SECURE Act 2.0

The first “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was passed December 2019 eliminating the ‘stretch IRA’ for non-spouse and changing the RMD (Required Minimum Distribution) age to 72. These were changes that impacted everyone across the board. With the Secure Act 2.0, congress appears to be reversing its prior leanings and instead allowing Roth conversions. The reversal towards ‘Rothification’ (encouraging ROTH savings/conversions) appears to be with the goal of increasing tax revenues today. It is fair to say that no single provision made by the SECURE Act 2.0 appears to have the same impact across so many as the elimination of the stretch, which now requires many inherited distributions to complete within 10 years, rather than spreading distributions over the entire beneficiary’s lifetime. Even so, 2.0 has so many more detailed provisions that it will impact most in some way. It is already evident that implementation will take more effort than the first SECURE Act.

Some of the new provisions included in SECURE Act 2.0 will be implemented over the next two years and require preparation in 2023. We will explore the provisions that may be relevant to your specific situation during our meetings this year. Let us know if you have any questions.

Edi Alvarez, CFP®

Fed Action and Your Portfolio

The last Jackson Hole meeting was hugely anticipated, and Federal Reserve Chairman Jerome Powell reiterated that he would stay true to the current approach to tame inflation. The market reacted with a sharp sell off. Why? Because some were expecting the Fed to return to a loose monetary policy at the slightest economic weakening. January 4th, we heard from the Feds that any pivot prediction is misguided.

It is important to recognize that there are more important factors that drive stock prices than Fed policy – corporate earnings and greed actually impact prices far more!

While I agree that the Fed policy can and does impact economic activity, it is company earnings, economic growth, geopolitics, sentiment, innovation, and global economic trends that will certainly play a bigger role in our economic future and support higher lasting market valuations.

It appears that the media and market participants are fixating on every Fed utterance. Do not follow their lead. We are expecting a cool market over the next months, but inflation appears to be responding. If we stay the course and not return to easy money, we may recover without stagflation and the economic downturn associated with it.

Edi Alvarez, CFP®

Stress Testing Your Retirement Plan for Social Security

Social Security is a unique guaranteed source of income in retirement and one of the essential components in everyone’s retirement plan. Findings from the Annual Social Security Trustees Report for 2022 shows that at the current rate, existing reserves will be depleted in 2034. It is also estimated that on depletion, continuing social security tax income will provide for 77% of guaranteed benefits.

Social Security is inflation adjusted (COL). The 2022 COL was 5.9% and increased to 8.7% for 2023. This increase will certainly accelerate the level of depletion. We don’t yet know if the trust reserve will be amended to last beyond 2034 so we need to consider how to stress test your retirement plan for this potential risk. How might we prevent depletion of the trust?

  1. Raise social security retirement age again?
    This is least likely since the benefits take a long period of time to be effective and the impact is highest on those with least savings. Can you imagine the reaction if the full retirement age was changed from age 67 to 70? This strategy would need to be implemented early enough to have an impact.
  2. Raise the income cap or eliminate it as we did with Medicare?
    This is more likely and, in a small way, is already taking place. For example, Social Security taxable earnings in 2022 were capped at $147K and increased 9% to $160K for 2023. This should provide additional assets for the Social Security benefit trust, BUT it will also reduce disposable income and impact economic growth.
  3. Follow an IRMAA-type of income/means testing of benefits?
    It has been suggested that Social Security benefits should be reduced like Medicare based on your retirement income (means tested). This appears to have traction since it is currently working for Medicare (which uses the IRMAA annual tables to increase Medicare premiums on those with higher retirement income).
  4. Target a % Reduction of Social Security benefit?
    This is possible and much easier. This approach will occur by default if congress doesn’t take some alternative accommodation before 2030. The estimates are that we are looking at a 21%-25% reduction in benefits.

    On a positive note, although the potential fixes outlined above are outside of our control, they nevertheless could push back the depletion date of this essential benefit or reduce the benefit reduction that will be required if the trust is depleted.

    Either way, we include social security stress testing once we have a functioning retirement plan and after we’ve considered all other risks (like long term care).

    Edi Alvarez, CFP®
    BS, BEd, MS

    SEC’s Office of Investor Education and Advocacy Alerts

    The SEC made these recommendations to prevent fraud and avoid certain vulnerabilities. I agree and have added a comment when appropriate.

    1. Investors should not make any investment decisions relying solely on information from social media platforms and apps. Best to email us and research outside of the platforms/device.
    2. SEC states that celebrities and millionaires, and influencers are paid to make investment recommendations on social media and investors should not be swayed by these testimonials or celebrity endorsements. This applies even if they are not paid. It is surprising how many can be swayed when enough fame surrounds a topic.
    3. Find and verify the identity of the underlying source. Particular attention paid to slight variations in the email address, screen name, account name. Only contact a broker/advisor with a number listed on the SEC website or from the advisor ADV/agreement. If in doubt, contact us.
    4. Though a verified account (like Instagram, Twitter, LinkedIn) can help towards some authenticity. You are encouraged to verify all information outside of social media. These ‘verifications’ are not regulated.
    5. If you receive a message from an advisor recommending that you buy a specific investment, then first contact them directly (outside of social media) to ensure they were the source of that recommendation. Do not invest your hard-earned dollars based on an app or an online conversation.
    6. Be aware that there are many crypto scams that promise high investment returns with rapid increase and touted as having little to no risk. Any time you see little or no risk, STOP, this is likely fraud since crypto has real risks.
    7. Do not share your financial information or identity when in a new romance. Your SSN, DOB, passport, bank accounts are the keys to your financial life and electronic identity – protect them. If travelling be wary of a travel romance that accelerates quickly into financial involvement or marriage.
    8. Be cautious of postings from social media accounts that have minimal history or a history of reporting company stock prices. It is common to do ‘pump and dump’ strategies through social media (remember that I described ‘pump and dump’ mailing strategies a few years ago – these are just online versions of the old scams). These are most common with Penny Stocks since they are easily manipulated.

    Let us know if you encounter any financial product before you purchase them. Sometimes it is not a fraudulent product but one that is not ideal for your long-term goals.

    Edi Alvarez, CFP®
    BS, BEd, MS