Do Fixed-Income Investments Belong in Your Portfolio; Tax Considerations for Retirees
by rwilczek on Jan 22, 2019
Hope this email finds you well.
I would add to the first article, municipal bonds (funds) appear to have held up better year to date than corporate bonds in general.
Below is an excerpt from my colleague, Catherine Blackburn’s email to her clients from 11/25/18 I thought you might find it of interest. If you wish to schedule your review, please email or call with dates. Thanks and be well.
“Financial performance during the last month has certainly been dramatic. We have seen 2018 gains erased across the spectrum of investment choices, except for Treasury Bills (Bloomberg 11/23). As noted, not just in The New York Times, (by Matt Phillips on 11/20), but in many other financial sections, “Unemployment is near lows not seen in half a century. The American economy is set for its best year since 2005. Large corporations are producing giant profits. Even wages are starting to rise.” It is difficult to wrap your head around the Black Friday news that Americans will purchase between $800 and $1,000 of merchandise (depending on which report you read) this Thanksgiving weekend and news on the very same day that the stock market indexes have returned all of their gains in 2018. The difference is that, on the one hand, Americans are celebrating and doing something they love to do, which is to shop for bargains, while the financial markets are increasingly concerned about trade wars, interest rate hikes, and wage pressures that will cut into profits. “Stocks often act as an early warning system, picking up subtle changes before they appear in the economic data.” (Ibid.)
There is little we can do about the market concerns over our healthy economy: whether it be trade wars, slowing growth within our tech sector, oil prices plummeting, the heavy debt load Corporate America is carrying, or a slowdown in the housing market caused by interest rate hikes. The Federal Reserve has a mandate to maximize employment and stabilize prices, and that has served us well these last 10 years as the nation and world continues to recover from the “Great Recession.” They can pause in their planned interest rate hikes if they believe an economic slowdown could result from the known risks before us. “Futures markets, for now, are only factoring in a little more than one of the three quarter-point rate hikes that Fed officials in September projected as likely for next year.” (Bloomberg 11/25). We may get more information this coming week as Federal Reserve Chairman, Jerome Powell, is expected to speak on the matter of interest rates.
I am not suggesting we make any changes in portfolios beyond adding money that you expect to spend over 2019 to the Money Market, currently paying about 1.3%. The question to always ask yourself is, “how much money do I need and when do I need it?” As famed former Fidelity money manager Peter Lynch once said: “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.””
Rita
Do Fixed-Income Investments Belong in Your Portfolio?
Unappealing or too conservative for you? Think again. They have their place.
Provided by Rita Wilczek
When stocks soar, fixed-income investments have comparatively little allure. Investors hungry for double-digit returns may regard them as bland, vanilla securities saddled with an opportunity cost, geared to risk-averse retirees who are “playing not to lose.”
An investment earning a consistent rate of return on a fixed schedule is not a negative. Fixed-income investments are something you may want as part of your portfolio, particularly when stocks fall.
Fixed-income investments have a steadiness that stocks lack. Most are simple debt instruments: an investor transfers or pays money to a government or financial institution in exchange for a promise of recurring payments and eventual return of principal.1
Corporate and government bonds are popular fixed-income investments. U.S. Treasury bills, bonds, and notes, all backed by the federal government, pay interest based on the duration and nature of the security. States and municipalities also issue bonds to generate funds for infrastructure projects. Corporate bonds usually have 10-year or 20-year durations; the interest on them may exceed that of Treasuries and state and muni bonds, but the degree of risk is greater for the bondholder. Firms with subpar credit ratings issue bonds that are junk rated, offering a relatively higher return and higher risk.1
There are bond funds that also pay a set rate of return. Some of these funds trade like stocks and can be bought and sold during a trading day, not merely after the close. They typically contain a wide variety of both corporate and government bonds.2
Additionally, there are money market funds and money market accounts. They do differ. A money market fund is a managed investment fund made up of assorted fixed-income debt securities. A money market account is simply a high-yield bank account insured by the Federal Deposit Insurance Corporation (FDIC).3
Consider certificates of deposit as well. Banks create these debt securities to generate pools of capital to use for their business and personal loans. Some CDs have terms of less than a year; many are multiyear. Typically, the longer the commitment a CD investor makes, the greater the coupon (annual interest rate) on the CD. These investments are FDIC-insured up to $250,000.1,3
At some point, you might want less of your portfolio in equities. That realization might be prompted by a consideration of the markets or simply by where you are in life.
When the financial markets turn volatile, the last thing you want is to have all your investments moving in the same direction at the same time. If your portfolio includes a balance of investments from different asset classes, some with little or no correlation to the stock market, then you may take less of a loss than someone whose portfolio is overloaded in equities.
The risk is, this “someone” could be you. Across a long bull market, the equity investments within your portfolio will usually outgain the non-equity investments. That can throw your original asset allocations out of whack and leave you mostly invested in stocks. If stocks plunge, the value of your portfolio can drop rapidly.4
The conventional wisdom is to lessen your equity position as you age. You may currently hold stocks across many sectors of the S&P 500, but that is not diversification. True diversification uses multiple asset classes – and conservative, fixed-income investments – to try to minimize risk.
Fixed-income investments may not always return as spectacularly as equity investments, but they are also less prone to spectacular losses. They are designed to provide some stability for an investor, and as you get older, stability becomes increasingly important.
Rita Wilczek may be reached at 952-542-8911 or rwilczek@hirep.net
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 - thestreet.com/investing/fixed-income/what-is-fixed-income-investment-14758617 [10/29/18]
2 - investopedia.com/articles/investing/041615/pros-cons-bond-funds-vs-bond-etfs.asp [5/25/18]
3 - thebalance.com/certificates-of-deposit-versus-money-markets-356054 [9/16/17]
4 - fool.com/investing/2018/01/29/heres-how-bull-markets-can-be-bad-for-your-portfol.aspx [1/29/18]
Tax Considerations for Retirees
Are you aware of them?
Provided by Rita Wilczek
The federal government offers some major tax breaks for older Americans. Some of these perks deserve more publicity than they receive.
If you are 65 or older, your standard deduction is $1,300 larger. Make that $1,600 if you are unmarried. Thanks to the passage of the Tax Cuts & Jobs Act, the 2018 standard deduction for an individual taxpayer at least 65 years of age is a whopping $13,600, more than double what it was in 2017. (If you are someone else’s dependent, your standard deduction is much less.)1
You may be able to write off some medical costs. This year, the Internal Revenue Service will let you deduct qualifying medical expenses once they exceed 7.5% of your adjusted gross income. In 2019, the threshold will return to 10% of AGI, unless Congress acts to preserve the 7.5% baseline. The I.R.S. list of eligible expenses is long. Beyond out-of-pocket costs paid to doctors and other health care professionals, it also includes things like long-term care insurance premiums, travel costs linked to medical appointments, and payments for durable medical equipment, such as dentures and hearing aids.2
Are you thinking about selling your home? Many retirees consider this. If you have lived in your current residence for at least two of the five years preceding a sale, you can exclude as much as $250,000 in gains from federal taxation (a married couple can shield up to $500,000). These limits, established in 1997, have never been indexed to inflation. The Department of the Treasury has been studying whether it has the power to adjust them. If modified for inflation, they would approach $400,000 for singles and $800,000 for married couples.3,4
Low-income seniors may qualify for the Credit for the Elderly or Disabled. This incentive, intended for people 65 and older (and younger people who have retired due to permanent and total disability), can be as large as $7,500 based on your filing status. You must have very low AGI and nontaxable income to claim it, though. It is basically designed for those living wholly or mostly on Social Security benefits.5
Affluent IRA owners may want to make a charitable IRA gift. If you are well off and have a large traditional IRA, you may not need your yearly Required Minimum Distribution (RMD) for living expenses. If you are 70½ or older, you have an option: you can make a Qualified Charitable Distribution (QCD) with IRA assets. You can donate up to $100,000 of IRA assets to a qualified charity in a single year this way, and the amount donated counts toward your annual RMD. (A married couple gets to donate up to $200,000 per year.) Even more importantly, the amount of the QCD is excluded from your taxable income for the year of the donation.6
Some states also give seniors tax breaks. For example, the following 11 states do not tax federal, state, or local pension income: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania. Twenty-eight states (and the District of Columbia) refrain from taxing Social Security income.7
Unfortunately, your Social Security benefits could be partly or fully taxable. They could be taxed at both the federal and state level, depending on how much you earn and where you happen to live. Whether you feel this is reasonable or not, you may have the potential to claim some of the tax breaks mentioned above as you pursue the goal of tax efficiency.5,7
Rita Wilczek may be reached at 952-542-8911 or rwilczek@hirep.net
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 - fool.com/taxes/2018/04/15/2018-standard-deduction-how-much-it-is-and-why-you.aspx [4/15/18]
2 - aarp.org/money/taxes/info-2018/medical-deductions-irs-fd.html [1/12/18]
3 - loans.usnews.com/what-are-the-tax-benefits-of-buying-a-house [10/17/18]
4 - cnbc.com/2018/08/02/some-home-sellers-would-see-huge-savings-under-treasury-tax-cut-plan.html [8/2/18]
5 - fool.com/taxes/2017/12/31/living-on-social-security-heres-a-tax-credit-just.aspx [12/31/17]
6 - tinyurl.com/y8slf8et [1/3/18]
7 - thebalance.com/state-income-taxes-in-retirement-3193297 ml [8/15/18]