Q4 2020 Investment Commentary

Contributed by: Center Investment Department

Closing the books on an eventful 2020

I think we can all agree that 2020 has been unlike anything we have experienced before! If 2020 had a spokesperson, it would be Mayhem from the Allstate commercials. From disturbing scenes of social unrest and racism to a major pandemic, crazy devastating wildfires and an ongoing trade war, not to mention, murder hornets and a very eventful election there have been many reasons why this year has been astounding!

The pandemic has been truly heartbreaking for the average American and the economy, despite this, the S&P 500 ended 2020 with fantastic returns of nearly 18.5%. Again, we are experiencing a large disparity in returns between technology companies and “value” stocks as represented by the Russell 1000 value index, up only 2.8% for the year in stark contrast. Check out the below chart showing the returns of the various S&P 500 sectors for 2020.

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During the last quarter of the year, Emerging Markets and Small company stocks staged a large comeback as investors’ risk appetite increased.

However, whatever party equity markets were having, the economy was not invited!

Economic Update

Efforts to resume business amid the pandemic were rewarded during the latter half of 2020. Reeling back from a historical low of -31.4% during the second quarter, real GDP was 33.4% in the third quarter of 2020. That is a substantial comeback, but still around 3.5% shy of where it was during the fourth quarter of 2019. In other words, GDP is headed in the right direction, but we still have some catch-up work to do for full economic recovery. October readings support positive momentum for 4Q20 numbers. However, the surging cases of coronavirus infections over the holiday season may reflect slower growth at the end of the quarter and into 1Q21.

While it's easy to confuse positive stock market returns with economic growth, they are quite different. We can see this in the context of employment. Thirty-four percent of the S&P 500’s growth in 2020 can be attributed to technology, yet the technology sector only represents 2% of the US labor market. On the other hand, government, agriculture and other services, which is almost 40% of the labor market, is not even represented in the S&P 500. Concisely put, US stock strength doesn’t necessarily represent strength in the economy.

Digging into unemployment numbers, the unemployment rate decreased slightly to 6.7% in November. Nonfarm payrolls increased by 245,000 during the same month. Note, this is the weakest pace of payroll increases since the start of the recovery, which reflects a larger challenge. While 56% of the jobs lost between February and April have come back, only about 7% of that comeback has happened since September. We’re witnessing how hard it has been to have business and job growth while maintaining measures created to prevent the spread of covid-19. Both are important, so future job growth is dependent on how we negotiate the two moving forward.

Finally, let’s talk about inflation. Headline CPI and core CPI rose 0.2% month on month in November. Year on year, headline CPI was 1.2% and core CPI was 1.6%. Headline and core personal consumption expenditures (PCE) were generally flat, at 1.1% and 1.4% year on year, respectively. Due to low energy prices and economic slack, inflation ended lower in 2020 than in 2019. However, 2021 may be a different story. With a vaccine-facilitated boost to economic activity, prices hit hardest by the pandemic (think sporting events, dining, concerts, hotel rates, airfare, rent) could strengthen. We’ll likely see depressed prices start to go up. Many suspect the Federal Reserve will recognize this inflation is based on temporary factors, and will not raise interest rates to compress it. We are keeping an eye on how things play out. Overall, 2021 could foster a low and rising inflation environment.

Other investment headlines: Tesla & Bitcoin

You may have noticed two headlines gaining a lot of attention in the 4th quarter from two of the most volatile investments seen in 2020: Tesla and Bitcoin. Tesla finally recorded its fourth consecutive profitable quarter in a row which prompted its entry into the S&P 500. This means that if you own any fund that tracks the index, you now own a piece of TSLA! Albeit a small piece, as it makes up about 1.5% of the index.

Bitcoin was also back making headlines as it broke past its previous high from late 2017 and rose above $28k per BTC by the end of the year. Is the digital currency a speculative asset with no value or the world currency of the future? That is yet to be decided, but as it currently stood at year-end its market cap was ~540B – about the same market cap as Berkshire Hathaway.

COVID-19

The COVID-19 pandemic took a turn for the worse during the 4th quarter of 2020. Cases, hospitalizations, and deaths all continued to climb, but December brought us a glimmer of hope as the FDA expedited the approval process for two vaccines to be distributed across the country. Governor Whitmer gave guidance for the prioritization in Michigan, and the first phase began in December with health care workers who have direct exposure to the virus receiving round 1 of the 2-round vaccine. All essential frontline workers will follow, starting first with those aged 75 and older, then ages 65-74 and adults ages 16-64 with underlying medical conditions, finishing up with the rest of adults aged 16 and over. Click here for more details. We hope that these vaccines are a light at the end of the tunnel, and wish you all health and happiness going into the New Year.

Government Update

The $900 billion fiscal stimulus act continued to face headwinds in the final hour as President Trump changed his stance on the support to families. He called for an increase to the prior negotiated $600 stimulus payments to $2,000. The House narrowly voted in favor of this package and the change, only to be met by resistance in the Republican-led Senate. Voting on this was delayed resulting in $600 stimulus payments getting issued.

The package includes new funding for:

• Small businesses with an expansion to the PPP program highlights including:

  • Guaranteed funding for first-time applications

  • Second loans with more expansive forgivable uses

  • Easier forgiveness process for loans under $150,000

  • Clarification that businesses can still deduct the (otherwise deductible) expenses of funds paid with this loan

  • Excludes publically traded companies and a business must demonstrate a 25% drop in revenue or more from 2019

• The second round of individual checks for individuals and families with phase-out starting at $75,000 of income. $600 per adult and child

• Extension of federal unemployment benefits including an additional $300 per week benefit to unemployed workers until March 14, 2021

• Moratorium on evictions through January 2021

• Various funding for state/local programs highlights including

  • $82 Billion to schools and colleges

  • $27 Billion to state highway, transit, rail and airports

  • $22 Billion to state healthcare funding

Restrictions placed on the Federal Reserve

The Federal Reserve (Fed) found itself amid the political battle of the stimulus package. It looks like the Fed may have to discontinue at the end of 2020 and potentially not be able to restart programs under the same terms that were backed by CARES Act funding, including:

• Primary Market Corporate Credit Facility – loans to investment grade businesses experiencing dislocation due to the pandemic

• Secondary Market Corporate Credit Facility – the ability for the Fed to purchase investment-grade corporate debt to facilities liquidity in the credit markets

• Municipal Liquidity Facility – allows the Fed to purchase short term bonds from certain states, counties and cities to ensure access to funds throughout the pandemic

• Main Street Lending Program – support for small and medium-sized business loans

• Term Asset-Backed Securities Loan Facility- support for AAA bonds backed by assets such as student/auto/credit card loans backed by the Small Business Administration (SBA)

Fed Chair Powell stated that these lending programs can still be restarted using Treasury’s Exchange Stabilization Fund but the effort to restrict this particular aspect of the Fed’s lending authority can be viewed as Congress stepping in and exerting oversight powers to limit how far the Fed can go in support of critical market functions. We will be watching the evolution of this debate and if the Fed’s communications become more restrained as a result. In the future, we may not be able to expect the Federal Reserve to step in and start buying secondary market issues to support prices.

The new Biden Administration

The run-off election held on January 5th in Georgia determined who holds the Senate. Democrats needed to win both of the Senate seats in Georgia to split the Senate 50-50. This meant that the democrat Vice President would be the tie-breaking vote giving a slight edge to the Democrats. This was the last major hurdle in understanding the makeup of the government for the next couple of years. This democratic advantage paves the way for a more ambitious President Biden legislative agenda. See our post-election update webinar for a summary of potential agenda items for the Biden administration. A shortlist includes President-Elect Biden’s proposed tax increases on corporations, income for those in the highest tax bracket, capital gains and estate taxes, aggressive health care changes, and the Green New Deal. While markets and the economy may favor party splits between the Presidency and Congress, an all-Democratic situation has still yielded positive outcomes for markets. The below chart shows that 27% of the time the Democrats have been in control and GDP growth has been at its best during these times and returns have been good as well.

In the short term, we could see some near-term weakness in market reaction but President Biden has announced that we can expect a third wave of stimulus payments of $2,000 (or at least the additional $1,400 they were hoping for in the second round) so this could outweigh the risks of market downside in the near term. This still requires a 60 vote in the Senate to pass and may take until March to do so.

There could be some potential impacts to investors that we will be watching closely. Most notable are:

• Corporate tax rate increases and a minimum tax for corporations seems to be the biggest potential impact to markets under a Democratic sweep

• Changes to capital gains tax rates and the preferential tax rate on qualified dividends (although could be limited to those with incomes over $1 Million) could affect individual investor behavior

It’s important to remember that many factors impact markets with politics making up a small portion of those factors!

Hopefully in 2021 Mayhem sticks with the commercials but regardless of what happens, we are here as your partners to get you through whatever is thrown our way and help you achieve your financial goals. Thank you for the trust you place in us.

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Sector Returns: Sectors are based on the GICX methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Retirement Plan Contribution and Eligibility Limits for 2021

Contributed by: Robert Ingram, CFP®

For the New Year, the IRS had released its updated figures for retirement account contribution and income eligibility limits.  While most contribution limits remain unchanged from 2020, there are some small adjustments for 2021 certainly worth noting. 

Employer retirement plan contribution limits stay largely the same (401k, 403b, 457, and Thrift Savings)

• $19,500 annual employee elective deferral contribution limit (same as 2020)

• $6,000 “catch-up” contribution if over the age of 50 (same as 2020)

• The total amount that can be contributed to the defined contribution plan including all contribution types (e.g. employee deferrals, employer matching, and profit-sharing) is $58,000 or $64,500 if over the age of 50 (increased from $57,000 or $63,500 for age 50+ in 2020)

Traditional, Roth, SIMPLE, and SEP IRA contribution limits

• $6,000 annual employee elective deferral contribution limit (same as 2020)

• $6,000 “catch-up” contribution if over the age of 50 (same as 2020)

Traditional IRA deductibility income limits

Contributions to a traditional IRA may or may not be tax-deductible depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your Modified Adjusted Gross Income (MAGI). The amount of a traditional IRA contribution that is deductible is reduced or “phased out” as your MAGI approaches the upper limits of the phase-out range. For example:

Single Filer

• Covered under a plan

• Partial deduction phase-out begins at $66,000 up to $76,000 (then above this no deduction) compared to 2020 (phase-out: $65,000 to $75,000)

Married filing jointly

• Spouse contributing to the IRA is covered under a plan

• Phase-out begins at $105,000 to $125,000 (compared to 2020: $104,000 to $124,000)

• Spouse contributing is not covered by a plan, but other spouse is covered under the plan

• Phase-out begins at $198,000 to $208,000 (compared to 2020: $196,000 to $206,000)

Roth IRA contribution income limits

Similar to making deductible contributions to a traditional IRA, being eligible to contribute up to the maximum contribution to a Roth IRA depends on your tax filing status and your MAGI. Your allowable contribution is reduced or "phased out" as your MAGI approaches the upper limits of the phase-out range. For 2021 the limits are as follows:

Single filer

• Partial contribution phase-out begins at $125,000 to $140,000 (compared to 2020: $124,000 to $139,000)

Married filing jointly

• Phase-out begins at $198,000 to $208,000 (compared to 2020: $196,000 to $206,000)

• If your income is over the limit and you cannot make a regular annual contribution, using a Roth IRA Conversion in different ways may be an appropriate strategy depending on your circumstances.

As we begin 2021, keep these updated figures on your radar when reviewing your retirement savings opportunities and updating your financial plan. However, as always, if you have any questions surrounding these changes, don’t hesitate to reach out to our team!

Have a happy and healthy New Year!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

FireEye, SolarWinds, and The Center

Contributed by: James Brown

The Center Armor

As the Senior I.T. Manager at The Center, I would like to let our clients know that Cybersecurity and protecting our client’s information is of the highest priority in our technology department. Our security structure encompasses a multi-vendor firewall protected network and off-premise connections are made via secure multi-factor authentication across a virtual private network. The desktop and laptops used at The Center are protected with multiple real-time scanners for viruses, malware and unauthorized applications.

SolarWinds

The SolarWinds attack was a software supply chain attack that could allow malware to be loaded and provide a remote threat agent with access to network data. The breach at FireEye did result in the theft of Red team tools that could cause a problem in the future. The SolarWinds attack compromised government agencies, providers as well as private sector organizations. Though providers and companies began quarantining and patching their systems in the days after the discovery, we are bound to learn more about the effect and depth of the attack.

Attacks such as these often lay dormant but we are confident that our firm data and systems have not been impacted by this attack. Along with our vendors 24 hours a day, 365 days a year monitoring, we perform endpoint analysis to monitor our Internet traffic to look for any anomalies that could be a sign of an exploit.

Defense against the Known and Unknown

Vigilance is the only defense against cyber threats. We will continue to monitor our network and endpoints but we also recommend that our clients stay vigilant and take precautions to protect themselves and their data.

• Monitor your social media and financial accounts for unauthorized changes.

• Use complex passwords, PINs and answers to security questions.

• Enable two-factor authentication on all financial accounts.

• Do not share personal identifying information on social media, email or a Web site.

• If you receive a link in an email about your online account information, do not click on it. A better practice is to go the normal login page that you use for that institution and login with your two-factor authentication as you normally do.

James Brown is a Senior IT Manager, at Center for Financial Planning, Inc.® With more than 30 years of technology experience, he manages The Center’s technology resources.

Helping You Set Your Financial Goals For The New Year!

Contributed by: Kali Hassinger, CFP®, CDFA®

New beginnings provide the opportunity to reflect.  What choices or experiences got you to where you are today, and where do you want to go from here?  Whether you’re motivated by the New Year or adjusting your course due to circumstances outside of your control, goals provide the opportunity to set your intentions and determine an action plan.

Budgeting, saving, retirement, paying off debt, and investing are all common, and often reoccurring, resolutions and goals. Why reoccurring?  Because, as is human nature, it is too easy to set a goal but lose focus along the way.  That is why it’s so important to set sustainable goals and find a way to remain accountable.

Working with an outside party, like a financial planner, can help you define these attainable goals and, most importantly, keep you accountable.  When we make commitments to ourselves and share them with others, we are more likely to follow through.

When goals are written down and incorporated in a holistic financial plan, it becomes easier to track progress and remain committed throughout the year.  The financial planning process, when executed correctly, integrates and coordinates your resources (assets and income) with your goals and objectives. As you go through this process, you will feel more organized, focused, and motivated. Your financial plan should incorporate the following (when applicable):

• Goal identification and clarification (you’re here now!)

• Developing your Net Worth Statement

• Preparing cash flow estimates

• Comprehensive investment management and ongoing monitoring of investments

• Financial independence and retirement income analysis

• Analysis of income tax returns and strategies designed to help decrease tax liability

• Review of risk management areas such as life insurance, disability, long term care, and property & casualty insurance

• College funding goals for children or grandchildren

• Estate and charitable giving strategies

As you reach one goal, new ones can emerge, and working with a financial planner can help you navigate life’s many financial stages. When you’re setting and working toward your objectives, don’t hesitate to reach out and share them with your trusted financial planner!  If you aren’t working with anyone yet, it’s never too late to start!  

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Consolidated Appropriations Act Of 2021: More Stimulus On The Way

Contributed by: Kali Hassinger, CFP®, CDFA®

After months of deliberation, Congress passed a bill providing a second round of Coronavirus relief, and it was signed by the president on December 27th.  This will provide direct payments to citizens, extend unemployment benefits, and reopen the Paycheck Protection Program to provide loans to small businesses.  This Act, totaling $2.3 trillion dollars, earmarks $900 Billion for stimulus relief with the remaining $1.4 trillion for the 2021 federal fiscal year.   

The direct stimulus rules are largely similar to the CARES Act from March 2020, with a few changes, most notably, of course, the amounts provided.

Direct Payments

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government.

• Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

  • Married Filing Jointly: $150,000

  • Head of Household: $112,500

  • All other Filers (Single): $75,000

If income is above the AGI limits shown above, the credit received will reduced by $5 for each $100 of additional income.

• How much can I expect to receive?

  • Married Filing Jointly: $1,200

  • All other Filers: $600

  • Additional credit of up to $600 for each child under the age of 17

The rebates are dispersed based on your 2019 tax return, but, like the CARES Act, is a 2020 tax credit.  This means that if your income in 2019 phased you out of eligibility, but your 2020 income is lower and puts you below the phase out, you won’t receive the rebate payment until filing your 2020 taxes.  The good news is that those who do receive a rebate payment based 2019 income, and, when filing 2020 taxes, find that their income actually exceeds the AGI thresholds, taxpayers won’t be required to repay the benefit.

• When will I receive my benefit? As soon as possible, though delays similar to the CARES Act payments should be expected. 

• Where will my money be sent?  Payment to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have a payment sent to the last known address on file.

Charitable Giving Tax Benefits

• The charitable deduction limit on cash gifted to charities will remain at 100% of Adjusted Gross Income for 2021.  This was increased from 60% to 100% for 2020 with the CARES Act.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

• This Act also extends the above-the-line tax deduction for charitable donations up to $300 that was authorized by the CARES Act, but it increases this deduction to $600 for married couples ($300 per person)

Support For Small Businesses

The Paycheck Protection Program (PPP) will allow businesses affected to COVID-19 to apply for loans. Those who did not receive a loan through the CARES Act once again have the chance, and those who successfully applied for a loan previously, may have the opportunity to obtain another loan. If applying for a second loan, however, the previous loan funds must already have been received and spent.

Some of the Paycheck Protection Program provisions are more stringent and other provide more clarity:

• The business must have experienced a 25% or larger drop in revenue for any quarter in 2020

• The loan is limited to a 2.5 times the average monthly payroll costs or 3.5 times for businesses categorized as “Accommodation and Food Services.”  The total amount received is capped at $2 million.

• Expenses paid of forgiven Paycheck Protection Program funds are deductible

  • The IRS tried to withdrawal the deductibility of items funded with PPP, but this Act states that expenses paid with both forgiven and new PPP loans shall remain deductible.

• Loans are limited to businesses that have no more than 300 employees with the exception, again, for businesses categorized as “Accommodation and Food Services.”

Expanded Unemployment Benefits

Unemployment benefits were set to expire for many Americans, but the Consolidated Appropriations Act extends the benefit for an additional eleven weeks.  Additional relief will also be provided at $300 per week until Mid-march when the extension expires.

Individual Healthcare & Tax Planning

• Individuals are able to deduct medical expenses if they exceed 7.5% of their Adjusted Gross Income.  This hurdle was previously 10% of AGI.

• FSA funds that haven’t been used in 2020 can be rolled into 2021 if the employer permits this extension. 

Higher Education Deduction With Increased Phase-out

The Lifetime Learning credit provides a credit of 20% of the first $10,000 spent on higher education expenses (so $2,000 if you spend $10,000). The income phase-out limit has been increased to match the American Opportunity tax credit at $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Although the American Opportunity tax credit is more lucrative for the amount spent (100% credit up to $2,000 in education expenses with an additional 25% credit on the next $2,000 of expenses.  So a total credit of $2,500 on $4,000 spent), you can only claim this credit for 4 years.  As the name Lifetime Learning credit implies, you can claim this credit throughout your lifetime!

Earned Income Tax Credit Changes

The Earned income Tax Credit and additional Child tax credit are determined by an individual’s earned employment income.  Because so many Americans have faced periods of unemployment in 2020, this Act will allow individuals to use their 2019 earned income to calculate the amount they will receive for 2020.

Student Loan Repayments

The ability for an employer to pay up to $5,250 of an employee’s qualified student loan debt is extended through 2025. The employee receives this benefit tax free.  

The period of time between the passing of the CARES Act and the passing of a 2nd round of relief throughout the Consolidated Appropriations Act of 2021 was much longer than many anticipated.  Thankfully the majority of the legislation did not provide short term deadlines for the end of 2020!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.

Tying Up Loose Ends Post-Divorce: What’s Your Game-Plan?

Contributed by: Jacki Roessler, CDFA®

Your divorce is final! For many couples, getting divorced takes so much time and effort, it practically feels like a part-time job. While it might be tempting to quickly close the door on this unpleasant chapter, you actually need to do the opposite. 

It’s important to understand that your divorce decree is only binding on you and your ex. It isn’t binding on third parties such as insurance carriers, retirement plan administrators, credit unions and credit card companies. Regardless of what your Judgment says, third parties aren’t bound by your divorce decree.  Let’s suppose your ex-spouse was supposed to make the payments on the mortgage (currently in both of your names) and she decides to stop. The lender isn’t going to care that your divorce decree says she was supposed to pay. Your name is on the loan, therefore, you’re responsible. The same is true for pension plans, retirement accounts, etc.… If your ex-spouse dies, remarries, retires, moves money to a different account or stops making insurance payments before you tie up the loose ends, you may end up getting significantly less than what you worked hard to agree upon. Time is your enemy.

Tracking asset transfers

First things first, create a document that lists all the assets/debts that are being transferred as well as all the details. Since we work with such a large number of post-divorce clients at the Center, we often create a transition table or spreadsheet to track paperwork and follow-up.  Again, follow up is key as once your Judgment of Divorce is signed, there is little incentive for your ex-spouse to cooperate with any transitions.

Prioritize your list of “do it now” versus “do it later” items

Not all post-divorce tasks should be categorized as “do it now” items. Some might be “do it later” such as re-financing a mortgage or getting help with investing your settlement. Others are definitely “do it now” such as making sure your ex’s employer has received notice you want to continue your health insurance coverage through COBRA. Another important “do it now” item is closing all joint credit card accounts. Again, you don’t want to be responsible for debt that isn’t yours and you certainly want to be in control of your own credit rating. Be careful to note any items that have a written deadline in your divorce decree.

Also keep in mind that everyone’s list of “do it now” versus “do it later” might be different. If you think mortgage rates are going to up, for example, it might higher on your list than someone who is more concerned about building a better credit rating than interest rate fluctuation. Same is true for those that are ready to develop and implement an investment strategy tailored to their new lifestyle and circumstances.

A word of caution for the “do it later” items. Put a deadline in place for yourself to make sure these items actually get done. It’s shocking to learn how many people wait more than 10 years to get their QDRO drafted, for example. Similarly, during times of market volatility such as we’ve been experiencing, novice investors sometimes choose to sit on the sidelines. Since no one has a crystal ball, this wait and see approach –called “market timing” is generally a losing proposition. Many market timers miss out on the largest days of investment gains in the stock market which can seriously impact their retirement objectives.

There IS light at the end of the tunnel

There will come a day when everything is resolved. It will surely come sooner and with much less aggravation (and chance of post-judgment legal fees) if you develop your strategy now.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

9 Actionable Steps For The New Year To Help Your Finances

Contributed by: Josh Bitel, CFP®

Yes, it’s time to turn the page on 2020 and start anew!  There’s nothing like a fresh calendar to begin making plans for your envisioned future.  We previously provided you with some tips for year-end tax planning in our annual year-end tax letter. Here, we provide you with some very specific and actionable steps you can take now. Ultimately, while no strategy can guarantee your goals will be met, these steps are a great start on improving your financial health in the New Year:

1. Take score: review your net worth as compared to one year ago.

2. Review your cash flow: how much came in last year and how much went out (hint: it is better to have less go out than came in).

3. Be intentional with your 2021 spending: also known as the dreaded budget – so think “spending plan” instead.

4. Review and update beneficiaries on IRA’s, 401k’s and life insurance: raise your hand if you want your ex-spouse to receive your 401k.

5. Review the titling of your non retirement accounts: consider a “transfer on death” designation, living trust, or joint ownership to avoid probate.

6. Revisit your portfolio’s asset allocation:

7. Review your Social Security Statement: if not yet retired you will need to go online – everyone’s trying to save a buck on printing and mailing costs

8. Check to see if your retirement plan is on track: plan your income need in retirement, review your expected sources of income, and plan for any shortfall.

9. Set up a regular review schedule with your advisor: an objective third party is best – but at a minimum set aside time on your own, with your spouse, or trusted friend to plan on improving your financial health.

So, after you promise to exercise more and eat less, get started on tackling your financial checklist!

We wish you a wonderful New Year!

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Active Or Passive Management, How Do We Decide?

Contributed by: Abigail Fischer

Let’s begin with a refresher course! What is active and passive management?

Usually, a passive management strategy closely mirrors the performance of large indexes and benchmarks. Whereas, investment professionals hand-pick securities in an attempt to outperform or adjust the risk of those same indexes and benchmarks in an active management strategy.

Investment professionals who praise passive management strategies were further convinced of their validity when indexes and benchmarks outperformed the active management space, yet again for many asset categories and managers, in 2018 and 2019. One challenge active strategies must overcome is their fee. The fee for active management chips away at performance beyond benchmarks.

So why would you ever choose active management?

Active strategies are often perceived to be “advantageous” because of their agility to trade stocks or bonds as they see fit.  They may also be accountable to keep risk in line or lower than their peers or benchmarks which could be appropriate for many investors.

A Case Study Of Our Research

The Center’s Investment Department research on the fixed income space found an interesting correlation. Just as markets are cyclical, active management tends to outperform passive management at some very specific points in the economic cycle. The low-interest rate environment, along with the dislocations in the pricing of bonds encapsulating 2020 fixed income markets, diminishes passive investors’ success in the broad fixed income market. The chart below shows just how muted annualized returns, punctuated by very low yields now, have become in some of the largest fixed income categories on a more recent basis versus what occurred in the last decade; this environment has set the stage for active managers to shine.  When interest rates are low and bonds aren’t trading consistently across asset classes, a manager with flexibility is more likely, through careful research, to identify and exploit mispricing. When interest rates are so low, even small successes can contribute heavily to returns relative to benchmarks.

What does this mean for portfolios now?

When interest rates will increase is purely a guessing game, could be next month or next year. In the meantime, we strive to take advantage of the possibility that active fixed income managers can find risk-adjusted returns more favorable than passive management fixed income returns. While this is just an example of one asset class, the Center’s investment team applies this same theory in researching all asset classes.  This results in a dynamic mixture of both active and passive investment strategies in portfolios.  Have more questions?  Don’t hesitate to reach out!

Abigail Fischer is an Investment Research Associate and Investment Representative at Center for Financial Planning, Inc.® She gained invaluable knowledge as a Client Service Associate, giving her an edge as she transitions into her new role in the Investment Department.

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Views expressed are those of the author and not necessarily those of Raymond James and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

Gifting Considerations During The Holiday Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Giving is top of mind for many now that we are officially in the thick of the holiday season. Whether you’re shopping online or fighting crowds at the mall, there are other forms of gifting to consider – ones that would arguably have a much larger impact on your loved one's life.

Gift Tax Exclusion Refresher

The annual gift tax exclusion for 2020 is $15,000. This means you can give anyone a gift for up to $15,000 and avoid the hassle of filing a gift tax return. The gift, if made to a person and not a charitable organization, is not tax-deductible to the donor nor is it considered taxable income to the recipient of the gift. If you are single and wish to gift funds to your daughter and son-in-law, you can give up to $30,000, assuming the check issued is made out to both of them. Remember, the $15,000 limit is per person, not per household. For higher net worth clients looking to reduce their estate during their lifetime given estate tax rules, annual gifting to charity, friends, and family members can be a fantastic strategy. So what are some ways can this $15,000/person gift function? Does it have to be a gift of cash to a loved one’s checking or savings account? Absolutely not! Let’s look at the many options you have and should consider: 

1. Roth IRA funding 

If a loved one has enough earned income for the year, he or she could be eligible to fund a Roth IRA. What better gift to give someone than the gift of tax-free growth?! We help dozens of clients each year with gifting funds from their investment accounts to a child or grandchild’s Roth IRA up to the maximum contribution level of $6,000 ($7,000 if over the age of 50). Learn more about the power of a Roth IRA and why it could be such a beneficial retirement tool for younger folks. 

2. 529 Plan funding 

529 plans, also known as “education IRAs” are typically used to fund higher education costs. These accounts grow tax-deferred and if funds are used for qualified expenses, distributions are completely tax-free. Many states (including Michigan) offer a state tax deduction for funds contributed to the plan, however, there is no federal tax deduction on 529 contributions. Learn more about education planning and 529 accounts.

3. Gifting securities (individual stock, mutual funds, exchange-traded funds, etc.)

Gifting shares of a stock to a loved one is another popular gifting strategy. In some cases, a client may gift a position to a child who is in a lower tax bracket than them. If the child turns around and sells the stock, he or she could avoid paying capital gains tax altogether. As always, be sure to discuss creative strategies like this with your tax professional to ensure this is a good move for both you and the recipient of the gift.  

4. Direct payment for tuition or health care expenses

Direct payments for certain medical and educational expenses are exempt from the $15,000 gift tax exclusion amount. For example, if a grandmother wishes to pay for her granddaughter’s college tuition bill of $10,000 but also wants to gift her $15,000 as a graduation gift to be used for the down payment of a home, she can pay the $10,000 tuition bill directly to the school and still preserve the $15,000 gift exclusion amount. This same rule applies to many medical costs. 

For those who are charitably inclined, gifting highly appreciated stock or securities directly to a 501(c)(3) or Donor Advised Fund is a great strategy to fulfill philanthropy goals in a very tax-efficient manner. For those over 70 ½, gifting funds through a Qualified Charitable Distribution (QCD) could also be a great fit. Gifting funds directly from one’s IRA can reduce taxable income flowing through to your return which will not only reduce your current year’s tax bill but could also lower help lower your Medicare Part B & D premiums, which are determined by your income each year.  

As you can see, there are numerous ways to gift funds to individuals and charitable organizations. There is no “one size fits all” strategy when it comes to giving – the proposed solution will have everything to do with your goals and the need of the person or organization receiving the gift. On behalf of the entire Center family, we wish you a very happy holiday season, please reach out to us if we can be of help in crafting your gifting plan for 2020!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of earnings are permitted. Earnings withdrawn prior to 59 1/2 would be subject to income taxes and penalties. Contribution amounts are always distributed tax free and penalty free. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover educational costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

2 Easy Ways To Determine If Your 401k Is Too Aggressive

Contributed by: Matt Trujillo, CFP®

For the investor who’s unsure of how their retirement plan works…here are two easy ways to measure how aggressive or conservative your 401k is.

1. Determine your stock-to-bond ratio.

Most custodians offer a pie chart with this information. Login to your 401k account to view the percentage of your money that is invested in stocks and how much is in bonds. In general, it’s aggressive to invest 70% or more in stocks. Once you know your level of risk you should understand if you can handle the ups and downs of that risk emotionally, and also how much risk your long-term planning calls for. 

2. Check your balance at the end of each month.

For example, if an investor’s account jumped from $100K to $110K (10% growth in a month) then they probably have invested most of their money in stocks. This will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn like what we just saw in March and April.

So, how can an investor strike a good balance? And when should an allocation change from aggressive to conservative?

As you get closer to taking distributions, it’s reasonable to scale back your stock exposure and move money into safe havens like highly rated corporate bonds and treasury bonds. I say “taking distributions” instead of “retirement” because your plan should be based on when distributions begin. Retirement is a type of distribution event, but not necessarily the only one.

However, if a client has most of their income needs satisfied from other sources and has the emotional appetite to handle the swings, I can see them continuing a more aggressive allocation even in retirement (70% or more in stocks). However, if a client is relying heavily on their portfolio then generally a more conservative allocation is recommended (50% or less in stocks).

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

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401(k) plans are long-term retirement savings vehicles. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.