Podcast: Episode 4

What should you be thinking about now?

Hear what TIAA clients are asking about, and ways to plan with confidence in any market climate.

Podcast: Planning amidst uncertainty: Answers to your top 5 questions

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TIAA Perspectives Podcast Episode 4: Planning amidst uncertainty: Answers to your top 5 questions Hosted by Jim Daniello, CFP®, wealth management director for TIAA. - Hi everyone, I'm Jim Daniello, a wealth management director for TIAA. Thank you for joining me for another installment of TIAA Perspectives podcast where we'll talk about financial planning strategies, money management tips, and steps you can take now to remain on track towards your goals. Today I'll be addressing the top five questions my colleagues and I at TIAA have received from retirement savers and investors in recent weeks. We'll talk about how to decide if you should take required minimum distributions in 2020, ways to stay the course towards your goals in uncertain times and in what opportunities may be available to you in light of recent legislation. Now, before we begin, I should also mention that these questions are not in any specific order based on their importance or the frequency by which they're asked. So let's start with our first question. What if anything, should I be doing right now? One of the first things you wanna look at during times of uncertainty is how your money is allocated to different investments and asset classes such as stocks and bonds. That's because over time, market swings can throw your asset allocation and potentially your risk targets and investment goals out of balance. When this happens, your advisor can help you by reviewing your portfolio to see if it needs any adjustments. Diversification is also important for managing risk. Your portfolio needs to be spread among a broad mix of securities that may include US and international stocks and bonds, and in certain cases, real estate and other alternative investments. However, it doesn't end there. Another aspect of diversification that doesn't always get the amount of attention it should is income diversification. This speaks to one of the most basic aspects of retirement planning. You wanna make sure that each month, regardless of whether the markets go up or down, you have enough income to meet your essential living expenses such as food, shelter, clothing, and healthcare. But what if those sources fall short and don't cover 100% of your needs? If there's a gap, you can consider annuitizing a portion of your savings outside of Social Security and pensions annuities are the only retirement option capable of providing income that's guaranteed for as long as you live, and if you're concerned about market risk, fixed annuities offer steady, reliable income regardless of market performance. Of course, it's important to mention that guarantees are based on the claims paying ability of the issuer. The next question clients are asking about is how can I keep my emotions in check when faced with ongoing volatility? That takes me back to one of the most powerful lessons I learned in my early career. Back in my 20s I had the opportunity participate in a management training program at a prominent financial advisory firm. As part of my rotation, I spent two weeks in the office of the firm's president while most of my time was spent observing his staff. I did have one encounter with the company's president that really stuck with me. One morning he took a call from his financial advisor. I watched as he provided input and then authorized his advisor to make certain transactions on his behalf. I was stunned that this gentlemen, who had been one of the most successful advisors in the firm and had worked his way up to president of the company, had an advisor himself. I asked, "Why don't you manage your own money?" And his response back to me was, "That's the most dangerous thing you can do." Keep in mind, this came from a man who understood the markets as well as anyone, but he also understood that when it comes to your own money, you have to separate yourself from your emotions, which can be really hard to do. It's the same reason why surgeons don't operate on their own family members. They're too emotionally connected. The problem with emotions is they can lead us to make poor decisions. Think about decisions you may have made that were driven by emotions, especially driven by fear. Fear can get you into all kinds of trouble. I found that out the hard way a few years ago when driving to work, afraid of messing up my alignment. I swerve to avoid a pothole and instead ran up against a curb causing much more damage than that pothole would ever have done. So we can make things a lot worse when we let fear take over. One reason is because losses weigh more heavily on us than wins. So in environments where your accounts may have lost value in a very short period of time due to a risk that was unforeseeable and uncontrollable, it's really easy to make decisions based on fear instead of reason. For example, if we look at the period from January 1st through April 15th of this year, the S&P 500 was down about 15% for the year. However, if you had missed the five best days of the market's performance during that period, you'd be down roughly 44% as of mid April. That's something to think about if you have money on the sidelines and you're waiting for a good time to invest, when to get in and when to get out of the market is a really tough call, and the wrong call can be very costly. That's why it's so important to have a disciplined and repeatable process in place for managing your investments. It's not only helps to ensure alignment between your investment strategy goals and timeline, but can help prevent reactionary behavior that can lead to decisions that don't serve your longterm interests. If you're working with a professional advisor and you're following a disciplined process that you know is aligned with your goals, it becomes much easier to remove emotion from the equation. Another question that a lot of our advisors are hearing from clients this year, concerns required minimum distributions, also known as RMDs. A lot of retirees depend on these distributions from their retirement plans to supplement income from other sources. However, for the first time ever, retirees can waive them in 2020. As a result, many clients are asking, should I take my RMD in 2020? Let's talk about some of the considerations that go into this decision. The volatility that the markets had experienced in February and March was concerning, especially for those subject to RMDs. That's because when you take a distribution in a volatile market, there's potential to cement losses. It can leave less money working to help that portfolio generate new earnings. That's why Congress included a provision in the CARES Act, which was signed into law in late March, enabling anyone subject to RMDs to waive their RMDs in 2020. If you're on the fence about taking your RMD, think about whether or not you may have other resources that you can use to meet your income needs and your expenses such as an emergency savings account or other cash reserves. If you don't need to take a distribution this year that could allow your retirement assets to continue to grow tax deferred, and potentially begin to recover from some of the recent market volatility we've experienced. I've been using our asset location worksheet with a lot of our clients recently for this very reason. The worksheet organizes your assets based on their purpose and when you intend to use them. It shows us if your emergency savings or other resources will provide you enough income so you can avoid taking a distribution from your retirement plan, and if there are ways to reduce tax exposure as a result. For example, if you were to take a $100,000 distribution from a retirement account, you need to pay taxes on it. Let's say that would net you 65 to $70,000 after taxes. Would it make more sense to take the $65,000 you need from savings since you've already paid taxes on that income? If you have adequate cash reserves that could not only help you reduce your 2020 tax bill, but allow the $100,000 you would have normally taken as an RMD, stay in your retirement account and continue to generate earnings. That's one of many scenarios we would weigh. Now, if you still wanna take a distribution this year, you can, the waiver doesn't prevent you from doing so if you need that money, but what if you took an RMD and then changed your mind? Well, fortunately under certain circumstances if you have already withdrawn all or a portion of your 2020 RMD, the 60 day rollover rule allows eligible rollover distributions to be rolled back into the plan. While this is a limited one-time payment received from an IRA within a 12 month period, the IRS has extended the deadline for 60 day rollovers of distributions made on or after February 1st, to July 15th. To date, they have not extended the deadline for those who took distributions in January, but keep in mind that this is also subject to your plan's rules, and different rules apply to non-spouse beneficiaries of inherited accounts. Some of the rules are complex, so be sure to talk to your tax and wealth advisors before making any decisions about RMDs in 2020. Let's move on to another question that's been top of mind for many of our clients lately. What opportunities are available to me now? That's a great question. There are actually a number of opportunities, especially for those who are charitably inclined. Let's start with the CARES Act, which was signed into law late March. The CARES Act provides a new above the line deduction for 2020 which allows you to take a $300 deduction for cash contributions to charities if you're single, or a $600 in combined contributions if you're married filing jointly. However, these only apply to cash donations made directly to a qualified charitable organization and do not apply to donations made through donor advised funds or by supporting organizations. Also, the deduction does not apply to gifts of securities or other assets, only cash. If you itemize on your return, you can make large donations. The opportunity to reduce your tax burden in 2020 is even greater. Normally the amount you can contribute to deduct from your taxes is limited to 60% of your adjusted gross income, but in 2020 that limitation has been suspended, allowing you to offset up to 100% of your income through charitable donations. Now another opportunity that I've been talking to clients about all year is the potential to do a Roth IRA conversion. When you take money out of a traditional IRA and convert it to a Roth, the amount you convert is taxed as ordinary income at the time of the conversion. The reason a conversion is attractive now is because many people will report a reduction in earned income this year due to the elimination of the RMD requirement. So converting these assets could be beneficial from a tax perspective if your overall income is down this year. One reason so many people are looking at Roth conversions right now is because of the SECURE Act which was passed last December. The SECURE Act changed the rules for how beneficiaries can receive distributions from inherited retirement plans. Most non-spouse beneficiaries must take distributions within a 10 year period, which can create a major tax burden for them. Converting to a Roth would enable your beneficiaries to receive tax-free distributions, since the taxes were already paid upon the assets being converted, and if you're in a lower income tax bracket than your beneficiaries, this may provide significant tax savings. Now I know some people may be concerned about locking in losses if they convert assets now. One thing to keep in mind is that with the market's down from their highs that they experienced back in 2019 and early 2020, converting now may result in lower taxes paid on the assets converted. In addition, any new growth will actually occur in the Roth, so it'll grow tax free. So it really comes down to a weighing of the different options available to you and determining which strategies make the most sense for you and your goals. And again, be sure to talk to your tax and wealth advisors before making these or other decisions that impact your tax and planning strategies. Okay, I want to address one more question before we wrap up today's podcast, and it's actually the toughest one to answer. Many of you wanna know are we in a recession right now? And if so, how long can we expect the current market volatility to last? The easy part of the answer is yes, we are in a recession right now. However, it's important to remember that the stock market doesn't fairly represent the economy. So we wanna be careful about how we talk about both. So we're not just lumping the two together. For example, we know that nearly 40% of the S&P 500 consists of technology and healthcare stocks, both of which rallied hard in April. However, those sectors combined make up a far smaller percentage of the US economic growth. In addition, due to low yields on bonds and fixed income securities, many investors have turned to dividend and growth stocks to provide a portion of income. We also wanna be careful about how we talk about volatility since it refers to swings in both directions, as we've seen in recent months. For example, between late February and March 23rd of this year, the S&P 500 fell 34% easily exceeding the 20% threshold that technically defines a bear market. However, what surprised many investors is that it only took a month for the index to soar nearly 27% back into bull market territory, which is generally viewed as a gain of 20% or more from the most recent trough. In all likelihood, we'll continue to see ups and downs in the markets because there's still a lot of uncertainty ahead that can impact the markets in both positive and negative ways. The important thing to understand is that there are steps you can take to help manage through all of this uncertainty. Begin by talking to your advisor, understand your income needs, and make sure you have adequate sources of guaranteed income. Second, make sure you continue to focus on your longterm goals to ensure your portfolio is well-diversified. Third, consider if you need to rebalance your portfolio if the current volatility in the markets has caused your asset allocation to become misaligned with your target allocation. And forth, think about your investment related tax bill. Should you consider tax loss harvesting or other strategies to help reduce your tax exposure? These are all areas where your TIAA advisor can help. The key is to communicate on a regular basis with your advisor, who will work with you to adjust your plan and your investment strategy as needed, and help you unlock opportunities in any market environment. Thank you for listening in and for spending a few minutes of your time with me. Have a great day everyone. Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute investment advice under any securities laws. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Please consult your Financial or Tax professional before taking any action. 2020 and prior years. Teachers Insurance and Annuity Association of America College Retirement Equities Fund. New York, NY 10017 1180832

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