And “I stopped making contributions to my retirement account until the “Stock Market” recovers.”- Otto said. Cecilia, on the other hand, is oblivious to the value of her retirement account, and her contributions continue. So, what are the outcomes? The following hypothetical example tests the question.* Let’s say Otto stops making retirement plan contributions when the “Stock Market” drops from $50.00 to $47.50; then, resumes making contributions when prices climb back where he left off, at $47.50. This action would have skipped the drop to $35.00. Yet, his account value dropped by about -28%. As the “Stock Market” recovers back to $50.00, the price at which he started making deposits, his account balance reaches $6,158 for a compounded rate of return of 2.63%. By neglecting to look at her account, Cecilia lets her deposits continue, and allows the investments to ride. As a result, her maximum draw down is only -17% to Otto’s -28%. And, her compounded rate of return is 14.77% versus Otto’s 2.6%. How are these seemingly counter-intuitive outcomes possible? Simple: by continuing to purchase as prices decline, Cecilia accumulates 241 shares at an average price of $43.50 to Otto’s average share price of $49, resulting in 123 shares… Read More
In late 2009, you may remember, the Greek economy suffered the longest recession of any developed capitalist-based economy, overtaking the U.S. Great depression. Not only did the Greeks spiral into history’s deepest and longest recession but also, failed to make their International Monetary Fund loan repayments on time – they went broke. Their friends, the Germans, led the effort (paid most of the bills), leading to bailout loans in 2010, 2012, and 2015. You may recollect, the government raised taxes, cut spending and reformed their pension system leading to riots and nationwide protests – tourism suffered, nothing worked in the country. Banks closed, the country’s Gross Domestic Product (GDP) dropped to negative numbers. Oh, what fun. That was then. On Friday (1/24) FitchRatings upgraded Greek debt up one notch to semi-lousy from lousy: Not investment grade yet, but better junk than before. But that is not all, investors are bullish – the Greek stock market scooted to a 49% gain last year. Unemployment dropped to a whopping 16.6% in October the lowest unemployment rate since 2011. And, the administration’s GDP goals for this year of 2.8% seem doable: They are estimating GDP growth of greater than 3% in the future.… Read More
On December 20th the SECURE Act – Setting Every Community Up for Retirement Enhancement, was signed into law. There went yours and my daughter’s Stretch IRA: If you recollect, under the old rules, a beneficiary, an heir, could stretch the required distributions over their lifetime. This had the effect of allowing funds to build over a lifetime with relatively small withdrawals over the heir’s lifetime. The new rule requires heirs to empty their inherited IRA in 10 years – welcome to a tax increase. Exceptions include spouses, minor children, and heirs who are chronically ill or disabled. If the stretch IRA was part of your estate strategy, we’ll think-up something different: A Charitable Remainder Trust or similar charitable strategy or transferring more assets to a Roth IRA may help, on this later. If you just turned 70 ½ mandatory distributions now start at 72 and if you are still employed at age 70, IRA contributions are allowed. On the positive side of the legislation the rules have been simplified and strengthened, in my opinion, to encourage increased 401(k) plan participation by allowing pooled employer plans creating lower cost, more accessible plans. I’ve included a link to the bill if you… Read More
