A preview of the SECURE Act, a new retirement bill out of the House of Representatives.

Earlier this year, the House of Representatives passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act. (Acronyms are kind of a thing in Congress.) As the name implies, the bill has important ramifications for people’s retirement savings. In this letter, we want to give you a preview of what the bill is designed to do.

Now, before we do that, it’s important to note that the SECURE Act must first be passed by the Senate and then signed by the president before it actually goes into effect. Many things in the bill could change before that happens, though, so it’s impossible to know exactly what the final law will look like. And of course, it’s always possible the Senate could choose not to pass the bill, or make so many changes that the House decides to rework their version.

That said, the SECURE Act enjoys bipartisan support. In fact, only three members of the House voted against it, with 417 members voting for.¹ So it’s expected the Act will become law sometime soon. As your financial advisors, it’s our job to get familiar with the bill now so we can help you prepare for the changes it will bring.

What is the SECURE Act?
The SECURE Act does many things, but at its core, it’s designed to help more Americans save for retirement. Many of the bill’s provisions are designed specifically for businesses, which we won’t get into at this time.  But there are also provisions that impact regular individuals, including pre-retirees, the recently retired, and even their children. None of these changes are particularly dramatic, but they are important nonetheless.

Changes to IRAs and 401Ks²
One of the changes the bill makes is lengthening the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½. Once they hit this milestone, they are required to begin making withdrawals, called required minimum distributions. Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Another change the bill makes is for new parents. Under current law, you must be 59½ years old to make withdrawals from a traditional IRA or 401k. If you withdraw money earlier than that, you would have to pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if you need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money you contribute to your retirement accounts to be saved for retirement.

Under the SECURE Act, new parents will also be able to withdraw funds penalty-free. This is to help cover birth and adoption expenses, and it’s especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they would need to be made within one year of the birth or adoption.

Changes to inherited IRAs²
Another important change – especially from an estate planning perspective – regards inherited IRAs. For years, one of the more popular estate planning strategies has involved the use of Stretch IRAs. When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs. Under current law, the beneficiary can take distributions from their inherited IRA based on their official life expectancy. This allows them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period of time. For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.

If the SECURE Act goes into law, this will no longer be possible. Instead, the beneficiary must take out 100% of the IRA’s assets within 10 years of the original owner’s death. As distributions are taxable income, this could have a major impact on the beneficiary’s tax situation.

Planning ahead
As you’ve probably guessed, this topic is important to all of our clients. Some are older, some younger; some nearing retirement, some far away; and some already there. That’s because, while no single provision will affect everyone, almost everyone will be affected in some way.

As mentioned earlier, the SECURE Act has not yet become law, and it’s uncertain when the Senate will vote on it. That said, it’s important that we start planning ahead. If you have any questions about the SECURE Act, please let us know. Otherwise, we’ll make a point to go over any provisions that affect you the next time we have an account review.

If any of the changes you just read about don’t affect you, but could affect someone you know, please share this letter with them. Or, please let us know so we can reach out to them if and when the bill becomes law. As your financial advisors, we want to ensure you’re prepared for any changes coming down the pike – and we want to ensure your family is prepared, too.

We will keep a close eye on Washington as this bill makes its way through Congress. As soon as the situation is clearer, we will let you know. As always, please let us know if there is ever anything we can do for you.
Have a great month!

¹ “Congressional Leaders Want SECURE Act Passage in 2019,” Plan Sponsor, October 7, 2019. https://www.plansponsor.com/congressional-leaders-want-secure-act-passage-2019/
² “Text of H.R. 1994,” Congress.gov, 6/3/2019. https://www.congress.gov/bill/116th-congress/house-bill/1994/text

The simple answer is probably.  
Historically, the American economy has grown in fits and starts, otherwise known as recessions and expansions. As a result, it is likely there will be another recession in the United States.

What are recessions? When gross domestic product (GDP), which is the value of all goods and services produced in the United States, declines for two consecutive quarters, many people will say the economy is in a recession.¹

Typically, during recessions, unemployment rises, consumer income declines, consumer spending falls, and industrial production and manufacturing slow down.²

The last recession began in 2007 and ended in 2009. It lasted for 18 months, and was the longest recession since World War II.³

What are expansions? An expansion begins when GDP begins to grow again. Usually, during expansions, unemployment declines, consumer income increases, consumer spending grows, and industrial production and manufacturing accelerate.²

The current expansion began in June 2009. It is the longest expansion in the history of the United States.^{3, 4}

 It’s important to note that during recessions and expansions, there may be brief reversals. For example, a recession may include a period of growth before the economy declines further, and an expansion may include a period of decline before the economy grows more. Usually the beginning of a recession or an expansion isn’t identified until well after it has occurred.¹

When will there be a recession?
There is no simple answer to this question.

The causes of recessions are not always easily recognized, reported Robin Harding of Financial Times. When a threat to economic growth is observed, policy makers or central bankers often take action to minimize it.⁵

Recent recessions have been caused by unanticipated financial crises. In 2001, the bursting dotcom bubble sparked recession. In 2007, mortgage loan defaults and the housing crisis were the catalyst.⁵

The longevity of the current expansion has many investors worried about the chances of recession. However, as previous Federal Reserve Chair Janet Yellen commented, “I don’t think expansions just die of old age.”⁶

Despite the inverted yield curve*, which can be a recession signal, Harding wrote:⁵  “There are some signs we are late in the current cycle. Asset valuations are high by historic standards. Private debt has risen a lot in China and some peripheral economies. The Trump administration is rolling back financial regulation. It all increases risk. But the signs of stress that often precede a crisis – wild ebullience or rising defaults – are not obvious.”

In July 2019, the Federal Reserve Bank of New York estimated the probability of a recession in the United States by July 2020 at 31.5 percent.⁷

Fortunately, recessions tend to be far shorter than expansions. The United States has experienced 11 economic cycles – contractions followed by expansions – since 1945. The average length of recessions has been about 11 months. The average length of expansions has been 4.8 years.³

What will the stock market do?
Stock markets reflect investors’ expectations for the future. As a result, they tend to fall before a recession begins and rise before a recession ends. It’s not a very useful pattern because market volatility makes it very difficult to recognize when a market decline signals recession ahead and a market gain signals recovery.

No matter what the stock market does, it’s important for investors to implement strategies that will help them remain calm when markets are volatile. Here are four tips to help you stay focused on your goals when markets are turbulent:

1. Keep your perspective. They may be uncomfortable, but stock market downturns are normal. Historically, markets have regained losses suffered during downturns and moved higher.⁸
2. Choose the right amount of risk. When stock markets deliver strong returns, it can be tempting to invest in stocks more heavily. Before you do, remember more stocks means higher volatility. Choose a portfolio allocation that will let you stay calm during periods of volatility and market downturns.
3. Take time to rebalance. The performance of markets can affect your portfolio allocation. If the stock market does well and the bond market poorly, you may end up with more risk than intended. Rebalancing preserves your allocation.
4. Downturns may create buying opportunities. The silver lining behind the dark cloud of recession is you may be able to invest in strong companies at low share prices.
5. Remember your goals. We spend a lot of time helping clients identify life and financial goals and then designing portfolios to help pursue those goals. The stock market may head south, but that doesn’t mean your goals have changed. Remember why you’re investing.

If you’re nervous about financial markets and would like to discuss what’s happening or just be reassured, give us a call. We’re happy to talk with you.

*An inverted yield curve is where long-term debt has a lower yield than short-term debt.
Sources:
¹ https://www.nber.org/cycles/recessions.html
² https://www.investopedia.com/articles/economics/08/recession-affecting-business.asp
³ http://www.nber.org/cycles/cyclesmain.html
⁴ https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
⁵ https://www.ft.com/content/8a9d12a8-ce31-11e9-99a4-b5ded7a7fe3f (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Oct_2019_FinancialTimes-Recessions_Have_Become_Rarer_and_More_Scary-Footnote_5.pdf)
⁶ https://www.bloomberg.com/news/articles/2019-01-10/do-economic-booms-die-of-old-age
⁷ https://www.newyorkfed.org/research/capital_markets/ycfaq.html
⁸ https://finance.yahoo.com (Click on to S&P 500, click on Chart, click on Max)

“Markets are flashing deep red as investors worry about the health of the economy”
– CNN Business
“S&P and Dow Slide as Evidence of Global Slowdown Mounts”
– The New York Times
“Stocks Drop on Worries About Growth”
– The Wall Street Journal

The markets hit turbulence this week, with the Dow dropping almost 500 points on Wednesday, October 2.¹  Since recent reports have stoked new fears of a coming recession, we decided to write down our thoughts about what’s happening and why.

For over a year now, economists have fretted about the possibility of a recession. The amount of evidence for one has waxed and waned, as good news and bad have jockeyed for attention. But recently, the signs in favor of a coming recession have started to light up in neon.

Before we get into that, though, it’s useful to remember what a recession actually is – and what it isn’t. Since the media tends to report every bit of news with breathless urgency, it’s easy to let the word “recession” transform into a scary, supernatural bogeyman come to gobble up our economy. But what is a recession, really?

Economists define a recession in different ways, but here’s the simplest way to look at it:

A recession is a significant decline in economic activity over an extended period of time.²

Let’s break that down with a little Recession 101.

When economists refer to economic activity, they usually mean a country’s gross domestic product, or GDP. This is a measure of the value of all goods and services a country produces every year. When a nation produces less, or when the value of what it produces drops, so too does the GDP. With that drop often comes a drop in employment, wages, corporate profits – and stock prices. As a result, consumers tend to spend less, which means less business is being done, which means less economic activity is happening. In other words, everything tends to slow down. Spending, lending, selling, making, building, investing. If this goes on for too long – usually at least two consecutive quarters – we’re in a recession. Make sense?

The tricky thing about recessions is that it’s almost impossible to know when they’ll occur until we’re already in one. After all, GDP is a measure of what has been produced, not what will be produced. That’s why we tend to get a lot of false alarms when it looks like a recession may happen – and little warning when one does happen.

So. That’s what a recession is. But why are experts worried about one now?

First, it has been a long time since the last recession. In fact, it’s been over a decade! Since then, we’ve enjoyed one of the longest bull markets in history. Since the economy tends to move in cycles – a period of growth, followed by a period of stagnation, followed by a decline, rinse and repeat – many analysts have felt we’re long overdue for the next one.

More important is the preponderance of data that suggests the economy is already slowing down. For example, on Tuesday, October 1, a new report showed that American manufacturing had slowed down for the second month in a row, dropping to its lowest level since 2009.¹ Other reports suggest the economy is adding far fewer jobs than in previous years. Combined with volatility in bonds, trade war uncertainty, and slower growth across the globe, and you can see why the horizon looks stormy.

That said, we’ve heard these tunes before. While parts of the economy are slowing, that doesn’t guarantee a recession is coming next month, next quarter, or even next year. Consumer spending – perhaps the single biggest driver of the economy – has remained strong all year, and the unemployment rate remains very low.

When it comes to fears of a recession, none of these signs are catastrophic on their own. All these smaller issues just seem to be piling up on top of each other, enough to make everyone sit up and take notice. Here’s how I look at it. Imagine you’ve had a very nice, reliable car for a long time. It’s been strong, steady, and always gets you where you want to go.

Recently, though, you’ve noticed that the miles on your car are starting to show a bit. Your odometer is now over 100,000, a reminder that you’ve had your car for a long time. Furthermore, little problems are starting to pop up. That check engine light keeps coming on, even though you’ve had a mechanic look at it. The engine makes a funny noise whenever you turn the ignition, and is it just you, or are your brakes less responsive than usual?

None of these problems, on their own, would make you think your car is anything less than reliable. But put them all together…

That’s where we’re at with the economy. We may yet be able to wring a few more family trips out of it – but it’s also time to start preparing for when it inevitably breaks down.

The effects of a recession

For the sake of discussion, though, let’s say a recession is going to happen soon. What does that mean? How long do recessions last? And how bad do they get? Every recession is different, but it’s important to remember that we’re not talking about another Great Depression here, or even another 2008-2009. If a recession happens, it doesn’t mean everything will collapse. And if it happens, it certainly won’t catch anyone unawares. Remember, experts have been stressing about this for a while.

Most recessions also tend to be mild in the grand scheme of things. Since 1940, the average recession has lasted just under eleven months, with the shortest being six months and the longest, eighteen.³  On the other hand, make no mistake: Recessions can cause real economic pain for people. A slower economy means less spending, which means less profits, which means lower stock prices, which means lower wages, and worst of all, lower employment. And sometimes, even when a recession is technically over and the markets recover, it can take much longer for employment to get back to normal.

So, if a recession is coming, what should we do to prepare?

Great question! I love the word “prepare.” You know what the definition is, right?

Prepare
verb
To make someone ready or able to do or deal with something.⁴

So, how do we make ourselves ready to deal with a possible recession?

First, even the wealthiest of people should always have enough in emergency savings to cover at least six months’ worth of expenses. This is also a good time to prioritize paying off short-term, high interest debts and evaluating your career security. If you need help with any of these things, please let me know.

Second, we need to remember that even though a recession will have an impact on the markets in the short term, we must always treat your portfolio for what it is: a long-term investment in your long-term future. That means we must not start making panicked decisions because we’re afraid of short-term losses.

That said, if you are nearing the horizon on some of your long-term goals – like retirement, starting a business, building a house, whatever – then it may be prudent to start thinking more conservatively with your investments. After all, no one wants to get knocked off track right before the finish line. With 2019 winding down, it’s time for us to have a complete review of your portfolio and your goals so we can update your financial plan as appropriate.

In other words, if a storm is coming, let’s determine whether you can weather it, or whether it’s time to “batten down the hatches.”  If you have any questions or concerns about the markets, the economy, or a possible recession, please let us know!  We want to address them, so that you’ll continue to feel confident about working towards your goals.

It’s impossible to know whether a recession is coming or not. There are signs for, and there are signs against. But regardless of when the next recession hits, let’s remember that it’s not a scary bogeyman. It’s a slowdown in the economy – and it’s not uncommon. Most importantly, let’s remember that when it comes to the future, prediction is futile…but planning is not.

Have a great October!

¹ “U.S. Stocks Drop on Worries About Growth,” The Wall Street Journal, October 2, 2019. https://www.wsj.com/articles/globalstocks-fall-amid-rising-fears-of-economic-slowdown-11570004904
² “Recession,” Investopedia.com, May 6, 2019. https://www.investopedia.com/terms/r/recession.asp
³ “List of recessions in the United States,” Wikipedia.org, https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#Great_Depression_onward
⁴ “Definition of prepare,” Lexico, https://www.lexico.com/en/definition/prepare

Throughout history people have made inheritance choices that are inexplicable to others. In 1926, Harry Houdini left his magical equipment to his brother, his pulled-from-the-hat rabbits to the children of friends, and a series of random words to his wife. The words were a code that would let her know when he was in touch from the afterlife.

It may sound strange to hear a financial advisor say this but achieving the things you care about most requires more than just money. There are certain habits and behaviors that, while not directly related to finance, can spell the difference between reaching your goals or not. In our experience, people rarely hear about these things from their financial advisors. We want to share some non-financial lessons we’ve learned. It’s our belief that applying these lessons makes working towards your goals both easier and more rewarding.

So, without further ado, here is:

Things Most Advisors Don’t Tell You #2:

Managing your most precious asset

Do you know what your most precious asset is?
It’s not your house. It’s not your car. It’s not your investment portfolio.
It’s your time.

Benjamin Franklin once said:
If time be of all things the most precious, wasting time must be the greatest prodigality, since lost time is never found again, and what we call time enough, always proves little enough.

You’ve probably seen or heard a lot of fancy terms related to your finances. “Asset management,” for example, or “Investment management.” You get the idea. But just as important is the concept of time management.

The definition of time management is, “The act of planning and exercising control over the amount of time spent on specific activities, especially to increase effectiveness, efficiency, or productivity.” 1 Look at those words again. Planning. Control. Effectiveness. Productivity. All things that can have a big impact on how much money you have to achieve what you want most.

The art of time management is essentially the art of prioritizing your life. It’s the art of recognizing which activities are most important in terms of reaching your goals. Some activities will bring you closer; others will move you further away. Many activities, of course, will have no effect either way.

Let’s call them “A” activities, “B” activities, and “C” activities. “A” brings you closer to your goal, “B” keeps you stationary, and “C” moves you further away.

For example, let’s say one of your most cherished goals is to travel to the country your ancestors came from. “A” activities could include creating a plan for getting there, setting aside money specifically for the trip, or learning that country’s language. “B” activities, meanwhile, could be anything from going to the grocery store, to playing a round of golf once a month, or sleeping.

Some examples of “C” activities? How about buying that new $1,000-version of the phone you already have? Or deciding not to plan, but just wing it, instead? As you can see, “B” and even “C” activities are NOT inherently bad! In many cases, those activities can be fun, rewarding, or even necessary. But when you prioritize “B” activities over “A” activities, or when you spend your time or money mainly on “C” activities, then your most cherished goal will always be a fantasy instead of a reality.

Time management, then, is the process of:
• Determining what you need to do to get where you want to go. (These are your “A” activities.)
• Making those activities be your first priority on a daily, weekly, and monthly basis.
• Filling up the remainder of your time with “B” activities after the “A” activities are done.
• Being very cautious about when you spend time or money on “C” activities.

As you may know, we help people plan for retirement. In our experience, people who don’t practice time management end up planning for retirement this way:
1. First, they dream about what they’d like to do in retirement, and then decide it’ll probably happen “some day.” Then they start thinking about what to do for the weekend.
2. A few months or years later, they read a book or article on retirement planning and think, “This makes sense, I’ll have to get on that sometime.” Then they turn on the TV.
3. Occasionally, they remember to save or invest a portion of their income, between bouts of buying the latest thingamajig that everyone else seems to have.

Then, before they know it, they’re in their sixties, and realize they’re nowhere close to being ready for retirement. The point is, time is an asset. But like all assets – money, property, personal skills – if you fail to manage it properly, it will go to waste and be lost forever. That’s why, when it comes to accomplishing what really matters, time management is just as important as money management.

And that’s something most advisors just don’t bother to tell you.

1 “Time Management,” Wikipedia.org, accessed July 10, 2019. http://en.wikipedia.org/wiki/Time_management