Objective Financial Advice
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Happy new year! We hope this newsletter finds you happy and healthy. As Omicron speeds through our communities, it's caused all of us a heightened sense of appreciation for good health when we and our families are enjoying it.
Overall, 2021 was a great year to be an investor with the S&P 500* (large-cap US stocks) returning just under 29% for the year. The first few weeks of January have been a bit rough in the markets with large-cap US stocks down more than 7% through Friday. In this newsletter, we have a 2021 investment market overview. We also examine whether we're starting the next bear market and whether that matters for your actions today.
If like many, you're refocusing on your finances at the start of the year, we have a handy guide to all the key numbers to make it easier. The 401k limit increased to $20,500 for this year and $27,000 if you're 50 and over at any point during the year. Yes, you can make the catch-up contribution even if you turn 50 on December 31!
We are entering tax season. Banks and retirement plans have until January 31 to mail out 1099Int and 1099R forms. Brokerage firms have until February 15 to mail out Consolidated 1099s, and they can file an extension to take until March 15. If you've opted in for e-Delivery, you may need to go to the bank or brokerage firm's website to download your tax documents. Each year, we see people miss including 1099 income on their tax returns because the documents were delivered electronically. It's a good idea to have a list of all your accounts and double-check that you received a document for each one prior to filing your taxes. The only accounts you won't receive a tax document for are retirement accounts without distributions and those that generated less than $10 in income.
In our last newsletter, we discussed proposed legislation that would end the popular backdoor Roth strategy. This legislation did not pass, so we are recommending clients continue to pursue this strategy in 2022 if it's incorporated into their financial plan.
Please read on for other actionable planning ideas. Our office will be closed for President's Day (Monday, February 21st) and Good Friday (Friday, April 15th). We plan to send the next newsletter out in mid-April. We'd love to hear from you on questions or suggestions for topics you’d like to see covered in the future.
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How Does Inflation Affect Your Financial Plan?
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We’ve all seen the headline number for 2021: a 7% increase in the consumer price index. You may be wondering: how does this affect my financial plan? Jean addresses this in-depth on our website.
You may also be wondering: Will inflation hurt stock returns? The answer is "Not necessarily." Dimensional Funds provides analysis and perspective in this white paper.
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Federal Student Loan Repayment Set to Begin in May
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After five payment pauses that began roughly two years ago, federal student loan payments are set to resume in May 2022.
The first payment suspension came in March 2020 when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and lasted for six months through September 2020. The second and third pauses came via presidential executive order (one from Trump and one from Biden) and extended the payment pause through January 2021 and again through September 2021. The Department of Education set a fourth extension through January 31, 2022. Then in December 2021, President Biden announced a fifth pause through May 1, 2022, due to ongoing public health challenges.
Here are some things to know as payments get set to resume.
Payments made during moratorium: Borrowers who chose to continue making full or partial payments during the suspension period will have the full amount of their payments applied to principal, which will draw down their loans faster.
Payments not made during moratorium: Borrowers who didn't make payments during the suspension periods won't be worse off because interest did not accrue on their loans. Essentially, the interest rate was set at 0%.
Auto-debit payments. According to the Department of Education, borrowers who signed up for auto-debit before March 13, 2020 (the date the first payment pause began) will be contacted by their loan servicer before the payment pause ends to confirm whether they want to stay on auto-debit. If borrowers do not respond to these communications, their servicer will stop auto-debit. For borrowers who signed up for auto-debit after March 13, 2020, their auto-debit payments will resume automatically on the first due date when payments begin again. Borrowers who have questions about their auto-debit status or who need to update their banking information on file should contact their loan servicer.
Hardship options. Borrowers who still face financial hardship when the moratorium ends can request a loan deferment or forbearance, which generally pauses payments for six months. The federal government's Loan Simulator tool can help borrowers understand the impact of suspending payments and identify loan repayment plans that may help lower payments, such as an IDR (income-driven repayment) plan. The tool is available online at studentaid.gov/loan-simulator.
Article used by permission of Broadridge Forefield Investor Communications.
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2022 Key Financial Numbers
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Here are some of the highlights. For more details including 2022 tax brackets, here's a pdf.
General
- Child tax credit: $2,000 (down from $3,000 / $3,600)
- Mileage rate: $0.585/mile (up from $0.56)
- Maximum earnings subject to social security tax: $147,000 (up from $142,800)
- Maximum social security benefit when beginning benefits at full retirement age: $3,345
Savings Contributions
- Health Savings Account: $3,650 individual / $7,300 family / additional $1,000 age 55+ catch-up
- IRA contribution: $6,000 under 50 / $7,000 50+
- Roth IRA contribution income phase-out: $204,000 - $214,000
- 401k / 403b: $20,500 under 50 / $27,000 50+
- Qualified plan total contribution limit: $61,000 (up from $58,000)
Gift and Estate
- Annual gift tax exclusion: $16,000 (up from $15,000)
- Estate tax exclusion: $12,060,000 (up from $11,700,000)
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2021 Investment Highlights
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2021 turned out to be an extraordinarily good year in the investment markets. Despite COVID, supply chain issues, concerns about inflation, and a host of other potential issues, both US and international stock markets turned in strong performance. Bonds had a more challenging year as interest rates increased.
In the US markets, the S&P 500 was up 28.71%. Small caps were up 14.82%. Small cap value dramatically outperformed small cap growth with a 28.27% return as compared to small growth's 2.83% return. On the large-cap side, growth and value were much closer with growth slightly outperforming at 27.6% as compared to value's 25.16%.
International developed stocks had a solid 11.26% return for the year. Emerging markets struggled more with the MSCI EM index producing a 2.54% loss, while some of the actual emerging markets index funds were slightly positive.
Most bonds were negative for 2021 because of rising interest rates. The yield on 10-year treasury bonds increased by 0.6% over the course of the year. As a result, the US Aggregate bond index was down 1.54%. Inflation-protected bonds, on the other hand, were positive with a 5.96% rate of return.
After a year like this, it's important to review your portfolio and ensure that it's still within a few percentage points of its target asset allocation. Allowing your stock percentages to get higher than planned can expose your financial plan to more risk than desired. We generally recommend rebalancing for the entire portfolio in your retirement accounts when possible to avoid tax consequences. Or, if you're adding money to your portfolio, you can direct it to the asset classes that are under their target until you get back to your target allocation. For our retainer clients, we are handling this rebalancing as part of our ongoing portfolio reviews. For project / hourly clients, we provide tax-optimized rebalancing instructions as part of your review.
*Source for investment returns is Morningstar as of December 31, 2021. S&P 500 TR USD for S&P 500. Russell 2000 TR USD for small cap stock. Russell 2000 Value TR USD for small value. Russell 2000 Growth TR USD for small growth. Russell 1000 Value TR USD for large value stocks. Russell 1000 Growth TR USD for large growth. MSCI EAFE NR USD for developed international markets. MSCI EM NR USD for emerging markets stock. Bloomberg US Agg Bond TR USD for the US aggregate bond index. Bloomberg US Treasury US TIPS TR USD for inflation-protected bonds.
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Bear or no Bear? Does it Matter?
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In U.S. stock market history, bear markets—defined as a drop of 20% or more for a broad market index—happen roughly every four years and eight months. With the recent downturn in the markets, we may be in the early stages of a new one.
Or we may not—and that, of course, is the problem. It is very easy to see these market downdrafts in retrospect, but impossible to know when one is occurring, or to predict them in advance. Nor can we know how far down they’ll take us or when the recovery will begin.
Some of the longest declines were triggered by major geopolitical events—such as the attack on Pearl Harbor that pulled the U.S. military into World War II (a 308-day downturn, nearly a year), and Iraq’s invasion of Kuwait in 1990 (108 days). The terrorist attacks of 2001 and the North Korean missile crisis of 2017 also triggered market declines. In 2008, the collapse of Wall Street speculation nearly brought down the entire global economy. More recently, in 2020, the emergence of a major global pandemic caused a rapid decline which was, as most of us remember, followed by a precipitous rise in market values that has continued through the end of last year.
At the moment, it’s not easy to see a major catastrophic trigger that would cause investors to race for the exits, but there have been other bear markets where a bull market simply ran out of steam—a recent example is the bursting of the dot-com bubble in 2000. The hardest-hit investors in that period were all crowded into the latest craze—tech stocks—and the tech-heavy Nasdaq index didn’t recover its former value until 2015. The lesson there was not trying to time the market but to maintain the discipline of diversification despite the temptations of rising valuations.
Which brings us back to the possibility that we’re entering a bear market today. Taking another look at history, since 1929, the average duration of these 20%+ downturns is 21 months—and it is just as impossible to predict these durations as it is to predict the downturns to begin with. The Covid-related downturn in 2020 is a terrific example of how unpredictable the recovery can be. The pandemic news didn’t change from February to April 2020, but the markets recovered anyway, and were not discouraged through the ensuing political drama, the Delta and Omicron variants, and the highest inflation rate in decades.
The most important historical fact is that every bear market in U.S. history has been followed by new highs. Since 1950, we have experienced 53.8% up days in the market and 46.2% down days, and the magnitude of the positive days has exceeded the magnitude of the downdrafts. So, to answer the question: Does it matter? No, it doesn't matter. If your portfolio is diversified to match your risk tolerance and your financial plan, you don't need to fear the bear market. When the next one occurs, it will be an opportunity to rebalance and buy stocks on sale.
Article adapted with permission of financial columnist Bob Veres.
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Address:
1692 Keller Parkway
Keller, TX 76248
Ph: 817-993-0401
Fax: 817-993-0002
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