Client Newsletter 2Q22
Dear Ambassador Family,
Happy Spring! We have a lot to talk about this quarter. Let’s jump right in!
2022 Will Be a Difficult Year
Over the next couple of years, we expect the economy to struggle. We are taking proactive steps to ensure that, as the economy rotates and challenges come and go, each client’s positions are adjusted to fit their individual needs and goals.
If you anticipate any changes to your circumstances in the coming months, please let us know. The better we understand you and your situation, the more appropriately we can adjust your investments.
Debbie is scheduled for knee-replacement surgery this April. She eagerly awaits her return to work and appreciates your thoughts and prayers as she recovers.
We have welcomed Kecia Kulla to our team! She looks forward to interacting with each of you in the coming months.
Thank you for your trust. We look forward to serving you!
It’s Up to You to Protect Your Family
Each of you is in a unique situation. Depending on where you fall on the retirement timeline, we can offer some recommendations to potentially help you preserve your assets, grow your investments, and keep up with inflation.
- Retirement: You Are Retired.
Set aside time to review your Trust documents. In seasons of high inflation and rising prices, you potentially might position your assets to mitigate estate taxes that your heirs might otherwise pay more of.
The key in this stage is income, tax & estate planning.
- Preparation: You Are Getting Ready to Retire.
As you prepare for your upcoming retirement, ask yourself if your investment accounts are working for you and if your business or real estate holdings are positioned to prepare you for retirement.
The key in this stage is income & tax planning.
- Accumulation: You Are Establishing a Career.
Establish a good, working budget to understand where your money is going. Think about ways to increase your savings, maximize retirement account contributions, invest in real estate, and/or work on paying down debts.
The key in this stage is budgeting & saving.
Due to higher energy costs, geopolitical turmoil around the world, shortages of fertilizer, and various restrictions on trade between nations, we expect food costs will continue to rise. Some parts of the world might even suffer more supply chain shortages.
We have kept you informed about what we are doing with your portfolios to prepare for these challenging times ahead. Check out this sidebar for ideas everyone should consider to help their family in these inflationary times.
- Cut back on wasteful spending. Maybe eat out less and cook at home more. When you do eat out, consider ordering a cheaper meal (chicken over prime rib). You can also plan closer vacations or even staycations.
- If you have some extra cash (and you find a good deal), consider buying extra goods that you know your family will use in the future. In a world of inflation, the dollar you spend today buys more than it will tomorrow.
- Be prepared for more taxes. Taxes are going up (even if the laws don’t change). A hot real estate market might make you homeowners feel better about your net worth. That said, higher home values mean property taxes will also be racing up next year.
- Consider Estate Planning. Save your heirs from unexpected (and unnecessary) taxes. As the value of your assets grows due to inflation, be aware of exceeding state and federal estate tax thresholds. When you pass on, your heirs might be surprised to find taxes will eat up a bigger piece of their inheritance than expected.
Investment Thoughts (by Petr Burunov & Stuart Quint)
In our last newsletter, I told you that 2022 was likely to be quite different than 2021. So far, it has.
Both stocks and bonds have declined moderately. (In fact, bonds have declined slightly more.)
While the economy is cooling off, prices are not. As a consequence, the Fed for the first time in 3 years started to raise interest rates. Though we are near historically low-interest rates, the fact remains that bond yields, which used to be notably above inflation, are significantly below. Controversy exists as to how far the Fed can raise rates without putting the economy into recession. Yet, inflation has now resurfaced for the first time in decades as a serious potential problem to people’s purchasing power.
Consider the recent news in Germany, Europe’s largest economy. Supermarkets just announced price increases from 20 to 50% on over 300 products. While the official excuse is the war in Ukraine, remember that supply chain issues and commodity price hikes had begun well before the end of February. In fact, prices started to go up in the first half of 2021
Closer to home, many of you have noticed higher gasoline prices. Not only are commodity costs rising, but prices for homes, appliances and even wages are also moving up. After several decades of modest inflation, we are experiencing an environment more similar to the 1970s.
As mentioned in our previous newsletter, we entered the year moderately cautious about risk. Stocks looked richly valued, and bonds even more so. Traditional stocks and bonds might face further headwinds to posting compelling returns while inflation and higher interest rates loom.
Part of your portfolios has been invested in what we call a “diversified” bucket. This “diversified” bucket consists of select alternative investments that are less reliant on traditional stocks and bonds. Their purpose is to add potential stabilization to your portfolio while seeking positive returns.
Examples include precious metals, commodities, and long/short strategies. Precious metals might serve as a hedge either against higher inflation and/or recession. Base commodities such as energy, agriculture, and metals face supply shortages and have the potential to appreciate in US Dollar terms. Your long/short manager has the potential to benefit from price dislocations in companies in both rising and falling markets.
Though markets have recovered tremendously from the trough last month, it appears early to declare the coast is clear. First-quarter earnings could introduce near-term volatility. Economic data appears to be slowing (jobs, housing market, consumer confidence). Add in uncertainty surrounding further Fed rate hikes and geopolitics. We would not be surprised to see further choppiness in markets in the coming months. Furthermore, you should not be surprised to see further traditional risk being reduced in your portfolios in the coming weeks and months.
- Tax-free growth
- No RMDs (require minimum distributions)
- No stealth tax impacts
- Tax-free distributions
But did Roth IRAs just get more attractive? Let’s take a look at a newly released SECURE Act regulation.
According to the IRS, when an IRA owner dies on or before their RBD (required beginning date), the beneficiaries will be subject to a 10-year rule and annual RMDs. Your beneficiary will have to calculate annual RMDs for years 1-9 and take the remaining balance during the 10th year after your death. Missed RMDs incur a 50% penalty. Yikes.
But we’re talking about Roth IRAs. The IRS confirmed that all Roth IRA owners are considered to have died before their RBD. Put simply, beneficiaries of Roth IRAs have no annual RMDs, even though the 10-year rule still applies.
Roth IRAs offer complete flexibility within those 10 years and have no complicated RMD restrictions. The best part is, that Roth IRAs can grow tax-free for 10 years before any distributions are required.
Upcoming Changes
Every year there seems to be some form of adjustment made by Congress to impact your retirement. This year is no exception.
Congress already passed several rules to defer RMDs (required minimum distributions) and increase annual contribution limits. Pending a Senate vote, more changes are coming. Stay tuned for future updates.
Final Thoughts
It’s great to have money, but at the end of the day, your bottom line is what counts. Remember: it’s not about how much you make, it’s about how much you keep. This is where planning, savings, and budgeting is crucial.
Plan for the taxes and unexpected circumstances. I want to see you thrive.
Sincerely,
Petr Burunov, CFP®
President / Wealth Strategist