IT STARTED FAST AND THEN SLOWED DOWN
The first quarter of 2021 started quickly as stocks continued the bull market following the fastest bear market in history which ended on March 23, 2020. The S&P 500 started the year at 3,736 and quickly reached 3,934 in mid-February before ending the quarter at 3,973 for a gain of 6.17%. The Russell 2000 was up 12.70%, the Bond Index was down -3.37%, and the MSCI EAFE finished up 3.48%.
INVESTING VERSUS TRADING
Given all the interest in the GameStop phenomena and the young enthusiasts that jumped on the train, we thought it might be interesting to compare investing with trading. From a tax perspective, the differences are stark. Traders are actively and continuously buying and selling, sometimes within minutes of each trade. Any gain that is enjoyed by traders is considered short-term and is taxed at ordinary income tax rates. Conversely, investors think long-term and typically keep the investments for at least 12 months so their gains would be taxed at long-term capital gains rate, which varies from 0% to 15% to 20% depending on other income. For individual investors with an income over $200,000 and married investors with income over $250,000, there is an extra 3.85% to pay on top of the capital gains tax. Traders can write off 100% of their losses where investors can only deduct losses against gains, plus $3,000 of other income. Traders can deduct business expenses, but investors cannot. (Source: Kiplinger Tax Letter Vol 96, No.5)
RMDs ARE BACK, BUT WITH A TWIST OR TWO
Last year, Required Minimum Distributions (RMDs) were waived because of the Coronavirus. But they are back this year and there are a few twists. First, there is no make up for skipping last year as you will use your December 31, 2020, IRA value to determine your RMD for 2021. Under the old rules, you had to begin taking distributions in the year that you turned age 70 ½, but you could delay it until April 1st of the following year. However, that meant you had to take two distributions in that year – one for the past year and another for the current year. For individuals who are not already taking an RMD, now you do not have to take a distribution until the year you turn 72. Last year, the IRS came out with a new life expectancy table, but do not use it this year as it doesn’t go into effect until 2022.
80% SAY THE PANDEMIC KNOCKED THEM OFF RETIREMENT SAVINGS GOAL
In a study by Fidelity Investments of 1,200 adult decision-makers, 80% indicated that the pandemic has caused them to fall behind on retirement savings by two to three years. Given that Fidelity said that retirement funds with them were at almost record levels, these folks may not be overly optimistic. Nonetheless, 36% are more concerned about their ability to retire when they want and to maintain the lifestyle to which they have been accustomed. In the same study, the research showed that “financial planning” means different things at different ages. Those in their mid-thirties consider financial planning as simply deciding how much to save and where to save it. Those closer to retirement were concerned about much more, including how to create income, manage debt and expenses, and handle estate planning. Now here is the really scary part. Only 25% correctly stated that most financial planners recommend saving of 10-12 times annual income and a small majority thought that only 5-6 times was the recommended amount. Generally, financial planners will recommend not taking any more than 4-6% from savings for income in retirement, but 28% of the participants thought that they could take 10-15%. WOW! Some would argue that 4-6% may be too high going forward given today’s low-interest-rate environment.
RAISE TAXES OR COLLECT WHAT IS ALREADY OWED?
President Biden and the Democratic Congress have great hopes of raising taxes on people who earn more than $400,000 per year. This would include raising the top tax rate to 39% from 37%. According to a recent study conducted by two IRS researchers and three college professors, the wealthiest 1% of Americans are not reporting more than 20% of their income and thus, are avoiding at least $175 billion in taxes by using complicated corporate structures and foreign accounts. The study suggests that more money is needed to hire specialized auditors for the IRS.
INFLATION IN OUR FUTURE – YES OR NO?
With all the money, about $5.3 trillion, authorized by Congress to fight the pandemic along with the bond buying spree of the Federal Reserve, many people are fearful of substantial inflation in the near term. First, let’s keep in mind that a little inflation is a good thing; the Fed’s official target is 2%. This target has been hard to hit the past couple of decades and especially the past 10 years. So, from some people’s viewpoint, we have some catching up to do. Thus, maybe letting it run at 2.5-3.0% for a few years would not be a bad thing. There is likely to be some isolated increases in prices on a year-over-year basis. We are already seeing it with microchips and energy costs. Soon it will come in the form of higher airline prices, hotel rooms, etc. as people begin traveling again. Do not fear the headlines over the next few months. You need to look closely at the numbers to truly understand them.
Federal Reserve Chairman Powell and Treasury Secretary Yellen spoke to Congress last week. Both seemed to not be worried about sustained inflation with Powell saying, “We do expect that inflation will move up over the course of this year… Our best view is that the effect on inflation will neither be particularly large nor persistent.” Much of the stimulus money in the past was used to pay down debt and/or placed into savings, rather than being pumped into the economy. If this continues with the recent COVID-19 Relief Bill, we too are less worried about prices accelerating at an unacceptable rate. The Fed is projecting 6.5% GDP growth for 2021, but inflation at only 2.4%. This is below the 2.5-3.0% range we have suggested as possible but not worrisome.
TAX DEADLINE DELAYED, BUT NOT PAYMENTS
The IRS recently extended the deadline to file taxes from April 15th to May 17th as a result of the many issues caused by the pandemic. Anyone not filing by May 17th can always do an extension to October 15th. HOWEVER, for those that pay tax on a quarterly basis, they must still send in the estimated owed tax by April 15th. This payment was NOT extended, which can easily create some confusion.
HIGH-INCOME EARNERS – NOT ENOUGH LIFE INSURANCE
Knowing the correct amount of life insurance for each individual and/or family members is not an easy process. Unmarried individuals may not need any life insurance, or very little, unless they have debts to pay off at death. They should also consider locking in their insurability in case their health changes. Using term insurance that can be converted into permanent coverage is usually adequate. For couples without children and/or debt, they too find themselves in a similar situation. But the more debt, children, expenses, and potential for future increases in income etc., the more they should have significant life insurance coverage. A recent study by LIMRA (a marketing and research firm for the life insurance industry), reported that as many as 30 million may be underinsured, and perhaps worse, the number of people without any life insurance coverage has increased dramatically. Interestingly, those with higher incomes represented a large percentage of the under and non-insured group. It further discovered that 28% of families would begin to have financial hardship within one month of death and that 44% would experience it within six months. Every situation is uniquely different and that is why we do an analysis when doing financial planning. If you have added children, expenses (current and future) and/or debt, or had an increase in income, please be sure to let us know. We will be glad to reexamine your situation.
A PRIMER ON SPACs
As if you did not have enough acronyms to learn in 2020, SPACs or special purpose acquisition companies were catapulted into the investment community’s vernacular and even inspired a rap song (https://www.youtube.com/watch?v=9rHkXfaIRTM). Also known as “blank check companies,” SPACs are publicly traded shell corporations that have the sole purpose of acquiring a private company. This allows the private company to forego the traditional initial public offering process and gives retail investors the chance to participate in some of the early (and more profitable) gains that take place in a public company’s stock. Some of the more high-profile SPAC deals in recent time include companies like Virgin Galactic, DraftKings, and Palantir. In 2020, SPACs raised approximately $80 billion versus 2019’s previous record of $14 billion. That was larger than traditional IPOs and represented 50% of the US IPO market, versus the previous peak of 14% in 2007.
There are a few important things to note before investing in a SPAC. The founders, also known as the sponsors, have two years to complete an acquisition or return funds to investors. The sponsors do not disclose acquisition targets and therefore investors have no idea what they are ultimately investing in and it could turn out that the SPAC does not find a suitable acquisition in time. Though retail investors have a chance to get in early on some parabolic stock runs, the sponsors stand to gain the most as the earliest investors, much like investment banks and broker-dealers in a traditional IPO. Also, given the government-fueled flood of liquidity, bidding wars among SPACs for the most attractive private companies could drive up acquisition prices and dampen investor returns. It is important to look for SPACs that have proven, credible sponsors at the helm as you are ultimately relying on their investing judgment and expertise.
THE FUTURE OF WEALTH IS FEMALE
The White Paper, “The Future of Wealth is Female,” notes that women could possess as much as $30 trillion in financial assets within the next 10 years. Why? Because of the wealth transfer where women outlive their spouses and partners. Additionally, generations of career-minded females are building wealth and adding $5 trillion to global wealth each year. However, as women approach and reach retirement, we embark on different life journeys than men, including divorce.
The divorce rate for older couples has increased dramatically. For women aged 55 to 64, the divorce rate has tripled since 1990; for women 65 and older, it has increased six-fold. These late-life breakups a/k/a “gray divorces” often bring women unexpected financial challenges and surprises.
During this critical transition, many women thrive with a team approach offering financial, legal and emotional support. From the financial perspective, ProVise will build a plan that accommodates a woman’s new lifestyle. This plan may encompass many unique issues from deciding how to reinvest assets received in the settlement to how to handle unforeseen events due to the loss of income. Focusing on what women need during these journeys can forge a stronger relationship between advisor and client.