Most investors, at some point, experience moments when it feels like the world is shifting beneath them. This week is one of those times. 

On March 4th, the president implemented new tariffs: 

• 25% on imports from Mexico and Canada (except Canadian energy, which faces a 10% tariff). 

• An additional 10% tariff on imports from China.  

Markets reacted predictably: the stock market dropped, volatility spiked, and headlines shouted.
 
And even as I write this, the situation continues to evolve. Markets are adjusting, policymakers are responding, and uncertainty remains. But while the news cycle moves quickly, the principles of sound investing remain the same. 

Why do tariffs make investors nervous?

At their core, tariffs increase costs for businesses, which can squeeze profit margins. And if there’s one thing markets care about, it’s profits. 

We read many perspectives on the global economy, and Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, has been a consistent voice of reason for over a decade. Known for his practical insights, Dr. Kelly asserts that tariffs result in "higher prices, slower economic growth, reduced profits, increased unemployment, greater inequality, lower productivity, and heightened global tensions." 
 
Investors aren’t just reacting to tariffs. They’re reacting to the unknown: 

• How long will these tariffs remain in place?

• Are they just a negotiation tactic? 

• Is this a temporary period of volatility, or the beginning of a longer cycle? 

Markets don’t panic about what they know—they panic about what they don’t.

Investing is messy. It always has been. 

Market downturns often feel like a unique crisis. But history tells a different story. 
 
Recessions, inflation spikes, political uncertainty, trade wars, interest rate hikes—these challenges are not new. The market has faced them all before. And yet, over time, it has moved higher. 
 
As noted by author Seth Godin, “The future is messy, and the past is neat. It's always like that.” 

The importance of perspective

Market downturns feel different when you’re living through them. The news feels bigger. The risks seem higher. The headlines are scarier.  
 
This feeling is amplified after strong market years, when investors feel they have more to lose—at least on paper. In 2023 and 2024, the S&P 500 delivered a total return of nearly 58%, propelling more investors into the ranks of "401(k) millionaires," according to Fidelity. 

It’s natural to feel anxious about market fluctuations, but fear is never a sound investment strategy.  

A strong financial plan is built specifically for you — your goals, your risk tolerance, and your timeline. More importantly, it’s designed with the understanding that markets are unpredictable and often messy. By accounting for uncertainty upfront, your plan provides a steady framework, allowing you to stay the course during volatility instead of reacting to short-term fluctuations. 
  
As John Bogle, the founder of Vanguard, wisely put it, “The stock market is a giant distraction from the business of investing.” 
  
Bad news drives headlines, but bad news should not drive investment decisions. Market downturns are inevitable, but they are also temporary. 

Reasons to sell? There will always be more.

There has never been a time in history when you couldn’t find a reason to sell. 
 
Recessions. Political chaos. Interest rate hikes. Pandemics. Trade wars. Every one of these events made investors think, “Maybe this time is different.” 
 
And yet, over time, the market has rewarded patience, discipline, and long-term thinking. 

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Morgan Housel, author of The Psychology of Money, puts it best: "Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control. A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy." 

What can you control?

While headlines will continue to change, wise investors focus on what they can control: 

1. Maintain an emergency fund. The best way to endure volatility is to have enough cash to cover the unexpected. 

2. Manage your news consumption. Headlines are designed to capture attention, not provide perspective. 

3. Hold enough short-term bonds and cash so that you’re never forced to sell long-term investments during even the longest downturn. 

4. Maintain a diversified approach to your portfolio. Lately, the market has been driven by just a handful of the biggest companies. However, as of March 4th, a globally diversified portfolio has outperformed the S&P 500 year to date. 

5. Stay focused on the long game. Your success as an investor won’t be determined by what happens in the next week or month. It will be determined by how you navigate market noise over decades.

What should you do now?

If you have a financial plan, now is a great time to revisit it. These moments of uncertainty are exactly what your plan was built for. 

If you don’t have a plan, this is a reminder of why you need one. A well-structured investment strategy helps you stay focused when markets get messy. 

At Human Investing, we help investors build financial plans that are designed for the long term; plans that account for uncertainty, so you don’t have to react to every headline. 

If you’re feeling unsure about the road ahead, let’s talk. The best investors aren’t the ones who predict the future—they’re the ones who are prepared for it.

References:

Kelly, D. (2025, March 3). The trouble with tariffs. J.P. Morgan Asset Management. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/the-trouble-with-tariffs/   

Housel, M. (2020). The psychology of money: Timeless lessons on wealth, greed, and happiness. Harriman House. 

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Disclosures:

These market returns are based on past performance of an index for illustrative purposes only. Past performance does not guarantee future results. All investing involves risk, including the loss of principal. Index performance is provided for illustrative purposes only and does not reflect the performance of an actual investment. Investors cannot invest directly in an index.

The information provided in this communication is for informational and educational purposes only and should not be construed as investment advice, a recommendation, or an offer to buy or sell any securities. Market conditions can change at any time, and there is no assurance that any investment strategy will be successful.

Diversification does not guarantee a profit or protect against a loss in declining markets. Asset allocation and portfolio strategies do not ensure a profit or guarantee against loss.

The opinions expressed in this communication reflect our best judgment at the time of publication and are subject to change without notice. Any references to specific securities, asset classes, or financial strategies are for illustrative purposes only and should not be considered individualized recommendations.

The opinions expressed by third-party individuals, including Dr. David Kelly, Seth Godin, Morgan Housel, and John Bogle, are their own and do not necessarily reflect the views of Human Investing or its affiliates. Their inclusion is for illustrative and educational purposes only.

Human Investing is a SEC Registered Investment Adviser. Registration as an investment adviser does not imply any level of skill or training and does not constitute an endorsement by the Commission. Please consult with your financial advisor to determine the appropriateness of any investment strategy based on your individual circumstances.

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An Analysis of Investment Advisor Representatives and Bureau of Labor Statistics Data: Determining the Percentage of Financial Advisors Acting as “True Fiduciaries”

In the financial services industry, the concept of acting as a fiduciary—putting the client’s best interests ahead of all else—has become a litmus test for ethical practice. However, determining how many financial professionals truly operate under a fee-only fiduciary model reveals a significant gap between perception and reality.

Industry Snapshot: Financial Professionals in the U.S.

According to the Bureau of Labor Statistics (2023), the financial services landscape in the United States includes:

• 513,000 financial services sales agents, encompassing roles such as stockbrokers and commodities traders.

• 321,000 personal financial advisors, offering financial planning and investment guidance to individuals.

Together, these figures total 834,000 professionals engaged in roles that directly or indirectly affect individuals' financial outcomes.

Investment Advisor Representatives: A Subset

Among these professionals, 77,468 individuals are registered as Investment Advisor Representatives (IARs), according to the Financial Industry Regulatory Authority (FINRA, 2022). IARs are often seen as closer to the fiduciary standard due to their regulatory obligations. However, even within this group, a significant portion still earns commissions.

• A recent analysis by Welsh (2024) indicates that 47% of IARs receive commissions, leaving only 53% as truly fee-only fiduciaries.

• Applying this percentage, the total number of fee-only IARs is approximately 41,958 individuals.

The True Percentage of Fee-Only Fiduciaries

To contextualize this figure, let’s consider the broader pool of financial professionals (advisors and brokers). Dividing the number of fee-only IARs (41,958) by the total number of financial professionals (834,800) yields a striking conclusion:

Only 4.92% of financial professionals operate as fee-only fiduciaries.

This percentage has seen growth from an estimated 2% in 2018 (Mantell, 2018), reflecting progress but also underscoring the rarity of this practice in an industry dominated by commission-based models.

References:

Bureau of Labor Statistics. (2023). Occupational Outlook Handbook. U.S. Department of Labor: Securities, Commodities, and Financial Services Sales Agents.

Bureau of Labor Statistics. (2023). Occupational Outlook Handbook. U.S. Department of Labor: Personal Financial Advisors.

Financial Industry Regulatory Authority. (2022). 2022 FINRA industry snapshot. Financial Industry Regulatory Authority.

Mantell, R. (2018, March 19). Is it time to adopt a uniform fee-only standard for financial advice? The Wall Street Journal.

Welsh, J. (2024, October 31). What role do commissions now play for advisors? Investment News.

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Understanding the Rules, Risks and Special Tax Incentives

As a Nike employee, it is common to have a desire to participate in the success of the company.  For many, this opportunity exists within the Nike 401(k) by investing retirement funds in Nike stock.  Even though it is available, is it a good idea and if so, how much is appropriate?  We will explore the rules, risks, and special tax incentives that exist within the plan.

The Nike Plan Rules and Limitations

1. Future Investments in the Nike Stock Fund are limited to a maximum of 10%, which includes Employee Contributions, Nike Matching, and Rollovers.

2. Existing Investments in the Nike Stock Fund:

   1. You can fully diversify out of Nike stock at any time by moving the dollars to a different available investment fund(s).

   2. If you want to increase your amount in the Nike Stock Fund from other existing investment funds, Nike will only allow it if the Nike Stock will be 20% or less of your overall account balance.

   3. Even though Nike places the 20% limit on transfers, there is no limit on the total amount of stock you can accumulate in the Nike Stock Fund. If you accumulate more than 20%, you can still contribute up to 10% to the Stock Fund.

Why the limitations on Nike Stock Fund within the RSP 401(k)?

You can see by the rules and limitations that Nike wants to encourage participation in the stock but in a responsible manner. It allows you to regularly contribute small amounts over time but with a cap of 10% at that time. It wants to discourage employees from making quick short-term decisions to move a large portion of their retirement savings into the Stock Fund by limiting that to 20%. To balance all of this out, it leaves an unlimited upside for the stock to grow in the 401(k) by having no overall limit in the value. Nike created guardrails to limit the risk and make sure that investment in Nike Stock is a long-term decision.

Understanding the Risks

Risk #1: Concentrated Stock Risk

Any stock or portfolio of stocks is subject to one type of risk known as Market Risk, which affects the entire stock market. Examples of factors that can create Market Risk are changes in interest rates, government regulations, taxes, and wars.

There is an additional risk that can affect you when you hold a large amount in a single stock. This risk is known as Company Risk, and it is related to the financial viability of that specific company. The emergence of new trends, technology, or even a scandal can decimate or take down an entire company. Examples of companies that have experienced this type of risk are Enron, Sears, Blockbuster, and AOL. This type of risk can be mitigated by diversifying and owning multiple stocks or investing in a diversified stock mutual fund or exchange-traded fund (ETF).

Risk #2: Employment Risk

If a company ever begins to struggle financially, the ramifications can likely be seen in the elimination of jobs and lower bonus’ for employees since they are tied to company performance. At the same time, the stock price of the company will typically drop, impacting the personal savings of anyone owning that stock. The effect of a stock price drop in your personal savings can become magnified if it happens simultaneously with losing your job or the elimination of your bonus.

How much Nike stock is too much?

The first step is to assess your overall exposure to Nike stock. Depending on the level at Nike, employees have access to different forms of Nike stock as part of the benefits package. It is common for Nike employees to accumulate a significant amount of Nike stock through benefits in the form of ESPP, Stock Options or Restricted Stock Units (RSUs). If you incorporate any Nike stock owned in your 401(k) and compare that to any other investments (retirement accounts, cash, real estate), what percentage of your assets are in Nike stock? So once you know the percentage, what is the right percentage for you?

Diversification and the “Rule of Thumb”

In the financial services industry, there is a rule of thumb that states that you should not own more than 5% or 10% of your overall investment portfolio in one single stock since it can create a significant amount of risk related to that Company Risk described earlier in this article. There definitely is prudence to this rule of thumb, but it can be challenging for employees to follow this “rule of thumb” strictly because of the stock benefits provided by Nike.

When It Can Make Sense to Exceed the Rule of Thumb

Part of maximizing your time at Nike is to take advantage of the benefits that are provided. Nike stock benefits all include a special incentive when compared to normal Nike stock. Whenever you consider risk, it should be evaluated in relation to the potential reward, so the higher the risk, the higher the reward should be for it to be a worthwhile investment. These incentives from the Nike benefits increase the reward so it can justify taking the additional risk of owning a concentrated amount of one stock.

The GAME-CHANGING Incentive for Owning Nike Stock in Your 401(K)

Net Unrealized Appreciation (NUA)

There is a unique tax strategy that exists within the Nike 401(k) that can make owning Nike stock more advantageous. The strategy is known as “Net Unrealized Appreciation” or “NUA” and applies to qualified retirement plans where you own company stock within the plan.

Net Unrealized Appreciation is the difference between what you have contributed (average cost basis) to the Nike Stock Fund and what it is worth today. Essentially, it is the growth above your contributions to the Nike Stock Fund.

The IRS has a provision that allows you to potentially receive a preferential tax rate on the NUA amount when you distribute Nike Stock from your 401(k) if you follow very specific rules. This preferential tax rate can save you between 13-37% in income taxes on the NUA amount depending on your specific situation.

When you make pre-tax contributions to your 401(k), future distributions will be taxed as Income when you take withdrawals from that account. If you follow the NUA Strategy steps, you would distribute all or part of the Stock Nike Fund as Nike Stock, pay taxes as Income on the contribution (Average Cost Basis) portion only. All growth of the Nike Stock (NUA) would be subject to a lower preferential tax rate of Capital Gains, which you can delay until you want to sell the Nike stock.

How to take advantage of the NUA strategy:

1. Nike stock must be transferred out of the 401(k) in-kind and cannot be sold before transfer.

2. The entire Nike 401(k) balance must be distributed in a single tax year. This could mean that the Non-Nike stock portion could be rolled into an IRA.

3. The distribution of the entire account can only be made after a “triggering event,” which are Death, Disability, Separation from Service, or Reaching age 59 ½.

As a future tax planning strategy, you could wait to sell the NUA Nike stock until you were in a low enough tax bracket and potentially have No Federal Capital Gains tax on the NUA amount.  The most common timeframe for this opportunity is after retirement and before age 73, when Social Security income and required minimum distributions from your IRAs can force you into a higher tax bracket.

The final and most important consideration is how your Nike stock exposure fits into your overall financial plan.  If you have a financial plan to show you how dependent your financial future is on Nike stock, this can help you make the most well-informed decision on your overall Nike stock exposure.

If you want to know more about incorporating Nike stock within your 401(k), please get in touch.

You can schedule time with me on Calendly, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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When it comes to a company’s stock, earnings are at the heart of its value. A company’s earnings represent its profitability—the actual money it makes after covering all costs—and this bottom line directly influences its stock price. Understanding earnings is key for investors because they reveal how well a company is performing today and provide insight into its potential growth. Let’s break down what earnings really mean and how they impact the value of the stocks you own.

What are earnings?

Earnings are the net income or profit for a business. Publicly traded companies report their earnings every three months in a document called the “net income statement,” which they must submit to the SEC (Securities and Exchange Commission). To find a company’s earnings, you can look up their 10-Q or 10-K filings on the SEC website.
 
Earnings are reported quarterly and are typically compared to the previous quarter and the same quarter from the previous year to show how profits are growing or shrinking. Companies will also release annual earnings, summarizing their financial year. There are also earnings calls where company leaders (like the  CEO or CFO) will discuss recent financial results, and provide guidance for the future.

What determines earnings?

Earnings start with total revenue (the money a company brings in). Then, all the costs are subtracted to see how much profit remains. Some of the main cost categories:

• Cost of Good Sold (COGS): Raw materials and labor to make the product

• Sales, General, and Administrative (SG&A): All the costs to keep the company running not involved in making the product. Think human resources, accounting, or marketing

• Depreciation: This tracks the decrease in value of physical items (like machines) over time.

• Amortization: This is the decrease in value of non-physical items (like patents) over time.

• Interest: This is what a company pays on its loans (outstanding bonds)

How should I think about earnings?

Think of earnings as a pie. The total size of the pie represents a company’s total profits. Each slice of the pie shows how much profit belongs to each share of stock. Earnings per share (EPS) measures the profit each share would get if the earnings were divided up evenly. For example, Nike (NKE) had $1.051 billion in net income in August 2024, resulting in EPS of $0.70 per share. Meanwhile Ford (F) had a higher $1.831 billion in net income June 2024. Because Ford has more shares outstanding than Nike, EPS came out lower at $0.456 per share.
 
When evaluating how expensive a single company stock is, investors look at the Price to Earnings (Price/Earnings or P/E) ratio. It’s a measure of how much someone is paying for every dollar of profit at the company. If you expect the company to grow a lot, you should be willing to pay a much higher P/E ratio than for a stable, established company that isn’t expected to grow. Looking at the P/E ratio is a much better way to get a sense of if a company is cheap or expensive. Stock prices reflect both the total earnings and future growth expectations (i.e. the size of the pie) and the number of shares out there (i.e. how big is each piece of the pie).

How do earnings impact stock prices?

Most publicly traded companies have earnings expectations, which is the average of what the professional analysts who track the company expect earnings to be for the next quarter (and beyond). Companies that exceed expectations have a positive surprise, and usually see their stock price go up in response. Conversely, companies that miss earnings (i.e. report lower earnings than expected, or reduce growth expectations) usually see their stock price decline.
 
Stock market reactions to earnings can sometimes seem unpredictable. For example, a company will beat earnings (i.e. report higher earnings than the analysts expected), but they didn’t beat earnings by as much as they did last quarter, so the stock price drops. Expectations can be so low for some companies any positive earnings surprise sends the stock soaring.

Many critique earnings as a measure of stock price. It’s possible to change accounting practices where the reported earnings number is higher, but the increase is more to do with changes in accounting policies than actual business activity. Extreme cases of manipulation can lead to fines and forcing companies to reissue earnings.

What do earnings do for me, the investor?

Earnings represent the company’s profits, which can benefit investors in two main ways:

1. Reinvest back into the company: typically done by growing companies, sometimes the best use for extra cash is to put more money back into the company to grow

2. Payout to investors: typically done by stable, established companies. The stockholders are the owners of the company, so the company returns the earnings to the investors in the form of dividends or stock buybacks

In traditional finance theory, the reason you own stock in a company is that your ownership means you will get the earnings returned to you in the form of dividends. Theoretically, any change in stock price is a change in the expected total dividends you’ll receive over the life of the company. While there can be lots of noise around stock prices (economic outlook, new leadership, etc.), ultimately the expectations around earnings (and thus dividends to investors) is the root of stock price fluctuations.
 
Whether your own stocks individually or through a broadly diversified fund, understanding how earnings impact stock price can be a helpful way to evaluate their long-term opportunity.

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As the person who manages most of the financial decisions in your household, it's natural to want to ensure your spouse is financially secure if you're no longer around. The financial burden on a widow can be overwhelming, especially with the lesser-known tax implications that often follow the death of a spouse. By planning ahead, you can safeguard your spouse from unnecessary financial stress.

Taking a few proactive steps now can help shield your spouse from these challenges and give them peace of mind. This guide will walk you through the financial implications of losing a spouse and what you can do today to ensure you preserve your assets for their well-being.

There are two common tax shocks you want to get ahead of:

Tax shock #1: The “survivor's penalty”

After a spouse dies, the widow is often left facing what’s called the "survivor’s penalty," which refers to higher taxes that result from a change in filing status. While you may currently file taxes jointly as a married couple, your spouse would be required to file as a single taxpayer after your death. This change can increase their tax bill substantially.

Here’s why this matters:

• Higher Marginal Tax Brackets: After your passing, your spouse’s income could fall into a higher tax bracket due to the narrower brackets for single filers compared to married couples.

• Reduced Standard Deduction: In 2024, the standard deduction for married couples filing jointly will be $29,200, but for single filers, it will be just $14,600. This reduction will increase the amount of income subject to taxes.

Looking ahead, it’s important to note that individual tax brackets are set to revert to pre-2018 levels in 2026, further increasing the tax burden on your spouse if you’re no longer here.

Tax shock #2: Hefty taxes on IRA distributions

If your spouse inherits your retirement accounts, such as an IRA, they’ll also face higher taxes due to Required Minimum Distributions (RMDs). These distributions are considered ordinary income, and combined with their new single filing status, could push them into an even higher tax bracket! The larger your IRA, the bigger this tax burden becomes.

What may seem like a well-planned nest egg now could become a source of financial strain later on due to taxes. By understanding this, you can take steps now to lessen the impact on your spouse’s financial future.

Firsthand example from a retired couple

When Spouse #1 and Spouse #2 file jointly, both receive Social Security and must take Required Minimum Distributions (RMDs) from their retirement accounts. Let’s look at their income and tax bill while filing as Married Filing Jointly (MFJ):

Now, if Spouse #1 passes, Spouse #2 becomes the sole taxpayer, facing a shift to the Single filing status. Spouse #2 is still required to take the same RMD amount as the beneficiary of the retirement accounts and claims Spouse #1’s higher Social Security benefit under the survivor benefit rules. However, Spouse #2 cannot receive both Social Security payments, so Spouse 2’s income is reduced. Here’s what their tax situation would look like:

Despite an almost 16% drop in income, Spouse #2's tax bill increases by over 30%, showing the impact of the survivor’s penalty on income and tax liability.

This example highlights why it’s essential to plan ahead to help lessen the financial burden on surviving spouses.

Four strategies to protect your spouse from a heavy tax burden

Fortunately, there are several strategies you can use to reduce the tax burden on your spouse in the future:

1. Complete Tax Projections: To best plan for the future and make calculated decisions, it’s necessary to understand your expected lifetime tax bill. A comprehensive tax projection will identify your current and future tax rates, potential gaps, and overall lifetime tax obligations. This helps you make informed decisions today.

2. Partial Roth IRA Conversions: Converting part of your traditional IRA into a Roth IRA over time can help reduce the tax impact on your spouse later. While you’ll pay taxes on the conversion now, the Roth IRA’s future growth will be tax-free, meaning less taxable income for your spouse when they inherit it.

3. Take Advantage of the Step-Up in Basis: For non-retirement investments, your spouse can benefit from a "step-up in basis." This allows the cost basis of assets to reset to their value at the time of your death, potentially eliminating capital gains taxes if they were to sell those assets. Understanding this advantage can save your spouse from an unexpected tax bill down the road.

4. Naming Non-Spouse Beneficiaries: Another option to reduce taxes is to name non-spouse beneficiaries for some of your retirement accounts, such as your children and grandchildren. While this can lessen the tax burden for your spouse, it’s essential that these non-spouse beneficiaries understand the new withdrawal rules set by the SECURE Act. This law requires that non-spouse beneficiaries fully distribute inherited IRA funds within 10 years, which could trigger substantial tax liabilities for them if not carefully planned. Additionally, consider adding a qualified charity as a beneficiary to your IRA for a tax-free transfer gift.

You can start planning ahead with your spouse now

Planning for your spouse's financial future can be an impactful gift. While it may be uncomfortable to think about what happens if you're no longer here, taking proactive steps now will ease your spouse’s transition during a difficult time. Here are a few key actions to consider:

Have Regular Financial Discussions: Make sure your spouse understands your financial plan, knows how to manage accounts, and is familiar with where to find important documents.

Work with a Fiduciary Financial Advisor: A financial advisor can help you develop a plan tailored to your family’s situation. By understanding your overall financial situation, an advisor can provide guidance now and assist your spouse when you're no longer there. They can also help with tax projections, Roth conversions, beneficiary updates, and staying ahead of tax law changes.

Create a Clear, Organized Estate Plan: Ensure your estate plan is up to date, including wills, trusts, health care directives, power of attorney, and beneficiary designations. This will help prevent unnecessary complications for your spouse during an already challenging time.

Be Proactive About Taxes: By planning for your spouse’s future tax obligations, you can reduce the “survivor’s penalty” and give your spouse more financial security.

You’ve worked hard to provide for your family, and planning for your spouse’s financial future if something happens to you is a vital part of that legacy. While it may seem difficult to know the "right" time to prepare, we can't predict the future. Whether you're already in retirement or facing a serious diagnosis, projecting out scenarios can make all the difference for your spouse’s security.

Don’t wait until it’s too late—start planning now to protect your loved one from unnecessary financial strain.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money.

One important update for 2025 is that under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in eligible retirement plans.

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2025!

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Social Security remains a cornerstone of American retirement planning, yet it’s often shrouded with concern and misinformation. As the dialogue about its future grows increasingly pessimistic, many people question its reliability and role in their retirement income plans. Understanding the current state of Social Security is crucial for making informed decisions about your financial future.

Perception vs. Reality:  The Role of the Trust Fund

Much of the anxiety around Social Security comes from media reports highlighting the shrinking trust fund. This often leads to the mistaken belief that the program is on the verge of collapse. But the real issue isn’t mismanagement—it's demographics. As baby boomers retire and people live longer, benefits are outpacing payroll tax revenues.

Historically, Social Security operated on a pay-as-you-go basis. Since 2010, however, benefits have exceeded payroll tax collections. To bridge the gap, the Social Security Administration (SSA) has been tapping into the trust fund, a practice that will continue until the fund is expected to run out by 2033[i]. While this sounds alarming, it doesn't mean Social Security will vanish.

Misunderstandings About Insolvency

A common misconception is that the depletion of the trust fund means Social Security will go bankrupt and cease to exist. In reality, even after the fund is exhausted, payroll tax revenues will still cover approximately 79% of retirement benefits[ii]. This isn’t a doomsday scenario; it’s a call for strategic policy adjustments.

Fixing the Funding Gap – Potential Reforms

The SSA has proposed several solutions to address Social Security’s funding gap. Here are some of the most viable strategies:

1. Increase Social Payroll Tax – Projections show Social Security's long-run deficit is 3.5% of covered payroll earnings[iii]. Raising payroll taxes by this amount—1.75 percentage points each for employees and employers—could secure full benefits through 2098, with a one-year reserve at the end.

2. Increase the Social Security Wage Base—In 2024, the first $168,000 of earned income is taxed at 6.2% each for employees and employers; self-employed individuals will pay 12.4%.[iv] Increasing the Social Security wage base can help address the shortfall.

3. Increase Full Retirement Age (FRA): Currently set at age 67 for individuals born in 1960 and beyond, the FRA dictates when retirees can claim full retirement benefits without reduction. Each one-year increase in the FRA equates to roughly a 7% cut in monthly benefits for affected retirees. Raising the FRA to 70 would reduce benefits by nearly 20% at any given claiming age.[v] This change aligns with historical precedent, as the FRA was originally 65 for most of Social Security’s history.  

4. Invest in Equities: The SSA could explore investment strategies to enhance returns, following successful models utilized by other countries like Canada or systems such as the US Railroad Retirement System.                    

These measures would require political compromise but could ensure the program’s sustainability and continued support for retirees.

Planning for a Reduced Benefit Scenario

Amid ongoing discussions about Social Security reforms, it’s essential to hope for the best but prepare for the worst—acknowledging the potential for reduced benefits if corrective actions fail to shore up funding. The looming risks of benefit cuts necessitate careful consideration alongside other retirement planning factors, including life expectancy, additional income streams, risk tolerance, inflation, and potential spousal benefits.

Consider your Options in an Ever-evolving Social Security Landscape

Despite the challenges and negative perceptions, Social Security is not on the brink of collapse. With informed decisions and potential policy adjustments, the program can continue to support retirees for many years. It's crucial to stay informed and consider the evolving landscape of Social Security in your retirement planning. We’re here to support you. Contact us to meet with an advisor and learn more about your options.

Sources

[i] Social Security Administration. (2024). The 2024 OASDI Trustees Report. https://www.ssa.gov/oact/tr/2024/

[ii] Munnell, Alicia H. 2024. "Social Security's Financial Outlook: The 2024 Update in Perspective" Issue in Brief 24-11. Chestnut Hill, MA: Center for Retirement Research at Boston College.

[iii] SSA, The 2024 OASDI trustees report. p.17.

[iv]Social Security Administration. (2024). Contribution and benefit base. https://www.ssa.gov/oact/cola/cbb.html

[v] Springstead, G. R. (2011). Distributional effects of accelerating and extending the increase in the full retirement age (Policy Brief No. 2011-01). Social Security Administration. https://www.ssa.gov/policy/docs/policybriefs/pb2011-01.html) 

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We’re all familiar with the risk-reward tradeoff: Do I risk injury to compete in a sport I love and feel fulfilled by? Do I risk leaving a stable job to pursue a career that excites me? It’s not surprising that this everyday phenomenon is also very present in our investment portfolios.

For example, there are three asset classes that an investor typically includes in their portfolio: cash, bonds, and stocks. Of the three, stocks can generate the greatest return but also merit the highest risk. On the other hand, a risk-free investment guarantees a future return with essentially no possibility of loss. An example of a risk-free investment is US Treasury bills, as they are backed by the full faith and credit of the US government. If investors are taking on more risk by investing in stocks, they want to know their efforts are worth it. Enter the equity risk premium.

Understanding the Equity Risk Premium

The equity risk premium measures how much more an investor may receive in returns when investing in stocks versus a risk-free investment like T-bills. Basically, it puts a number to the term, “the higher the risk, the higher the reward”.

As we’ve previously written, the fear of financial loss causes many investors to be overly cautious about their investments. ”Myopic loss aversion” is when focusing on avoiding short-term losses in equities leads to poor long-term allocation decisions.  Incorporating bonds into your investment portfolio can serve as  a stabilizer, reducing the payback period to see your portfolio recover from downturns. Many investors own some combination of stocks and bonds to ensure the risk-reward tradeoff is an acceptable range for them, either emotionally or financially (or both). Because of the fear of loss, many investors either avoid or under-weigh equities. How significant is the difference between owning stocks (highest risk), bonds (lower risk), or cash (no risk)?

Risks associated with investing in Stocks

So, why do those who invest in stocks generally receive a greater return? Because of the greater risk they take on by doing so, such as:

Unpredictability: Stocks do not offer fixed payments at specific intervals like bonds.

When an investor buys a bond, they are essentially lending money to a company or a government (see our Bonds 101 blog for a primer on bond basics). Like any loan, bonds have terms outlining specific payment amounts and dates. These payments, known as coupons or interest, are obligatory, with insolvency being the only reason for non-payment.

Conversely, stocks represent ownership in a company and entail greater uncertainty. Returns for stock investors can come in the form of dividends distributed by the company or by selling shares at a higher price in the future. Unlike bond payments, dividends are not mandatory and can be suspended unexpectedly, as seen during the onset of the COVID-19 pandemic. Additionally, the growth of dividends may not meet expectations, even for well-established companies commonly known as “blue chip” stocks (such as Coca-Cola, McDonalds, or Microsoft). Even large and stable companies face challenges that can cause fluctuations in their stock prices. Due to the unpredictability of stock payouts in terms of amount and timing, investing in stocks is inherently riskier and more volatile. As a result, investors demand higher returns from equities as compensation for bearing this additional risk.

Risk of Total Loss: Stockholders can see their investment go to zero more easily than bond investors.

Over the last thirty years, bondholders have frequently recouped 40% or more of their initial investment during bankruptcies, although exact recovery rates can vary[1]. In contrast, equity owners seldom receive any compensation in bankruptcy. The harsh reality is that most companies fail in the long term, and many of these companies made interest payments on bonds throughout their existence, while equity investors ultimately see their investments become worthless. Regardless of whether you’re investing in stocks or bonds, owning a broad index fund provides essential diversification. Owning a basket of companies ensures that even if one fails, the other companies that continue to grow offset your losses so you’re never experiencing a complete wipeout.

The Equity Premium at Play Can Sometimes be a Jackpot

First, a quick note: All return figures mentioned below are based on real returns, or returns after adjusting for inflation. Real returns are the most accurate comparison across different asset classes, reflecting changes in purchasing power over time. Although nominal returns are widely used in the financial world unless otherwise specified, they do not account for inflation and are therefore less accurate in this example. All returns are based on rolling 12-month periods, meaning this is the return if you held the investment for 12 months.

Table 1 - Real returns, rolling 12 month periods - (1926-2023, adjusted for inflation)[2]

When we look at the real returns for the last 97 years between cash, bonds, and equities, it’s clear stocks deliver the highest returns, albeit with the most downside risk. Cash is undeniably the safest asset class but struggles to outpace inflation. Bonds tend to be closer to cash than equities in terms of their risk-return profile.

The Long-Term Power of the Equity Premium for an Investor

While stocks undoubtedly offer the highest returns, it’s essential to grasp their long-term value to investors. To demonstrate this, let’s outline a hypothetical scenario:

• Assume three investors each save $5K annually for 40 years for retirement for a total contribution of $200K per investor.

• We’ll assume each investor owns only a single asset class (cash, bonds, or stocks) for all 40 years of saving.

• We’ll use the real return averages from Table 1 for each asset class.

• We’ll utilize the commonly cited 4% annual withdrawal rate[3] for retirees to determine how much income the portfolio provides in retirement annually.

Table 2 – Portfolio values assuming real returns

The difference in portfolio value, and resulting income possible in retirement, is significant. A pure equity investor ends up with nearly six times the spending power of a pure bond investor after 40 years.

While equity market volatility can be unsettling, exposure to equities can significantly reduce the amount of savings required to achieve your financial goals such as funding retirement. It’s critical to ensure your equity allocation is sufficient to facilitate asset growth yet small enough to prevent panic during market downturns. Striking this balance depends on your emotional risk tolerance and financial capacity for risk.

Determining the optimal equity and bond allocation requires careful consideration of factors such as taxes, time horizon, and liquidity needs. If you are seeking guidance in navigating this complex process, please reach out to us at 503-905-3100, or email hi@humaninvesting.com to start the conversation.

Sources

[1] https://www.spglobal.com/ratings/en/research/articles/231215-default-transition-and-recovery-u-s-recovery-study-loan-recoveries-persist-below-their-trend-12947167

[2] These returns are based on an index, do not represent actual investment results, and are not guarantees of future results.

Data based on rolling 12 month returns, with monthly return intervals.

Equity returns utilize the Ibbotson SBBI Large-Cap Stocks Total Return for Jan 1926 to Sep 1989 (data courtesy of CFA Institute), and S&P 500 TR for Oct 1989 to Dec 2023 (data courtesy of YCharts).

Bond returns utilize the Ibbotson SBBI US Intermediate Term Government Bonds Total Return for Jan 1926 to Apr 1996 (CFA Institute), and Bloomberg US Aggregate for May 1996 to Dec 2023 (YCharts).

Cash returns utilize the Ibbotson SBBI US (30-Day) Treasury Bills for Jan 1926 to May 1997 (CFA Institute), and Bloomberg US Treasury Bills 1-3 Month for Jun 1997 to Dec 2023 (YCharts).

Inflation rates for calculating real returns are based on the Ibbotson SBBI inflation for Jan 1926 to Jan 1947 (CFA Institute), and the Consumer Price Index (CPI) for Feb 1947 to Dec 2023 (YCharts).

[3] https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf

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The window is open from August 5-27, 2024

It’s that time of year again where Nike leaders will need to make their annual Nike Stock Choice and select between 100% Stock Options, 100% RSUs or 50/50. 

When comparing Nike Stock Options and Nike RSUs, RSUs are the safer option.  RSUs offer a more secure value and a more moderate level of upside and downside.  Stock Options are more volatile but can also provide significantly more upside over time.

At first glance the decision can feel simple since there are only 3 roads to take, and when in doubt picking the middle road of 50/50 is the easy compromise.  While this can be the right selection for many individuals, it is not always the optimal choice.   While working alongside Nike leaders over many years, we have found that there are 11 crucial questions to answer and consider so that you arrive at that optimal selection for you.

Timing questions: Is it a sprint or a marathon?

Understanding your timeline is one of the most important factors in your choice.  Stock Options do not have any value until the stock price increases, but they do grow at a faster pace than RSUs.  So given enough time, Stock Options can surpass RSUs in value.  This is why timing considerations can be crucial to your decision and you should consider questions like:    

1. What is the purpose of Nike stock for you and your family? 

Does it contribute to longer-term goals like retirement, building wealth, and creating a legacy? Stock Options are more appropriate here. Or is it for shorter-term needs like a second home, more vacations, or education for your kids?  RSUs typically make more sense for these scenarios.

2. How much longer do you think you will work at Nike?

To the best of your ability, you should consider how long you think you will remain at Nike.  Your timeline could be short if you are seriously considering offers from recruiters or think your position could be eliminated.  In those types of considerations, RSUs could make more sense.  Conversely, if you plan to stay at Nike long-term and feel like your position is secure, you have a better chance to participate in the long-term growth of Nike stock.  In this case, Stock Options may be a better fit.   

3. How often do you typically sell Nike Stock to fund purchasing needs?

If you frequently sell your Nike stock grants to fund lifestyle needs, you likely need a more consistent funding source like RSUs since there is not adequate time for the stock to grow and realize the value.  

Behavioral questions: It goes beyond the numbers

As human beings, behavioral and emotional factors often affect our financial decisions.  These types of questions include:

4. What did you select last year, and do you feel like that was a good decision? 

Do you have buyer’s remorse, or do you feel good about that decision regardless of which selection is better at this point-in-time?  It is important to remember that the Stock Choice selection is a long-term decision that should not be overly influenced by recent, short-term results.

5. How much regret would you have if your peers made a more financially successful choice? 

If your peers are all celebrating the success of their selection and yours is different, how much would this affect you?  Everyone has a different level of response in these situations and setting yourself up well to be at peace with your decisions is important to your well-being.

6. How do you currently feel about the long-term growth potential of Nike stock?

Your long-term feelings toward Nike stock potential should be considered since it will better match your expectations and satisfaction regardless of what actually happens with stock performance.    

Risk questions: How much turbulence are you okay with?

7. If stock price dropped by 20%, how would you feel?

It is normal for any stock, including Nike, to experience ups and downs and a 20% drop at some point should be expected.  During these moments, would you be concerned to the point of wanting to sell immediately, not concerned at all, or a little concerned?  If this type of drop would be too difficult to stomach, you may want to lean towards RSUs.  If it is not a concern at all, you may be well-suited for Stock Options.

8. How do you feel about your total exposure to Nike stock?

Does having the bulk of your financial assets tied up in Nike already cause you concern and anxiety, or are you hoping to build up more Nike holdings?  If you are already concerned about your exposure, you will likely be diversifying out of Nike stock.  In this case, it could make more sense to lean towards RSUs.

Quantitative questions: The numbers do matter

9. How is the price of Nike stock valued currently based on its earnings and other factors? 

Is it overvalued or undervalued?  You may want to examine the metrics to see how it currently stacks compared to its historical valuation.  If it is undervalued that could make you lean more towards Stock Options, or if it is overvalued it could make sense to lean more RSUs.

10. What is this year’s Stock Option Ratio?

Each year there is a calculation of how many Stock Options you will receive if you make that choice.  It is a ratio based on the value of the RSU choice.  For the first 4 years, it was a 5:1 ratio (5 stock options for 1 RSU).  Starting in 2022, it shifted to a 4:1 ratio.  We cannot say for sure the reason for this shift, but it would be reasonable to assume it was affected by interest rate changes and stock market volatility as those factors can change the valuation of a stock option.

The 4:1 ratio for Stock Options means that you would receive less Stocks Options and Nike stock price would require additional growth to become more valuable than RSUs.  A lower ratio could mean that you need more time for Stock Options to grow to have a chance to exceed the value of RSUs. 

The overriding ‘special’ question

11. Do you qualify for the Stock Option Special Retirement Vesting?

If you are age 55+ and have worked for Nike for at least 5 years, you qualify for the Special Retirement Vesting of any Stock Options. This is the most important factor in the entire equation to consider. 

When you terminate from employment at Nike, you will lose any unvested RSUs and Stock Options.  Additionally, any unvested Stock Options must be exercised within 90 days unless you qualify for the Special Retirement Vesting.  This Special vesting will allow you to keep your unvested Stock Options (held for at least one year).  These will continue to vest over the next 4 years or vest immediately if you are Age 60+.  You will also have more time to exercise your Stock Options instead of being forced to do so within 90 days after termination.    

Since this special vesting is so valuable, anyone that qualifies or will be qualifying for this vesting soon, should strongly consider Stock Options as part of their decision. 

Do you want help putting it all together?

As you can gather from the 11 questions above, there are many different factors that should be considered.  Determining which ones are the most important can be challenging. 

Based on your answers to these questions, you may already feel confident and comfortable with one of the three options.

For those who are still unsure or want to obtain detailed information while deliberating, our team at Human Investing created our own, proprietary scoring tool.  The scoring tool takes the answers to these questions, assigns different weights depending on the importance of each question, and generates a unique score report.    

GET YOUR OWN COMPLEMENTARY SCORE

If you or anyone you know is interested in receiving their own Stock Choice score sign up below. 

Get your score

Lastly, we believe it is important to consider how your Nike stock compensation fits within your overall financial situation.  The questions above and the scoring tool can be helpful, but this Stock Choice decision is best done in coordination with a personalized financial plan.

If you have questions or want to learn more about the Stock Choice, Stock Options or RSUs, please feel free to contact us at nike@humaninvesting.com

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Since the recent Nike quarterly earnings report, the stock price dropped 20% in one day (June 28, 2024) and continues to hover around $72 - $75 per share. This has raised concern for employees as they rely on Nike stock to fund a significant portion of their investment strategy and lifestyle needs.

Below are 4 thoughts on the recent price drop and action items you can implement to move forward during this downtime.

Give yourself time to recover

 It’s easy to lose sight of this when the stock price is rising. The focus goes towards remaining invested for as long as possible so you don’t miss additional investment gains and forget that volatility can disrupt your strategy.

In our blog post from August 1, 2022, we analyzed the recovery period for Nike stock price when there is a 20% downturn. We can’t predict how long this recovery period will take, but history tells us that on average, it takes 339 days.

Action Items:

• Stock options: The most common approach is to exercise and sell your Stock Options by converting it to cash before the expiration deadline. You may want to consider the less common option to exercise and hold the stock. This gives you an indefinite timeline to hold the stock and strategically wait until the right time to sell. For the exercise and hold strategy, you need to have cash to purchase the stock. For example, to exercise and hold 100 shares at $75 per share, you need $7,500 cash to purchase, so plan accordingly.

• Strategically diversify: Diversify new ESPP and RSU purchases. Selling new shares at the time of purchase does a couple of things: (1) Avoids the risk of loss in value, (2) allows you to diversify into a balanced investment portfolio, and (3) gives time for your older Nike stock purchases to recover.   

Strategically raise funds when needed to minimize taxes

Rather than focusing on “how much cash do I need”, look at each of your Nike investment buckets and determine how you can get the cash you need in a tax-advantaged way.

Action Item:

• Tax analysis: For RSUs and ESPP, look at each Lot to determine which holdings would sell at a capital gain and which would sell at a loss. Review critical factors such as (1) how much cash do I need, (2) how much investment will remain, (3) what is the net tax impact of what I’m selling, and (4) how long until I need to raise more funds.  

Re-evaluate your financial plan

When the stock price is down, it’s an opportunity to evaluate whether changes to your financial plan are required to stay on track with achieving your long-term goals.

Action Items:

• Maximize benefits: Specifically ESPP stock while the price is low. At the next ESPP enrollment, consider increasing your deferral percentage to the maximum of 10%. 

• Adjust investment strategy: Evaluate your overall concentration of Nike stock. If Nike stock is a large portion of your overall investment portfolio, consider ways you can maximize your savings going forward into a diversified portfolio to reduce your overall exposure.

• Stock choice: Think about your upcoming Nike stock choice. If you’ve taken 100% RSUs in the past, does it make sense to change your strategy to 50/50 stock options or 100% stock options?

• Prioritize your expenses: Determine which expenses are most important to you. Consider reducing or delaying expenditures that do not align with your highest priorities. This approach can feel difficult at first, but the more you buckle down during this season, the greater impact it will have on your financial plan.

Re-visit your college savings plan

Many Nike employees rely on their stock options to fund their kid’s college expenses. If this was your strategy, your options are underwater unless you have grants from 2014 (which expire soon) – 2017.

Action Items:

• Evaluate other funding sources: Do you have other investment levers that can be used to fund college expenses?

• Cash flow: How much cash flow do you have within your annual budget to fund college expenses? Will this be sufficient to cover part or all of the expected cost?  

• Deferrals: If you reduce your retirement deferrals, will this increase your cash flow enough to fund annual college expenses?

• Prepayments: If you are pre-paying any loans (ie: paying extra on your monthly mortgage), consider paying the minimum to free up cash flow for college expenses.   

• Grants and scholarships: Are there opportunities to explore this further?

• Adjusting expectations: Does this prompt a discussion with your kids around sharing the cost of college expenses?  

Consider your timeline. When Nike stock is increasing, it’s easy to lose sight of your timeline because the focus is not missing out on the appreciation. The recent volatility is a reminder that time is the most valuable asset when investing. The action items above are the starting point to navigate through the volatility. Please reach out to us so we can continue the discussion and help implement these strategies to remain on track with your long-term financial goals.

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As the golden years approach, retirement promises relaxation and newfound freedom. However, during this period of life, there's an often misjudged financial responsibility - Required Minimum Distributions (RMD). Despite an investor saving diligently to tax-deferred accounts like pre-tax 401(k)s or traditional IRAs for retirement tax advantages, higher tax rates often blindside retirees due to these distributions.

Failure to prepare for RMDs can lead to a substantial increase in your retirement tax bill.

Fortunately, strategic retirement planning and foresight offer avenues to mitigate the impact of an inflated tax bill. By reducing your taxes, you gain the flexibility to allocate your funds where they matter most – be it for personal expenses, supporting loved ones, or giving back to charitable causes.

Understanding RMDs

RMDs are mandatory withdrawals from tax-deferred retirement accounts starting at age 73 (or 75 for those born in 1960 or later). These withdrawals aim to ensure you pay taxes on the money you've saved.

Each year, individuals can calculate their RMD by dividing the total amount in their eligible retirement accounts at year-end by a factor determined by the IRS, derived from their life expectancy which is listed in the Uniform Lifetime Table.

Let’s use an individual who is age 73 and had a $1,000,000 IRA balance as of December 31 of the previous year as an example. Their IRS life expectancy factor is 26.5, which means that their RMD for this year will be $37,735.85.

$1,000,000 ÷ 26.5 = $37,735.85

It's crucial to take RMDs on time to avoid penalties. Failure to do so can result in a 25% excise tax on the amount not withdrawn as required.

Don’t Leave your RMDs Unchecked

As each year passes, the life expectancy factor used to calculate Required Minimum Distributions (RMDs) decreases. This results in a larger portion of the investment portfolio needed for mandated withdrawals. Put simply, the older you are, the higher the required withdrawal amount, which in turn increases the associated tax bill.

To illustrate this increase in RMDs over time, let’s consider that someone with a $1,000,000 IRA balance must take approximately $37,736 at age 73, or about 4% of their pretax eligible portfolio. Seventeen years later, at age 90, the required withdrawal amount grows to over $118,000, or about 8% of their qualified portfolio.

This is where the danger of RMDs becomes evident. Left unchecked, RMDs can snowball, leading to an increasingly burdensome annual and lifetime tax bill. Additionally, as your income rises due to RMDs, you may inadvertently trigger additional tax traps such as:

• Taxes on Social Security Benefits: An increase in income can subject a higher percentage of your Social Security benefit to taxes. Whether or not your Social Security benefits are taxed is based on your combined income level and marital status.

• Medicare IRMAA surcharges: These surcharges present another potential financial concern. This can increase monthly Medicare premiums due to the Income Related Monthly Adjustment Amount (IRMAA). If you're enrolled in Medicare or plan to enroll within the next two years, exceeding the income threshold by as little as $1 could result in hundreds of dollars in additional premiums for Medicare Part B and Part D.

Strategies to Mitigate Tax Impacts of RMDs

Although failure to plan for RMDs can cause tax traps, thoughtful strategizing can help. Here are a few ways to mitigate tax impacts of RMDs, so they support your retirement lifestyle rather than cause a headache:

Withdraw more funds than you need

The most straight-forward strategy is to withdraw more funds than you need after age 59½. This age typically marks the earliest point at which you can start withdrawing from a tax-deferred account without facing a 10% early withdrawal penalty. By deliberately withdrawing funds, you can reduce your account balance and, as a result, your future RMDs. This strategy can be advantageous when current tax rates are lower than anticipated future rates.

Utilize Roth Conversions

A Roth conversion involves transferring a portion of funds from a traditional IRA or other tax-deferred retirement account into a Roth IRA. During this process, taxes are paid on the transferred amount at ordinary income tax rates for the year of conversion. The remaining funds are then reinvested in the Roth account.

This strategy appeals to many, especially those aiming to strategically reduce future Required Minimum Distributions (RMDs). Withdrawals from Roth IRAs in retirement are tax-free, and there are no RMD requirements, making this option attractive for minimizing tax obligations.

The rationale behind opting for a partial Roth conversion revolves around managing when and at what rate taxes are paid. By strategically choosing to pay taxes on tax-deferred dollars in a year when you are in a lower tax bracket than when you anticipate withdrawing the funds, you can maximize tax benefits. Additionally, reinvesting dollars into a Roth IRA allows them to continue benefiting from compound growth, with all future growth being tax-free.

Effective Roth conversions should be based on a thorough analysis of both current and future tax brackets, considering potential changes in tax rates and various sources of retirement income. It's crucial to convert just enough to utilize the lower tax brackets, maximizing the advantages of Roth Conversion.

Consider this scenario: you possess a $1,000,000 IRA and have recently consulted with your financial planner for a retirement tax analysis. The analysis suggests that executing a $50,000 Roth Conversion to fill up the 12% tax bracket would be prudent. This strategic move takes advantage of the current lower tax rate, shielding you from potential future tax increases when Required Minimum Distributions (RMDs) come into play. Given the expectation that RMDs will push you into the 25% federal tax bracket in the future, this decision protects you from paying an additional 13% in taxes.

During this conversion process, the $50,000 seamlessly transitions from your traditional IRA to a Roth IRA. Although this amount is subject to ordinary income tax, you have flexibility in managing the tax liability, whether through tax withholding on the Roth Conversion or by utilizing estimated taxes from alternative sources.

It's important to note that any subsequent growth on the converted amount within the Roth IRA remains entirely tax-free for you or your beneficiaries, providing lasting financial benefits.

Make an Impact through Charitable Donations

Another strategy to decrease your tax burden involves donating some of your IRA distributions directly to a qualified charity. Once you reach age 70½, you become eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free transfer of funds from your IRA to an IRS-recognized charity. While these distributions are not subject to taxation, they do count towards fulfilling your required minimum distributions for the year.

Retirees who do not immediately require their RMDs and wish to support their chosen charity or religious institution tax-efficiently should evaluate whether making donations directly from their IRA aligns with their financial goals.

Viewing QCDs as part of a broader tax and charitable strategy is essential. Donating directly from an IRA offers a more significant financial benefit than donating cash or appreciated securities because it reduces your Adjusted Gross Income (AGI). This is particularly advantageous for retirees who no longer itemize deductions and instead choose the standard deduction, maximizing the tax benefits of charitable giving.

Have an RMD Strategy in Place

Grasping the nuances of RMDs is pivotal for retirement preparedness. Neglecting to address RMDs can result in significant tax liabilities, jeopardizing your financial stability during retirement.

By integrating proactive strategies into your retirement planning, you can mitigate the effects of RMDs, maintain control over your tax situation, and align your retirement savings with your lifestyle and legacy goals. Seeking advice from financial experts can offer personalized support in navigating RMDs effectively, empowering you to pursue your retirement aspirations confidently.

For more on retirement strategies, download our 36-page guide here.

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Between Fed Policy and the Presidential election, 2024 has all the makings to derail investors. While these factors introduce volatility and uncertainty, historical insights and a sound financial plan can guide those navigating the financial markets.

The year began promisingly, with the market reaching all-time highs in the first quarter of 2024. However, the start of the second quarter has highlighted the inherent unpredictability of the financial landscape. Beneath these surface-level fluctuations lies a geopolitical landscape marked by pivotal events that demand attention.

Fed policies will continue to impact market dynamics

The Federal Reserve's stance on interest rates emerges as a significant factor shaping market sentiment and performance in 2024. Speculation about potential adjustments in interest rates can significantly influence investor behavior and market dynamics. Lower interest rates can stimulate economic activity and boost equity valuations. However, uncertainties surrounding the timing and magnitude of such policy shifts add complexity to the investment landscape. At the beginning of the year, the Fed indicated it might cut rates at some point in 2024. But with inflation remaining higher than expected, it's now anticipated that there will be fewer rate cuts (if any) than initially predicted.

The "cost of admission": lessons from decades of market turbulence

Regardless of the headlines, it's fundamental to understand that the path to stock market growth is paved with bumps in the road. The following chart from JP Morgan nicely illustrates how volatile the stock market can be over short periods of time. In the chart, grey bars represent the returns for each calendar year, while red dots show the intra-year declines.

Looking back to 1980, the S&P 500 experienced an average sell-off of 14.2%, while ending positive in 33 of the 44 years measured. This inherent market fluctuation underscores the “cost of admission” for those seeking long-term gains through stock investments.

Insights from past elections: market performance amid political uncertainty

In most years, the stock market experiences growth, and this pattern holds true for presidential election years as well. However, investors should be prepared for increased volatility due to market uncertainty. Over the past four decades, election years have witnessed heightened market volatility fueled by the ambiguity surrounding political transitions. Despite this turbulence, historical data illustrates the market's resilience.

The S&P 500 has delivered a median total return of 11% over the past ten election cycles, inclusive of the 2008 Global Financial crisis. Though slightly lower than the median return of 15% across all years since 1984, this resilience showcases the market's ability to weather political flux.

Despite the uncertainty surrounding elections, historical data indicates that remaining invested through the election has proven advantageous. Once election results are announced, returns often speed up, usually boosting equity valuations and prices post-Election Day regardless of election outcome.

Leveraging a well-crafted plan for stability

During market turbulence driven by factors such as Federal Reserve policies and elections, a well-crafted financial plan acts as a stabilizing force. As we journey through 2024, it's essential to acknowledge that fluctuations are inherent in investing. Stress-testing your financial plan against various scenarios becomes vital, providing resilience in the face of uncertainty. While headlines may evoke strong emotions, maintaining a long-term perspective grounded in a robust plan aids in navigating choppy waters.

As 2024 unfolds, investors are reminded to stay committed to their financial plan's principles. By drawing on historical insights and adhering to a clearly defined strategy, investors can confidently maneuver through market volatility, knowing that their financial plan serves as their guiding star, directing them toward their long-term objectives.

Sources

1. Human Investing. (2024). 2024 Q1 Economic Update: Politics and the Market. Human Investing Blog. Retrieved from https://www.humaninvesting.com/450-journal/q1-2024-economic-update

2. Goldman Sachs. (2024, February 1). Global Macro Research. Retrieved from [https://www.goldmansachs.com/intelligence/pages/2024-the-year-of-elections-f/report.pdf]

3. J.P. Morgan. (2024). Guide to the markets: March 31, 2024.

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