Quote of the Week
“Never attribute to malice that which is adequately explained by stupidity.” – Robert J. Hanlon
U.S. stocks ended modestly higher as better than expected earnings and optimism around Brexit were offset by ongoing global growth concerns. The third quarter U.S. earnings season kicked off last week with major banks reporting solid earnings except for Goldman Sachs, against depressed investor expectations. Also helping investor sentiment was the news that the EU and UK agreed on a Brexit deal after days of negotiations. However, the deal was not approved by Parliament over the weekend. This sounds just like the U.S., except we don’t yell and jeer during our congressional sessions.
On the negative side of the ledger, U.S. retail sales disappointed, and the International Monetary Fund (IMF) once again lowered its projections for global growth this year from 3.5% to 3%.
Healthy household spending has been the linchpin of economic growth over the 10-year expansion, contributing to 70% of GDP. Last week new data showed that a key indicator of consumer health, retail sales, slumped for the first time in seven months, dropping 0.3% in September. It prompted market concerns that the consumers’ resilience to tariffs and slowing growth was starting to falter. If a new round of tariffs announced by the White House goes into effect later this year, the consumer may be more negatively affected by trade concerns or the prospect of rising prices on consumer goods.
We are still allocated to a safe investment profile just in case the economy falls into recession. I don’t see any catalyst to cause the economy to suddenly reverse its course to the upside. Remember, we allocate with the trend, not against the trend.
Last week Larry provided information on 401 (k) plans. The following article offers more food for thought.
Employer Plans Can Offer the Foundation of a Comfortable Retirement
October 20 to 26, 2019, is National Retirement Security Week, a nationwide effort to raise awareness about the importance of saving for retirement. Established by Congress in 2006, National Retirement Security Week is designed to elevate public knowledge about retirement savings and to encourage employees to save and participate in their employer-sponsored retirement plans. What better time to review the benefits of your retirement plan and determine if you’re making the most of them?
Whether you have a 401(k), 403(b), or governmental 457(b) plan, contributing helps benefit your tax situation. If you make traditional (i.e., non-Roth) contributions to your plan, they are deducted from your pay before federal (and most state) income taxes are calculated. This reduces the amount of income tax you pay now. Moreover, you don’t pay income taxes on those contributions — or any returns you earn on them — until you withdraw money from the plan, ideally when you are retired and possibly in a lower tax bracket.
If your plan offers a Roth account and you take advantage of this opportunity, you don’t receive an immediate tax benefit for participation, but you could receive a significant tax advantage down the road. That’s because qualified withdrawals from a Roth account are tax-free at the federal and, in many cases, state level.
A withdrawal from a Roth account is qualified if it’s made after a five-year holding period (which starts on January 1 of the year you make your first contribution) and one of the following conditions applies:
- You reach age 59½ (55 if separated from service; 50 for qualified public safety employees)
- You become disabled
- You die, and your heirs receive the distribution
So should you contribute to a traditional account, a Roth account, or both? The answer depends on
your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, you may find a Roth account appealing for its tax-free retirement income advantages. On the other hand, if you think you’ll be in a lower tax bracket in retirement, then a traditional account may be more appropriate to help reduce your tax bill now. Of course, you could also divide your contributions between the two types of accounts to strive for both benefits, provided you don’t exceed the annual maximum contribution amount allowed ($19,000 in 2019; $25,000 if you’re age 50 or older).1
Keep in mind that employer plans were created specifically to help Americans save for retirement. For that reason, rules were also established to discourage participants from taking money out early. With certain exceptions, withdrawals from traditional (non-Roth) accounts and nonqualified withdrawals from Roth accounts prior to reaching age 59½ are subject to regular income taxes and a 10% penalty tax.
Employers are not required to contribute to employee accounts, but many do through matching or discretionary contributions. With a matching contribution, your employer can match your traditional pre-tax contributions, your after-tax Roth contributions, or both (however, all matching contributions will go into your traditional, tax-deferred account). Most match programs are based on a certain formula — for example, 50% of the first 6% of your salary that you contribute.
If your plan offers a matching program, be sure to contribute enough to take maximum advantage of it. Neglecting to contribute the required amount is essentially turning down free money.
Your employer may also offer discretionary contributions, which often take the form of profit-sharing contributions. These amounts generally go into your traditional account once per year, and typically vary from year to year.
Employer contributions are often subject to a vesting schedule. That means you earn the right to those contributions (and the earnings on them) over a period of time. Keep in mind that you are always fully vested in your own contributions and the earnings on them.
Review your strategy now
While most people understand that their employer-sponsored retirement plan is a key to preparing adequately for the day when the regular paychecks stop, they may not take the time to review their plan’s benefits and ensure they’re taking maximum advantage of them. National Retirement Security Week provides a perfect opportunity to review your plan materials, understand its features, and determine if any changes may be warranted.
1Special catch-up rules may apply to certain participants in 403(b) or 457(b) plans.
Copyright 2019 Broadridge Investor Communication Solutions, Inc
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.