The economic recovery continued in the first quarter. All sectors of the economy experienced growth during the quarter, and the major market indexes posted healthy gains.

Now that the pandemic crisis is fading, investors should look for signs of continued economic recovery. The labor markets are showing considerable underlying strength. Unemployment declined to 6% in March, the lowest since the onset of the pandemic last year, and not far from the 5% level generally thought to be “full employment”. In most parts of the economy, jobs continue to grow at a healthy rate. Some sectors of the economy continue to struggle, including hospitality, leisure, and entertainment. For employment to fully recover, these sectors will need to see significant improvement. Fortunately, widespread vaccinations will make it much easier for these industries to reopen and recover.

COVID-19 Vaccinations Have Reached an Inflection Point

In late January, the COVID-19 vaccination campaign reached a critical milestone. At that time, the number of Americans with COVID-19 immunity through vaccination exceeded the number of Americans with some form of immunity through previously having been infected with the virus.

By the end of the quarter, total vaccinations reached 90 million, three times the total number of cases to date in the United States. Public health experts continue to debate the number of vaccinations required to achieve herd immunity. No matter what that number turns out to be, it is clear we are closer than ever.

Higher Interest Rates, Inflation, and Taxes Ahead

The Federal Reserve remains committed to keeping short-term interest rates low to support the economy. The Fed continues to indicate a willingness to tolerate higher levels of inflation as long as the economy continues to recover. For investors, this means that sitting in cash is not a safe alternative for long-term wealth. Cash holdings should be driven by your financial plan and spending needs, not by fear of what might (or might not) happen in the markets. Longer-term interest rates have started to move higher, although they are still well below pre-pandemic levels.

Congress is currently considering several infrastructure and spending bills. Combined with the pandemic-related stimulus measures, Federal government deficit spending will likely reach levels not seen since the second world war. In the longer run, well-run infrastructure programs will lay the foundation for future economic growth. However, tax increases accompanying these programs could act as a drag on economic growth in the near term.

For investors, the best strategies are the ones we’ve advocated for decades. Take the right risks, in the right places. Know what you own, and why you own it. Have a solid financial plan. Save money, invest wisely, and make sure your investments support your financial plan. If you do the right things, in the long run financial independence will follow, no matter which way the winds blow in the short run.

Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Hunting For Value

Posted on April 7, 2021 in

Last month, I did something I never dreamt that I would do… I went quail hunting. On a ranch that was over 8,000 acres, my group met with a guide who explained the do’s and don’ts of quail hunting and introduced us to our secret weapon: dogs. You may think on a piece of land that is 8,000 acres in size, surely, there must be a lot of quail, and there is, but quail are small, elusive birds. They blend in well to their surroundings and without aid, you could travel the entire ranch and miss them. Once prepared for our hunt, we hopped into our jeeps with our guns ready and headed out into the palmetto brush in search of quail. We were barely fifteen minutes into our hunt before we learned the true value of the dogs we brought with us. The dogs listened to commands, effortlessly did their job, and helped us find a ton of quail.

Dogs, when hunting, provide value, but what are dogs when it comes to investing? I am sure you may have heard that phrase “that stock has been a dog” or something similar. A dog is a security, most often a stock, that has underperformed when compared to its peers or to its benchmark. A security may underperform for many reasons. It may be in a struggling industry, it may have internal operational issues to work through, or it may just not be fully appreciated by the market yet. Sometimes though external events like a pandemic or another economic crisis can turn a stock into a “dog”, even if it was not before.  It is at these points of stress that it is crucial to know why you own the “dog”, or why you would buy a “dog”.

Peter Lynch, a value investing proponent and manager of the Fidelity Investments’ Magellan Fund once said, “Know what you own and why you own it.” This is crucial to navigating market corrections or downturns. Do you own an ETF or mutual fund that follows the market, or do you own stock in a company like Wal-Mart? Last March if I asked you to look at the market, it would be a scary picture. There would be what we would call “fleas”. Fleas, as you can imagine, are not good things for dogs to have. The pandemic was raging, an invisible enemy that the world was not prepared to fight. Stocks, bonds, gold, and even oil were trading erratically, and many investors were not sure what to do. They were itching themselves with nerves. But if I had asked you to go Wal-Mart and tell me what it looked like, you would see a store with more cars in its parking lot than anywhere else in town. There were lines to get in the store and, at times, bare shelves as consumers bought all the goods on them! At a time like that, it’s easy to understand why you may want to own a stock like Wal-Mart, even if the stock seemed like a dog for a while before that. There’s nothing wrong with owning a dog… as long as your dog has no fleas.

How exactly does this relate to the market today? Well, I often hear two things from people looking to invest. First, that the market is too expensive today, and second, that it is better to wait and get in when the market gets lower. I often point the conversation to two quotes that have guided me through long-term investing. First, Warren Buffet famously said, “Price is what you pay. Value is what you get.” You pay a price to buy a security. Understand its role in your portfolio and what it does for you, and what the value you get from it is. The second was a quote from Chas Smith, the founder of CPS. He used to say frequently, “Market timing is a loser’s game.” It is impossible to predict on any given day if the market is going to go up or down, but over time, the market goes up. Focus on the long-term, not the short-term. If you know what you own, and why you own it, then you are more prepared to weather volatility. And if your portfolio holds some dogs, or you are looking for dogs to add to your portfolio, check them for fleas. If you do not find any fleas, eventually that dog may help you find the quail you are hunting for and show you its true value.

Anthony M. Corrao | CFP®
Financial Advisor

How to Retire on Dividends

Posted on April 1, 2021 in

One of the most common problems retirees face is how to create an income stream from their retirement savings.

In decades past, bonds were the tool of choice to solve this problem. Retirees looking to turn their retirement savings into an income stream would buy bonds and live on the interest. This worked well back when  investment-grade bonds provided substantial returns above inflation. This changed dramatically after the Great Financial Crisis of 2008, when interest rates plunged to historic lows. Since then, it has become increasingly difficult for investors to find bonds that provide a reasonable return. Like all investments, even investment-grade bonds are risky. It only makes sense to own them if the investment returns compensate you for that risk. Bonds still provide diversification and stability, and because of that they have a place in a balanced portfolio. The days when bonds could be a primary source of retirement income are long gone.

For retirement savers and retirees, dividend-paying stocks are a great alternative to bonds. A portfolio of high-quality dividend paying companies can provide growth while you are saving, income in retirement, and protect your savings against inflation.

What are dividends?

Shares of stock represent a slice of ownership in a company. When you buy a stock, you become an owner of the company. As the owner of a business, you should expect to receive a portion of the earnings of the business. When a company pays a dividend, it is passing a portion of the company’s profits to its owners.

Not all companies in the stock market are profitable, and many profitable companies do not pay dividends. For retirement savers, the best investments are companies that consistently earn profits and pay out a portion to shareholders as a dividend.

Historically, dividends are responsible for over 30% of the total return in stocks.

Dividends provide a cushion during bad years, and an income stream in retirement. Stocks never go up in a straight line. History tells us that, although stocks are up more often than they are down, bad years can and do happen. Sometimes dividends can be the difference between ending a year with a gain and ending it with a loss.

For retirees, a portfolio of dividend-paying stocks can provide the income needed to live in retirement. Unlike interest payments on bonds, dividends of high-quality companies tend to grow over time. This means that retirees who buy high quality dividend-paying stocks for retirement income can expect their “paycheck” in retirement to continue growing as long as they hold those stocks.

A high dividend by itself does not make a company a good investment. Underlying earnings are also important, as well as the other fundamentals of the company. Sometimes companies that get into financial trouble continue paying dividends they can’t afford. When this happens, the dividend must ultimately be cut, leading to disappointment for investors. Wise investors look for well-run companies with strong earnings and a history of paying good dividends even when the economy is in a recession.

For retirees, a carefully crafted portfolio that is hand-curated and filled with high-quality dividend-paying companies could be the right way to provide income in retirement.

Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

The Roth IRA Advantage

Posted on March 24, 2021 in

An IRA is one of the most common retirement accounts available to investors when planning for retirement. While there are a few different types of IRAs, the two types that most investors choose between is the Roth IRA or the Traditional IRA. The main differences between the Roth IRA and the Traditional IRA are how and when the contributions are taxed, but the Roth IRA provides additional advantages as well for investors such as tax-free withdrawals, no required minimum distributions, and even the ability to access a portion of savings before the age of 59 ½. Roth IRAs can offer investors more flexibility in planning their retirement.

To really understand the benefits of a Roth IRA, investors need to understand what a Traditional IRA is. A Traditional IRA is an IRA in which contributions are made tax-free and earnings grow tax deferred. This means that, generally, investors who contribute to a Traditional IRA receive a tax deduction on their income today for their contributions but will defer taxes into the future. When withdrawals are made, investors will report the withdrawal as ordinary income. Dividends, income, and capital gains are not taxed with in a Traditional IRA. While there are some benefits to a Traditional IRA, there are some restrictions to them as well. There are income limits that apply to determine if an investor can take a deduction for their contributions to a Traditional IRA and requirements to begin taking withdrawals from the account after age 72. Furthermore, early withdrawals from the account come with a 10% penalty in addition to being taxed as ordinary income.

Roth IRAs, on the other hand, have some seemingly subtle, but powerful differences. The main difference for the Roth IRA is that investors do not receive a tax deduction today on their income. Instead, investors pay tax on their income today and allow their investments to grow tax free. That means that dividends, interest, and capital gains are not taxed in a Roth IRA, like a Traditional IRA, but additionally withdrawals from a Roth IRA are tax free. This difference alone can be a powerful reason to choose a Roth IRA when investing and opens many planning opportunities, specifically for young professionals or children.

Another main benefit to choosing a Roth IRA is the lack of a required minimum distribution, or RMD. The government requires investors to take a minimum amount of their Traditional IRAs. This can sometimes be annoying for investors who do not need their money at that time and can potentially even be expensive, pushing them into higher tax brackets. Investors who utilize Roth IRAs never have to access those funds if they do not want too and can leave them to beneficiaries when they pass. Finally, Roth IRAs allow the tax free withdrawals of their contributions at any time. This can be used creatively in financial planning to help pay for children’s college or to just make yourself a bridge loan during a tough time.

Roth IRAs provide investors, and their planners, flexibility in how to plan for retirement and life’s expenses. They are a great tool for passing wealth along through generations, savings vehicles for younger individuals, and can provide enormous tax benefits for young investors. Roth IRAs can also be used in conjunction with Traditional IRAs to allow otherwise ineligible investors contribute to IRAs through the conversions, commonly referred to as “Backdoor Roths”. The decision between a Roth IRA or a Traditional IRA can be extremely simple, depending on your income, but consider speaking to a financial advisor about the ways you can use the advantages in a Roth IRA.

Rick D. Bernard | MBA
Financial Advisor

What the ARP Means for You

Posted on March 22, 2021 in

The past few weeks have brought some big changes to individual taxes. On March 11th, the American Rescue Plan Act, HR 1319, was signed into law. In addition to providing economic impact payments to many Americans, the Act makes some significant changes to tax law. The Act provides economic stimulus payments, extends tax provisions from last year, and reduces taxes for many Americans through a variety of tax credits. The Act also provides relief and recovery assistance for small businesses. Separately, the IRS extended the individual Federal tax deadline.

Tax Filing Deadline Extended

The IRS has extended the individual Federal tax deadline to May 17th, 2021. The IRS is allowing tax payments for 2020 to be postponed until the new filing deadline without penalties or interest. If you need more time, an additional extension to October 15th is available by filing Form 4868. Taxes due must still be paid by May 17th to avoid interest and penalties. The extended due date only applies to individual Federal income taxes, not any other type of tax.

New Tax Exclusions and Credits

The first $10,200 of unemployment benefits received in 2020 are now tax-free for taxpayers who made less than $150,000 last year. For a married couple, the total benefit is up to $20,400 if they both received the full amount of unemployment benefits. If you received unemployment benefits last year and have already filed your tax return, you will need to file an amended return to take advantage of this change.

If you received unemployment benefits last year and have already filed your taxes, seek professional advice on amending your return!

The Act also increases the child tax credit and makes it refundable for 2021 if your tax liability is less than the amount of the credit. The amount of the credit is increased to $3,000 per child, and children up to 17 years old are eligible as qualifying children. From July through December of this year, the IRS will be estimating child tax credit amounts and sending out advances of 50% of the estimated annual amount. If the IRS over-estimates your child tax credit, you will have to repay the excess in 2021 while you file your tax return.

Assistance for Small Businesses

The Small Business Administration received an additional $15 billion of funding for Economic Injury Disaster Loans and EIDL advance grants for businesses in low-income communities. New funding of $7.25 billion for Paycheck Protection Program loans is now available. The deadline for PPP loans remains March 31st, 2021. The Act also includes $29 billion to create a new grant program providing relief for restaurants, and $15 billion for event venues, museums, and concert halls. Both of these programs will be run by the Small Business Administration.

The PPP loan window closes March 31st.

Small business owners need to act quickly!

In addition to these changes, the American Recovery Plan Act extends several provisions of last year’s CARES act and the Families First Coronavirus Response Act. Employee Retention credits and Family and Sick Leave credits for employers were among the items extended into 2021.

The American Recovery Plan Act makes significant changes to Federal taxes. It also significantly changes the kinds of relief available to small businesses. These changes are complex, and the cost of missed opportunities under the new tax law can be high. Individuals and business owners should seek professional advice from a tax and financial planning expert to maximize their benefits under the new law.

Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

I Never Planned to Retire Early – Now What?

Posted on March 18, 2021 in

Working primarily with individual employees, I am often asked “How much should I start putting away for retirement and when should I start?” My answer is always the same. Save as much as you possibly can and right now. But what happens when you did not plan to retire early, and you find yourself exiting the workforce? Whether its a layoff, the need to stay home with loved ones or a business closing the doors, you need to have a plan for what happens next.

Start with putting your monthly income in an Excel spreadsheet or just putting pen to paper. Make sure you are including pensions, investment returns, social security, annuity payments and even real estate income. Then list what your expenses will be. Once you have everything written down you can decide what you can cut out or if you will be able to sustain your lifestyle. Keep in mind, just because you are retiring early doesn’t necessarily mean you need to take your Social Security early or turn on the faucet of your pension plan. That conversation should take place with your financial advisor and then come up with a plan that works for you.

Now is also a good time to take a closer look at your needs vs wants. Look at your bank statements and credit card bills. See where the unnecessary spending is and start cutting back. Make it a realistic plan and not one that will set you up for failure. One way to evaluate what your needs vs wants are is by creating a spending plan. Being able to differentiate the two and what really matters the most to you, will help you identify more clearly those things you cannot live without.

Just because you do not have the job you once did, you have a lifetime of experience at your fingertips. Try getting back in the workforce part time or even try consultant work. If you have never considered this alternative way for income before, now is the time. Establish a LinkedIn account and start promoting yourself on professional platforms. Reach out to former colleagues or business contacts to get a feel for what changes are happening in your industry and how your skills can meet that demand.

Set up meetings with all of your advisors. Schedule a meeting with your financial advisor and ask if your investment strategy still aligns with your goals. With the unexpected change in your retirement timeline, this question is imperative for planning “what’s next”. Look at your portfolio and make sure that it is properly allocated. Ask about the changes in your taxes this year and if your investments will affect them. You should also speak to your accountant and estate attorney when a major life events, such as early retirement. Ideally, all your advisors should be on the same page with your financial future. Having a team that can help you navigate through the complexity of early retirement is extremely beneficial.

While we cannot predict the future when it comes to being forced into early retirement, we can do things to make it easier. Having a strategy in place will better prepare you for if it does happen. Call your financial advisor today and schedule a time to discuss all your options.

We’re here to help.

Tamara L Fales
Retirement Plan Specialist

American Rescue Plan Act: Key Provisions

Posted on March 17, 2021 in

Last Thursday, the American Rescue Plan Act of 2021 (ARPA 2021) was signed into law by President Biden. This $1.9trillion package includes funds for direct payments to individuals and families, funds for state and local governments, and continued funds for vaccine development and testing. Key relief provisions are summarized here and, as always, we stand ready to discuss in further detail should you have questions.

Stimulus Checks

Many individuals will receive another direct payment from the federal government. Technically a 2021 refundable income tax credit, the amount will be calculated based on your most recently filed tax return and sent automatically via check, direct deposit, or debit card to qualifying individuals. This stimulus payment is currently not protected from garnishment for unpaid debts, unlike previous payments that were protected.

The amount of the stimulus check is $1,400 ($2,800 if married filing a joint return) plus $1,400 for each dependent. The checks start to phase out for those with an adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). Checks are completely phased out for those with an AGI of $80,000 ($160,000 if married filing a joint return, $120,000 for those filing as head of household).

Student Loans

Borrowers eligible for forgiveness under existing programs will see significant benefits for tax years 2021-2025. Previously, most forgiven loans were included in taxable income. The American Rescue Plan Act of 2021 excludes the amount forgiven from taxable income during that tax year. It also broadens the type of forgiveness to include “any”, where only certain categories of loans were specified in the past.

Child Tax Credit/Dependent Care Tax credit

Parents can look forward to an increased child tax credit for 2021: $3000 per qualifying child ($3,600 for qualifying children under age 6), subject to phaseout based on modified adjusted gross income. The legislation also makes 17-year-olds eligible as qualifying children for the first time.

In addition, the dependent care tax credit for 2021 is increased to $4000 for one qualifying individual and up to $8000 for two or more. The income phaseout begins at $125,000.

Healthcare Funding

The federal COBRA continuation coverage program, which will generally pay the entire COBRA premium for those who’ve lost a job, will be extended from April 1, 2021, through September 30, 2021. Other healthcare initiatives include funding for state, local and territorial public health departments to support ongoing public health efforts (staff, technology, equipment, etc.)

Business Relief

Aid to businesses will include an extension of the employee retention tax credit, the tax credit for providing emergency sick and family leave, and tax advantaged loans/grants targeted toward small businesses.

Unemployment Provisions

For those collecting unemployment benefits, an additional $300 weekly benefit is added through September 6, 2021. Federal benefits were extended for 29 weeks to those who exhaust their state unemployment benefits.

What’s not in the Act

The much-discussed minimum wage increase was sidelined by Congress this time around. A hot topic during election cycles, this provision was left out mainly due to procedural issues with passing the stimulus. Another hotly debated item left out of the bill was student loan cancellation. That will also likely require a different process to enact change for student loan borrowers.

Have a plan!

Many Americans will start to see stimulus checks arriving in the coming days. Some will spend those dollars quickly, some will save or reduce debt, as they did with previous payments. We strongly encourage a discussion with your financial advisor to determine the best use of those funds, and how other ARPA 2021 provisions can impact your financial situation.

Patrick Gauthier | CFP®️, MSAPM
Portfolio Analyst

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