2,000 a year in contributions and are phased out based on your income levels. These are tax-deferred and tax-free if used for education. They do offer a wider array of investment options since it is a personal account. However, you also are required to move the assets to another beneficiary by age 30, or take out the assets and pay the taxes.

UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts for minors have a few pitfalls. The first of which is children can have full control of the assets at the age of majority in the state in which they live. In Nebraska, children have sole control at age 21.  These assets are also subject to income taxes and capital gains annually. Who is responsible for those taxes is based on the income level of the minor and in some cases their parents.

What if my kid gets a full ride scholarship?

Congratulations, you just won the lottery! You may have several options for their savings, depending on the account type. If it is a UTMA, it’s their money for good. If it is a 529 you can switch it to another beneficiary, do nothing and see if grad school funds are needed, take the money out (pay income tax on the growth), or distribute it to the beneficiary for other non-qualified educational needs (they pay income tax on the growth).

Just do it!

Planning for college is just that: planning. Like all plans, sometimes they will change. However, we believe it is important to at least quantify and begin saving as early as possible. You will have peace of mind and, more importantly, assets you can use to help aid in one of the most important decisions you and your child will ever make.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL

 Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.

AREAS OF FOCUS
  • Investment Advisory Services
  • Comprehensive Financial Planning
  • Business Owner Planning & Succession
  • High Net Worth Families
AFFILIATIONS AND CREDENTIALS
  • CERTIFIED FINANCIAL PLANNER™
  • National Association of Personal Financial Advisors, Member
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • Mount Michael Booster Club Board
  • Lutz Gives Back, Committee Chair
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

March Retirement Plan Newsletter 2020

March Retirement Plan Newsletter 2020

 

LUTZ BUSINESS INSIGHTS

 

MARCH RETIREMENT PLAN NEWSLETTER

CONSIDERING A TRADITIONAL SAFE HARBOR RETIREMENT PLAN?

It may be advantageous for a plan sponsor to consider adopting a traditional safe harbor design for their retirement plan. Adopting a safe harbor retirement plan design permits an employer to essentially avoid discrimination testing (the testing is deemed met). Remember, this testing limits highly compensated employees’ contributions based upon non-highly compensated employees’ contributions. By making a safe harbor contribution highly compensated employees can defer the maximum amount allowed by their plan and Internal Revenue Code limits, without receiving any refunds. General rules for all safe harbor contributions include the following:

  • Safe harbor contributions are 100 percent vested.
  • There may be no allocation requirements imposed on safe harbor contributions, for example, a 1,000-hour service requirement or a last day employment rule.
  • Safe harbor contributions may be used toward satisfying the top heavy plan minimum contribution requirement.
  • All eligible participants must receive a written notice describing the applicable safe harbor provisions between 30 and 90 days before the beginning of the plan year. This notice must be provided for each year the plan will be safe harbored unless the plan is going to elect safe harbor treatment after commencement of the plan year and utilize nonelective contributions to meet the safe harbor contribution requirement per the SECURE Act, which passed in December, 2019.

Generally, there are two types of safe harbor contributions:

  1. The non-elective contribution, which is a 3 percent contribution to all eligible participants (or 4 percent if safe harbor is going to be elected later than 30 days prior to plan year end, in accordance with the SECURE Act), or
  2. A matching contribution to participants who are contributing to your plan.

There are two options from which to choose for the matching contribution, either the basic or the enhanced match. The basic safe harbor matching contribution is defined as a 100 percent match on the first 3 percent of compensation deferred and a 50 percent match on deferrals between 3 percent and 5 percent of compensation. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100 percent of the first 4 percent deferred. All that said, employers wishing to explore a safe harbor solution should also be aware that it may entail more cost if their present contribution structure is less than the required safe harbor required structure.

Alternatively, a plan can adopt a qualified automatic contribution arrangement (QACA) design and receive the same safe harbor benefits with automatic enrollment and escalation features. To learn if a traditional safe harbor feature is appropriate for your plan, or to explore the workings of QACA, contact your plan advisor.

IS YOUR TURNOVER RATE ROUTINE? WHAT YOU NEED TO KNOW ABOUT PARTIAL PLAN TERMINATIONS

A partial plan termination is presumed by the IRS to occur when 20 percent or more of a company’s employees are no longer eligible to participate in the plan in a determined span of time (typically one plan year, but it can be other spans of time based on facts and circumstances). Routine turnover during the year is generally not considered a partial plan termination.

To determine whether your turnover rate is routine, consider the following factors:

  • What was your turnover rate during other periods and what was the extent to which terminated employees were actually replaced?
  • Do the new employees perform the same functions as the previous employees? Do they have the same job classification or title? Do they have comparable compensation?

There is no requirement to notify the IRS of a partial plan termination, but all affected employees must be 100 percent vested in their account balance as of the date of their termination. If this hasn’t happened, a Voluntary Correction Program would be appropriate. For more information on partial plan terminations, please contact your plan advisor.

TIPS FOR PREVENTING UNCASHED RETIREMENT CHECKS

Managing uncashed retirement checks may be considered a nuisance by plan administrators. Nevertheless, the employer still has fiduciary responsibility when a former employee fails to cash their distribution. Search efforts to locate a missing plan participant consume time and money and may fail to locate the participant. Likewise, going through the process of turning over dormant accounts to the state can also consume time and resources.

Decrease the burden of uncashed checks by:

  1. Discussing with terminating employees during the exit interview the options for their retirement plan. They may forget they have a company-sponsored retirement plan, or don’t know how to manage it.
  2. Reminding departing employees that they can roll over their retirement assets into their new employer’s plan. Your plan’s service provider or the new employer can answer questions the former employee may have about the rollover process.
  3. Letting employees with an account balance of $1,000 or less know they should expect to receive a check in the mail after a certain amount of time.
  4. Having the employee verify their current address to where the check can be sent. 

Remember, fiduciary responsibility and liability extends to terminated employees with assets in the plan. This responsibility includes delivery of all required distributions and all fiduciary prudence responsibilities. It’s very important to stay in touch with this important group.

PARTICIPANT CORNER: SIMPLE SECRETS FOR RETIREMENT SUCCESS

Retirement planning can often seem complicated and daunting. Really, though, most of the actions you need to take to work toward a confident retirement are very simple.

Follow a Plan
Successful investors have a plan and they stick to it. You have access to a qualified plan like a 401(k). With that comes access to educational materials and often, personalized information about saving for retirement. Creating a retirement plan, assessing risk tolerance, and setting up an asset allocation are easy steps to take toward retirement, and can always be readjusted later as circumstances change.

 

Focus on Saving More than Spending
Saving as much as possible is one of the most important steps for you to take. You should strive to live below your means and save the remainder. A qualified plan makes saving easy, since the money comes out before you receive it. Someone who starts saving 3 percent of income and increases that by 1 percent every six months will be saving 13 percent in five years.

 

Maximize Matching
If your qualified plan matches contributions, you should take full advantage of it. In this situation, the top priority is to contribute enough to get the maximum matching contribution. This “free money” can add tens of thousands of dollars to your retirement portfolio.

 

Seek Tax Deferred Retirement Plans

Tax-deferred plans are another huge boon to retirement savings. Money is contributed to the plan before taxes, and continues to grow and compound free of taxes, until withdrawal. This means that funds that would normally have gone to the government stay in your retirement account, boosting returns.

Q1 2020 FIDUCIARY HOT TOPICS

NEVER SAY NEVER - THE SECURE ACT BECOMES LAW
  • Last December, President Trump signed into law the “Setting up Every Community for Retirement Enhancement (SECURE) Act” (gotta love the name).
  • Although the most significant law affecting retirement plans in many years, all in all, it is a modest piece of legislation, as compared to prior laws such as Pension Protection Act of 2006 and the Tax Reform Act of 1986.  It is really a hodge podge of policy initiatives that have been bouncing around the halls of Congress in recent years.
  • The stated concerns of Congress in enacting this legislation are that almost half of the American work force is not covered by an employer sponsored retirement plan and many of those who are covered are not saving enough to provide adequate income in retirement.
  • Some of the provisions in the SECURE Act reduce or defer federal tax revenues. To pay for this the taxation of inherited IRAs is changing. Under current law, individuals who inherit an IRA may elect to take distributions based on their life expectancy which can be many years.  Going forward, non-spouse beneficiaries must take all distributions from an inherited IRA within 10 years. This change does not affect individuals who inherit an IRA from their spouse.
OPENING THE GATE FOR ANNUITIES IN 401(K) PLANS
  • One of the most important changes in the SECURE Act is removing a major stumbling block to offering annuities in 401(k) plans.
  • Only about 10 percent of 401(k) plans currently offer an annuity as an investment option. One of the main reasons for the reluctance to offer annuities is the potential fiduciary liability if the provider becomes insolvent, which may occur many years after the provider is selected.
  • The SECURE Act provides for a safe harbor that relieves plan fiduciaries of potential liability in regards to selection of annuity provider. This does not excuse plan fiduciaries from making a prudent and well considered decision in the initial selection and monitoring the provider ongoing. Additional guidance will be issued by the Department of Labor regarding the requirements to gain such protection.
  • The upside to including annuities in 401(k) plans is this offers participants an investment option that will provide a steady stream of income in retirement. This has become a greater concern in recent years as the American population ages and plan participants move from the accumulation phase into retirement. The concern is that annuities are complex and expensive, and the fees can be difficult for the average investor to discern.
  • Notwithstanding the potential complexities of annuities, participants who decide to invest in an annuity will probably be better off if the plan fiduciaries select the annuity provider, as opposed to participants rolling their account to a brokerage firm and then purchasing an annuity which frequently occurs under current law.
  • The SECURE Act makes a second important accommodation for offering annuities in plans. Where a plan sponsor eliminates a lifetime income option, the Act permits individuals to transfer this investment to another plan or to an IRA.
LIFETIME INCOME DISCLOSURE NOW REQUIRED
  • At present a few record keepers include on participant statements an estimate of the monthly income a participant’s account might generate. Often this estimate is based on a projected account balance at retirement.
  • The SECURE Act requires an annual disclosure on participant statements of the estimated monthly income a participant’s accrued benefit might produce in the form of a either a single life annuity or, if married, a joint
    life annuity.
  • The Department of Labor is directed to develop standards for making life time income projections. The Department has a year to develop these standards. This notice does not have to be provided to participants until after these standards are published.
AGE FOR REQUIRED DISTRIBUTIONS PUSHED BACK TO 72/AGE 70 1/2 LIMIT REMOVED FOR TAX DEDUCTIBLE IRA CONTRIBUTIONS
  • The SECURE Act increases the age at which minimum required distributions (MRDs) must commence.
  • The MRD rules are designed to prevent individuals from effectively using retirement plans and IRAs for estate planning and deferring income taxes on retirement benefits until the next generation. This rule requires individuals to begin taking distributions each year based on life expectancy and paying income taxes on these distributions. Under current law, for retirement plans, MRDs must commence in the year individuals reach age 70½, or if later, the year the individual retires. For IRAs, it is always the year the individual attains age 70½. The Act pushes this back to the year individuals reach age 72.
  • WARNING – This change is effective for individuals who do not reach age 70½ until 2020. Individuals who reached age 70½ in 2019 must take their first MRD April 1st, 2020.
  • The SECURE Act allows individuals to make tax deductible contributions to IRAs after age 70½. Under current law, only Roth contributions are permitted after age 70½. This change takes effect immediately and allows deductible contributions for 2019.
LONG TERM PART TIME WORKERS MUST BE OFFERED OPPORTUNITY TO DEFER
  • Current law allows plan sponsors to exclude part time workers who work less than 1,000 hours a year. The SECURE Act requires sponsors to allow “long term” part time workers to participate in their retirement plans. A “long term” part time worker is someone who works at least 500 hours in three consecutive years.
  • Employers are only required to offer these part time workers the opportunity to defer and do not have include these workers in any company contributions. These part time workers may be excluded from
    discrimination testing.
  • Practically speaking, this provision is not effective till 2023 as it does not require employers to begin tracking part time workers until 2021.
TAX CREDIT TO ENCOURAGE SMALL EMPLOYERS TO SET UP PLANS INCREASES TO $5,000 AND TO INCLUDE AUTOMATIC ENROLLMENT
  • The existing tax credit of $500 to encourage small employers to set up plans will increase to $5,000 per year for the first three years.
    • There is an additional tax credit of $500 for small employers that add an automatic enrollment feature to
      their plan.
    KEY PROVISIONS + APPLICABILITY AND EFFECTIVE DATES

    Multiple employer plans

    Defined contribution (DC) plans

    Plan years beginning after 2020

    Tax credits to encourage small employers to set up plans

    Qualified plans (e.g., 401(k) plans), SIMPLE IRA and Simplified Employee Pension (SEP) plans

    Tax years beginning after 2019
    Credit for small employers that add automatic enrollment 401(k) and SIMPLE IRA plans Tax years beginning after 2019
    Participation by long-term part- time employees 401(k) plans Plan years beginning after 2020
    Lifetime income disclosure on participant statements DC plans 12 months after the DOL provides guidance
    Fiduciary safe harbor for selecting insurer to provide lifetime income

    DC plans

    Date of enactment–December 20, 2019
    Portability of lifetime income options DC, 403(b) and 457(b) plans Plan years beginning after 2019

    Increase in the automatic escalation cap to 15% in the automatic enrollment safe harbor

    401(k) plans

    Plan years beginning after 2019

    Simplification of the rules for nonelective safe harbor 401(k) plans

    401(k) plans

    Plan years beginning after 2019

    Penalty-free withdrawals for birth or adoption expenses Qualified DC plans, 403(b) plans and IRAs Distributions made after 2019
    Increase in the age when distributions must begin Qualified plans, traditional IRAs, 403(b) and 457(b) plans Individuals who reach age 70 ½ after 2019
    Changes to the required minimum distribution rules for nonspouse beneficiaries Qualified DC plans, traditional and Roth IRAs, 403(b) and 457(b) plans Effective with respect to participants and account holders who die after 2019
    Permit traditional IRA contributions after 70 ½ Traditional IRAs Contributions for tax years beginning after 2019
    Expand tax-free distributions from 529 plans 529 college savings plans Distributions made after 2018
    DISCLOSURE INFORMATION

    Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

    For more important disclosure information, click here.

    RECENT LUTZ FINANCIAL POSTS

    Toll-Free: 866.577.0780  |  Privacy Policy

    All content © Lutz & Company, PC

    OMAHA

    13616 California Street, Suite 300

    Omaha, NE 68154

    P: 402.496.8800

    HASTINGS

    747 N Burlington Avenue, Suite 401

    Hastings, NE 68901

    P: 402.462.4154

    LINCOLN 

    115 Canopy Street, Suite 200

    Lincoln, NE 68508

    P: 531.500.2000

    GRAND ISLAND

    3320 James Road, Suite 100

    Grand Island, NE 68803

    P: 308.382.7850